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
March 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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33-0628076
(I.R.S. Employer
Identification No.)
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One Enterprise,
Aliso Viejo, California
(Address of principal
executive offices)
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92656
(Zip
Code)
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(949) 461-6000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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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, $0.01 par value, as of May 1, 2008 was
89,291,967.
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX
1
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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March 31,
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December 31,
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2008
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2007
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(Unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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498,097
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$
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309,365
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Marketable securities
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21,162
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52,122
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Accounts receivable, net
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169,400
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191,796
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Inventories, net
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118,199
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115,177
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Assets held for sale and assets of discontinued operations
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17,261
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66,247
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Prepaid expenses and other current assets
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19,741
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21,713
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Current deferred tax assets, net
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12,923
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11,819
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Income taxes
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25,426
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26,433
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Total current assets
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882,209
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794,672
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Property, plant and equipment, net
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122,320
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116,376
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Deferred tax assets, net
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64,967
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65,950
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Goodwill
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80,346
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80,346
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Intangible assets, net
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387,252
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401,575
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Other assets
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49,414
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35,343
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Total non-current assets
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704,299
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699,590
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$
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1,586,508
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$
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1,494,262
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Trade payables
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$
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45,740
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$
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49,203
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Accrued liabilities
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154,805
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139,754
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Notes payable and current portion of long-term debt
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1,080
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1,655
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Income taxes
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11,967
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10,239
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Liabilities held for sale and liabilities of discontinued
operations
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1,676
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4,194
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Current liabilities for uncertain tax positions
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9,890
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616
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Total current liabilities
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225,158
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205,661
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Long-term debt, less current portion
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785,862
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782,552
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Deferred tax liabilities, net
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7,300
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5,337
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Liabilities for uncertain tax positions
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59,974
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68,749
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Other liabilities
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26,254
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17,860
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Total non-current liabilities
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879,390
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874,498
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Total liabilities
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1,104,548
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1,080,159
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Commitments and contingencies
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Stockholders Equity:
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Common stock, $0.01 par value; 200,000 shares
authorized; 89,286 shares outstanding (after deducting
shares in treasury of 7,585) as of March 31, 2008 and
December 31, 2007
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893
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893
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Additional capital
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1,199,852
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1,192,559
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Accumulated deficit
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(850,109
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)
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(859,559
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)
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Accumulated other comprehensive income
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131,324
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80,210
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Total stockholders equity
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481,960
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414,103
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$
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1,586,508
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$
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1,494,262
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The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
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Three Months Ended
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March 31,
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2008
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2007
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Revenues:
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Product sales
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$
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181,913
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$
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167,933
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Alliance revenue (including ribavirin royalties)
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12,773
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36,470
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Total revenues
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194,686
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204,403
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Costs and expenses:
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Cost of goods sold (excluding amortization)
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54,890
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46,901
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Selling expenses
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63,790
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58,440
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General and administrative expenses
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26,106
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26,115
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Research and development costs
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29,392
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20,990
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Restructuring, asset impairments and dispositions
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(12,664
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)
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7,238
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Amortization expense
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18,066
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17,481
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Total costs and expenses
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179,580
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177,165
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Income from operations
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15,106
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27,238
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Other income (loss), net including translation and exchange
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(3,252
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)
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1,136
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Interest income
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4,946
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4,511
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Interest expense
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(9,719
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)
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(10,952
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)
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Income from continuing operations before income taxes and
minority interest
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7,081
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21,933
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Provision for income taxes
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7,651
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8,410
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Minority interest, net
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2
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Income (loss) from continuing operations
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(572
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)
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13,523
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Income (loss) from discontinued operations
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10,022
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(4,200
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)
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Net income
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$
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9,450
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$
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9,323
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Basic income per share:
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Income (loss) from continuing operations
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$
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(0.01
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)
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$
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0.14
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Income (loss) from discontinued operations
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0.12
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(0.04
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)
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Net income per share:
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$
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0.11
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$
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0.10
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Diluted income per share:
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Income (loss) from continuing operations
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$
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(0.01
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)
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$
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0.14
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Income (loss) from discontinued operations
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0.12
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(0.04
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)
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Net income per share:
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$
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0.11
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$
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0.10
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Shares used in per share computations Basic
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89,590
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94,730
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Shares used in per share computation Diluted
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89,590
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96,019
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The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
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Three Months Ended
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March 31,
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2008
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2007
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Net income
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$
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9,450
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$
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9,323
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Other comprehensive income:
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Foreign currency translation adjustments
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58,979
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118
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Unrealized gain (loss) on marketable equity securities and other
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(7,879
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)
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227
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Pension liability adjustment
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14
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443
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Comprehensive income
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$
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60,564
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$
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10,111
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The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
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Three Months Ended
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March 31,
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2008
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2007
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Cash flows from operating activities:
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Net income
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$
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9,450
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$
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9,323
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Income (loss) from discontinued operations
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10,022
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(4,200
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)
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Income (loss) from continuing operations
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(572
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)
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13,523
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Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities in
continuing operations:
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Depreciation and amortization
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22,890
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21,395
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Provision for losses on accounts receivable and inventory
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6,818
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1,568
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Stock compensation expense
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|
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2,514
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3,917
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Translation and exchange (gains) losses, net
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3,252
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(1,136
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)
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Impairment charges and other non-cash items
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(22,371
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)
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(447
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)
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Deferred income taxes
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2,156
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|
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33,022
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Change in assets and liabilities, net of effects of acquisitions:
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Accounts receivable
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38,508
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41,909
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Inventories
|
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(5,256
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)
|
|
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(4,213
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)
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Prepaid expenses and other assets
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(564
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)
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|
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(3,373
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)
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Trade payables and accrued liabilities
|
|
|
4,789
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|
|
|
(31,467
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)
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Income taxes
|
|
|
2,207
|
|
|
|
(44,376
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)
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Other liabilities
|
|
|
(842
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)
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|
|
785
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|
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Cash flow from operating activities in continuing operations
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53,529
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31,107
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Cash flow from operating activities in discontinued operations
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(10,560
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)
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(4,132
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)
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|
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Net cash provided by operating activities
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42,969
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|
|
|
26,975
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|
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Cash flows from investing activities:
|
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|
|
|
|
|
|
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Capital expenditures
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|
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(4,789
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)
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|
|
(4,431
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)
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Proceeds from sale of assets
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|
|
36,606
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|
|
|
38,493
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|
Proceeds from investments
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|
|
34,892
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|
|
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8,631
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|
Purchase of investments
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|
|
(500
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)
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|
|
(6,800
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)
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Acquisition of businesses, license rights and product lines
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|
|
(504
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)
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|
|
(31,325
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)
|
|
|
|
|
|
|
|
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Cash flow from investing activities in continuing operations
|
|
|
65,705
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|
|
|
4,568
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|
Cash flow from investing activities in discontinued operations
|
|
|
70,800
|
|
|
|
(135
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)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
136,505
|
|
|
|
4,433
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|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(398
|
)
|
|
|
(7,601
|
)
|
Proceeds from capitalized lease financing, long-term debt and
notes payable
|
|
|
50
|
|
|
|
395
|
|
Stock option exercises and employee stock purchases
|
|
|
|
|
|
|
4,214
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
(348
|
)
|
|
|
(2,992
|
)
|
Cash flow from financing activities in discontinued operations
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(348
|
)
|
|
|
(3,006
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
9,606
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
188,732
|
|
|
|
29,218
|
|
Cash and cash equivalents at beginning of period
|
|
|
309,365
|
|
|
|
325,579
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
498,097
|
|
|
$
|
354,797
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
VALEANT
PHARMACEUTICALS INTERNATIONAL
March 31, 2008
(Unaudited)
In the consolidated condensed financial statements included
herein, we, us, our,
Valeant, and the Company refer to
Valeant Pharmaceuticals International and its subsidiaries. The
condensed consolidated financial statements have been prepared
by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared on the basis of accounting principles generally
accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of
the results to be expected for a full year. Although we believe
that all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are
adequate to make the information presented not misleading, these
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in our annual report on
Form 10-K
for the year ended December 31, 2007.
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization: We are a multinational
pharmaceutical company that develops, manufactures and markets a
broad range of pharmaceutical products. Additionally, we
generate royalty revenues from the sale of ribavirin by
Schering-Plough Ltd. (Schering-Plough).
Principles of Consolidation: The accompanying
consolidated condensed financial statements include the accounts
of Valeant Pharmaceuticals International, its wholly owned
subsidiaries and its majority-owned subsidiary in Poland. All
significant intercompany account balances and transactions have
been eliminated.
Marketable Securities: Marketable securities
include short-term commercial paper and government agency
securities which, at the time of purchase, have maturities of
greater than three months. Marketable securities are generally
categorized as held-to-maturity and are thus carried at
amortized cost, because we have both the intent and the ability
to hold these investments until they mature. As of
March 31, 2008 and December 31, 2007, the fair value
of our marketable securities approximated cost.
Derivative Financial Instruments: Our
accounting policies for derivative instruments are based on
whether they meet our criteria for designation as hedging
transactions, either as cash flow, net investment or fair value
hedges. Our derivative instruments are recorded at fair value
and are included in other current assets, other assets, 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.
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. 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
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
of publicly traded options which have no vesting restrictions
and are fully transferable. Option valuation models require the
input of subjective assumptions which can vary over time.
Assets Held for Sale: We have classified
certain assets as assets held for sale in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144).
At December 31, 2007, assets held for sale included the
assets related to our Infergen operations and the assets
included in the sale of certain business subsidiaries and assets
in Asia to Invida Pharmaceutical Holdings Pte. Ltd.
(Invida). We sold the assets related to our Infergen
operations to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. We completed the transaction with Invida
on March 3, 2008. At March 31, 2008, assets held for
sale included the assets of our subsidiaries in Argentina and
Uruguay, which we have decided to sell.
Discontinued Operations: The results of the
Infergen operations and the related financial position have been
reflected as discontinued operations in the consolidated
financial statements in accordance with SFAS 144. The
consolidated financial statements have been reclassified to
conform to discontinued operations presentation for all
historical periods presented. More details on discontinued
operations are available in Note 5.
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from those
estimates.
Recent
Accounting Pronouncements:
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements but does not
change the requirements to apply fair value in existing
accounting standards. Under SFAS 157, fair value refers to
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity
transacts. The standard clarifies that fair value should be
based on the assumptions market participants would use when
pricing the asset or liability. SFAS 157 became effective
for Valeant as of January 1, 2008. For more details about
our implementation of SFAS 157, see Note 3.
SFAS No. 159. In February 2007 the
FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS 159) which provides companies with an
option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both
complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and
liabilities differently. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.
SFAS 159 does not eliminate any disclosure requirements
included in other accounting standards. SFAS 159 permitted
us to choose to measure many financial instruments and certain
other items at fair value and established presentation and
disclosure requirements. In adopting SFAS 159, we did not
elect to measure any new assets or liabilities at their
respective fair values.
The implementation of SFAS 159 did not have a material
effect on our financial statements as we did not elect the fair
value option for any financial instruments or other assets and
liabilities.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141(R) also
provides guidance for recognizing and measuring goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. Among other requirements, SFAS 141(R)
expands the
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
definition of a business combination, requires acquisitions to
be accounted for at fair value, and requires transaction costs
and restructuring charges to be expensed. SFAS 141(R) is
effective for fiscal years beginning on or after
December 15, 2008. When implemented, SFAS 141(R) will
require that any reduction to a valuation allowance established
in purchase accounting will be accounted for as a reduction to
income tax expense, rather than a reduction of goodwill.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not expect
the adoption of SFAS 160 to have a material impact on our
consolidated financial statements.
In December 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties.
EITF 07-1
also establishes the appropriate income statement presentation
and classification for joint operating activities and payments
between participants, as well as the sufficiency of the
disclosures related to these arrangements.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years.
Retrospective application to all prior periods presented is
required for all collaborative arrangements existing as of the
effective date. We do not expect the adoption of
EITF 07-1
to have a material impact on our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133, (SFAS 161). SFAS 161
requires enhanced disclosures about an entitys derivative
and hedging activities, including (i) how and why an entity
uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under
SFAS 133, and (iii) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. This standard becomes
effective for Valeant on January 1, 2009. Earlier adoption
of SFAS 161 and, separately, comparative disclosures for
earlier periods at initial adoption are encouraged. As
SFAS 161 only requires enhanced disclosures, this standard
will have no impact on our financial statements.
FASB Proposed Statement of Position APB
14-a (not
yet implemented). In August 2007, the FASB issued
for comment FASB Statement of Position APB
14-a
(FSP APB
14-a)
for a comment period that ended in October 2007. If the proposed
FSP APB 14-a
is implemented, it would require the liability and equity
components of convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) to
be separately accounted for in a manner that reflects the
issuers nonconvertible debt borrowing rate. The proposed
FSP APB 14-a
would be effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim
periods within those fiscal years. The guidance in the proposed
FSP APB 14-a
would be applied retrospectively to all periods presented. If
this proposal is implemented as currently drafted, it will
materially increase our reported interest expense.
2008
Restructuring
In October 2007, our board of directors initiated a strategic
review of our business direction, geographic operations, product
portfolio, growth opportunities and acquisition strategy. As
announced on March 27, 2008, we have completed this
strategic review and announced a strategic plan which will
include a restructuring program (the 2008
Restructuring). The 2008 Restructuring is expected to
reduce our geographic footprint and product focus by
restructuring our business in order to focus on the
pharmaceutical markets in our core geographies of the
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
United States, Mexico, Canada, Brazil and Australia. We are
pursuing plans to divest our operations in markets outside of
these core geographic areas through sales of subsidiaries,
assets or other strategic alternatives, to seek partners for
taribavirin and retigabine and to make selective acquisitions.
In December 2007, we signed an agreement with Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) to sell
Invida certain Valeant subsidiaries and product rights in Asia,
in a transaction that included certain of our subsidiaries,
branch offices and commercial rights in Singapore, the
Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China,
Hong Kong, Malaysia and Macau. This transaction also included
certain product rights in Japan. We closed this transaction on
March 3, 2008. The assets sold to Invida were classified as
held for sale as of December 31, 2007 in
accordance with SFAS 144. We received initial proceeds of
$37,855,000 and recorded a gain of $36,923,000 in this
transaction. We expect to receive additional proceeds in 2008 of
approximately $5,585,000 as a purchase price adjustment relating
to net asset value.
As of March 31, 2008, we classified our subsidiaries in
Argentina and Uruguay as held for sale in accordance
with SFAS 144. We are negotiating the sale of these
subsidiaries, which we expect to close in 2008. In the three
months ended March 31, 2008, we recorded an impairment
charge of $7,853,000 related to this sale.
The net restructuring, asset impairments and dispositions
benefit of $12,664,000 in the three months ended March 31,
2008 resulted from the gain of $36,923,000 in the transaction
with Invida, offset in part by restructuring charges of
$24,259,000. Restructuring charges incurred in the three months
ended March 31, 2008 included severance costs of
$6,742,000, contract cancellation and other cash costs of
$3,536,000, cash charges from the Invida transaction of
$1,350,000, a stock compensation charge for the accelerated
vesting of the stock options of our former chief executive
officer of $4,778,000 and an impairment charge of $7,853,000
related to the planned sale of our subsidiaries in Argentina and
Uruguay. The severance charges recorded in the 2008
Restructuring as of March 31, 2008 were primarily for our
former chief executive officer and six other executives. The
charges taken in 2007 for this 2008 Restructuring included
$957,000 for executive severances, $4,677,000 for professional
service expenses and $3,967,000 for contract termination and
transaction costs associated with the sale of our Asia
businesses to Invida.
2006
Restructuring
On April 3, 2006, we announced a restructuring program (the
2006 Restructuring) which was primarily focused on
our research and development and manufacturing operations. The
objective of the restructuring program as it related to research
and development activities was to focus our efforts and
expenditures on retigabine and taribavirin, our two late stage
projects in development. The restructuring program was designed
to rationalize our investments in research and development
efforts in line with our financial resources. In December 2006
we sold our HIV and cancer development programs and certain
discovery and pre-clinical assets to Ardea Biosciences, Inc.
(Ardea), with an option for us to reacquire rights
to commercialize the HIV program outside of the United States
and Canada upon Ardeas completion of Phase 2b trials. In
March 2007, we sold our former headquarters building in Costa
Mesa, California, where our former research laboratories were
located, for net proceeds of $36,758,000.
In the three months ended March 31, 2007, we recorded a
charge of $7,238,000 related to the 2006 Restructuring.
Severance charges recorded in the three months ended
March 31, 2007 for employees whose positions were
eliminated in the restructuring totaled $3,781,000. The charge
in the three months ended March 31, 2007 included
$2,050,000 related to 202 employees at our former
manufacturing facility in Humacao, Puerto Rico and $895,000
related to 10 employees in our sales and marketing
operations in Spain.
The objective of the 2006 Restructuring as it related to
manufacturing was to further rationalize our manufacturing
operations to reflect the regional nature of our existing
products and further reduce our excess capacity after
considering the delay in the development of taribavirin. The
impairment charges included the charges related to estimated
future losses expected upon the disposition of specific assets
related to our manufacturing operations in Switzerland and
Puerto Rico. We completed the 2006 Restructuring in June 2007
with the sale of our
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
former manufacturing facilities in Humacao, Puerto Rico and
Basel, Switzerland to Legacy Pharmaceuticals International.
The following table summarizes the restructuring costs recorded
in the three months ended March 31, 2008 and March 31,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Three Months
|
|
|
Cumulative
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Total
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Incurred
|
|
2008 Restructuring Program
|
|
2007
|
|
|
2008
|
|
|
|
|
|
Cash-related charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances (contractual obligations)
|
|
$
|
957
|
|
|
$
|
6,742
|
|
|
$
|
7,699
|
|
Contract cancellation and other cash costs
|
|
|
8,644
|
|
|
|
4,886
|
|
|
|
13,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
9,601
|
|
|
|
11,628
|
|
|
|
21,229
|
|
Stock compensation
|
|
|
|
|
|
|
4,778
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
7,853
|
|
|
|
7,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
12,631
|
|
|
|
12,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
9,601
|
|
|
$
|
24,259
|
|
|
$
|
33,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
2006 Restructuring Program
|
|
2007
|
|
|
Employee severances (approximately 480 employees,
cumulatively)
|
|
$
|
3,781
|
|
Contract cancellation and other cash costs
|
|
|
2,081
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
5,862
|
|
Impairment of manufacturing and research facilities
|
|
|
1,376
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
1,376
|
|
|
|
|
|
|
Total:
|
|
$
|
7,238
|
|
|
|
|
|
|
The $24,259,000 restructuring charge for the three months ended
March 31, 2008 represent charges of $13,643,000,
$9,956,000, $526,000, and $134,000 in the Corporate division and
the International, EMEA, and North America segments,
respectively. The restructuring charges for the three months
ended March 31, 2007 represent charges of $3,042,000,
$2,177,000 and $2,019,000 in respect of the North America and
EMEA segments and the Corporate division, respectively.
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
Cash-related charges in the above table relate to severance
payments and other costs which have been either paid with cash
expenditures or have been accrued and will be paid with cash in
future quarters. The $3,766,000 restructuring accrual for the
2006 Restructuring, accrued as of March 31, 2008, relates
to ongoing contractual payments to Legacy Pharmaceuticals
International relating to the sale of our former sites in Basel,
Switzerland and Puerto Rico. These payment obligations last
until June 30, 2009. A summary of accruals and expenditures
of restructuring costs which will be paid in cash is as follows
(in thousands):
2006
Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
3,979
|
|
Charges to earnings
|
|
|
|
|
Cash paid
|
|
|
(213
|
)
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
3,766
|
|
|
|
|
|
|
2008
Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
8,521
|
|
Charges to earnings
|
|
|
11,628
|
|
Cash paid
|
|
|
(6,926
|
)
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
13,223
|
|
|
|
|
|
|
|
|
3.
|
Fair
Value Measurements
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements but does not change the requirements to apply fair
value in existing accounting standards. This statement applies
under other accounting pronouncements that require or permit
fair value measurements. The statement indicates, among other
things, that a fair value measurement assumes that the
transaction to sell an asset or transfer a liability occurs in
the principal market for the asset or liability or, in the
absence of a principal market, the most advantageous market for
the asset or liability.
Relative to SFAS 157, the FASB issued FASB Staff Positions
(FSP)
157-1 and
157-2.
FSP 157-1
amends SFAS 157 to exclude SFAS No. 13,
Accounting for Leases, (SFAS 13) and its
related interpretive accounting pronouncements that address
leasing transactions, while
FSP 157-2
delays the effective date of the application of SFAS 157 to
fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis.
We adopted SFAS 157 as of January 1, 2008, with the
exception of the application of the statement to nonfinancial
assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a
nonrecurring basis. Non-recurring nonfinancial assets and
nonfinancial liabilities for which we have not applied the
provisions of SFAS 157 include those measured at fair value
in goodwill impairment testing, indefinite lived intangible
assets measured at fair value for impairment testing and those
initially measured at fair value in a business combination. We
are currently assessing the impact SFAS 157 will have on
such nonfinancial assets and liabilities.
SFAS 157 establishes a valuation hierarchy for disclosure
of the inputs to valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels as
follows.
Level 1 Quoted market prices in active markets
for identical assets or liabilities.
11
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Level 2 Inputs, other than quoted prices in
active markets, that are observable, either directly or
indirectly.
Level 3 Unobservable inputs that are not
corroborated by market data.
The following table provides the assets and liabilities carried
at fair value measured on a recurring basis as of March 31,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Available-for-Sale Securities
|
|
$
|
5,906
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
|
|
|
$
|
4,444
|
|
|
|
|
|
Undesignated hedges
|
|
|
|
|
|
$
|
58
|
|
|
|
|
|
Net investment derivative contr
|
|
|
|
|
|
$
|
(4,935
|
)
|
|
|
|
|
Cash flow derivative contracts
|
|
|
|
|
|
$
|
(979
|
)
|
|
|
|
|
Fair value derivative contracts
|
|
|
|
|
|
$
|
(24
|
)
|
|
|
|
|
Available for sale securities are measured at fair value using
quoted market prices and are classified within Level 1 of
the valuation hierarchy. Derivative contracts used as hedges are
valued based on observable inputs such as changes in interest
rates and currency fluctuations and are classified within
Level 2 of the valuation hierarchy.
For a derivative instrument in an asset position, we analyze the
credit standing of the counterparty and factor it into the fair
value measurement. SFAS 157 states that the fair value
measurement of a liability must reflect the nonperformance risk
of the reporting entity. Therefore, the impact of our
creditworthiness has also been factored into the fair value
measurement of the derivative instruments in a liability
position.
In the three months ended March 31, 2008, we acquired
product rights in Poland for $504,000 in cash and $407,000 in
other consideration. In the three months ended March 31,
2007, we acquired product rights in the United States, Europe
and Argentina. 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 $9,659,000. We acquired the rights
to two products in Poland and certain products in Argentina. The
aggregate cash consideration for these transactions was
$31,325,000.
|
|
5.
|
Discontinued
Operations
|
In September 2007, we decided to divest our Infergen product
rights. The results of the Infergen operations and the related
financial position have been reflected as discontinued
operations in the consolidated financial statements in
accordance with SFAS 144. The consolidated financial
statements have been reclassified to conform to discontinued
operations presentation for all historical periods presented.
We sold these Infergen rights to Three Rivers Pharmaceuticals,
LLC on January 14, 2008. We received $70,800,000 as the
initial payment for our Infergen product rights, with additional
payments due of up to $20,500,000. We recorded a net gain in
this transaction of $27,566,000 after deducting the carrying
value of the net assets sold from the proceeds received.
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
In the three months ended March 31, 2008 and 2007, the
results from discontinued operations primarily related to
Infergen and are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Infergen:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
1,050
|
|
|
$
|
8,970
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
2,076
|
|
|
|
3,270
|
|
Selling expenses
|
|
|
1,365
|
|
|
|
5,994
|
|
General and administrative expenses
|
|
|
|
|
|
|
145
|
|
Research and development costs
|
|
|
9,684
|
|
|
|
2,120
|
|
Amortization expense
|
|
|
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
13,125
|
|
|
|
13,179
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, Infergen
|
|
|
(12,075
|
)
|
|
|
(4,209
|
)
|
Provision (benefit) for income taxes
|
|
|
1,299
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(13,374
|
)
|
|
|
(4,201
|
)
|
Disposal of discontinued operations, net
|
|
|
23,396
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
$
|
10,022
|
|
|
$
|
(4,200
|
)
|
|
|
|
|
|
|
|
|
|
The disposal of discontinued operations, net in the three months
ended March 31, 2008 includes an income tax charge of
$4,152,000.
The assets and liabilities of discontinued operations are stated
separately as of March 31, 2008 and December 31, 2007
on the accompanying consolidated condensed balance sheets. The
major assets and liabilities categories are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Inventories, net
|
|
$
|
|
|
|
$
|
1,051
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
132
|
|
Goodwill
|
|
|
|
|
|
|
4,816
|
|
Intangible assets, net
|
|
|
|
|
|
|
54,450
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
60,449
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accrued liabilities
|
|
|
133
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
133
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
13
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 March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(572
|
)
|
|
$
|
13,523
|
|
Income (loss) from discontinued operations
|
|
|
10,022
|
|
|
|
(4,200
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,450
|
|
|
$
|
9,323
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted shares outstanding
|
|
|
89,286
|
|
|
|
94,574
|
|
Vested stock equivalents (not issued)
|
|
|
304
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
89,590
|
|
|
|
94,730
|
|
Denominator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
1,232
|
|
Other dilutive securities
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share:
|
|
|
89,590
|
|
|
|
96,019
|
|
|
|
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.14
|
|
Income (loss) from discontinued operations
|
|
|
0.12
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.14
|
|
Income (loss) from discontinued operations
|
|
|
0.12
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008, options to
purchase 479,744 weighted average shares of common stock were
not included in the computation of earnings per share because we
incurred a loss in continuing operations and the effect would
have been anti-dilutive.
For the three months ended March 31, 2008 and 2007, options
to purchase 9,182,000 and 9,659,000 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.
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at March 31,
2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
133,551
|
|
|
$
|
162,591
|
|
Royalties receivable
|
|
|
13,649
|
|
|
|
18,620
|
|
Other receivables
|
|
|
35,834
|
|
|
|
23,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,034
|
|
|
|
204,724
|
|
Allowance for doubtful accounts
|
|
|
(13,634
|
)
|
|
|
(12,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,400
|
|
|
$
|
191,796
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
32,266
|
|
|
$
|
30,935
|
|
Work-in-process
|
|
|
13,729
|
|
|
|
13,707
|
|
Finished goods
|
|
|
95,246
|
|
|
|
89,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,241
|
|
|
|
134,005
|
|
Allowance for inventory obsolescence
|
|
|
(23,042
|
)
|
|
|
(18,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,199
|
|
|
$
|
115,177
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
$
|
229,612
|
|
|
$
|
215,172
|
|
Accumulated depreciation and amortization
|
|
|
(107,292
|
)
|
|
|
(98,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,320
|
|
|
$
|
116,376
|
|
|
|
|
|
|
|
|
|
|
The increase in other receivables includes receivables of
$7,000,000 and $5,585,000 related to the transactions with Three
Rivers Pharmaceuticals, LLC and Invida, respectively, offset by
reductions in certain other receivables.
Other assets was $49,414,000 as of March 31, 2008, an
increase of $14,071,000 from $35,343,000, reported as of
December 31, 2007. This increase primarily related to the
$11,006,000 receivable from Three Rivers Pharmaceuticals, LLC
and the $3,728,000 increase in the value of the interest rate
swap.
Intangible assets: As of March 31, 2008
and December 31, 2007, intangible assets were as follows
(in thousands, except life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Lives
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
13
|
|
|
$
|
305,496
|
|
|
$
|
(135,586
|
)
|
|
$
|
169,910
|
|
|
$
|
306,398
|
|
|
$
|
(128,267
|
)
|
|
$
|
178,131
|
|
Infectious diseases
|
|
|
11
|
|
|
|
15,992
|
|
|
|
(12,355
|
)
|
|
|
3,637
|
|
|
|
21,992
|
|
|
|
(14,054
|
)
|
|
|
7,938
|
|
Dermatology
|
|
|
19
|
|
|
|
98,808
|
|
|
|
(49,462
|
)
|
|
|
49,346
|
|
|
|
111,934
|
|
|
|
(54,178
|
)
|
|
|
57,756
|
|
Other products
|
|
|
11
|
|
|
|
360,232
|
|
|
|
(199,681
|
)
|
|
|
160,551
|
|
|
|
343,831
|
|
|
|
(192,253
|
)
|
|
|
151,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
780,528
|
|
|
|
(397,084
|
)
|
|
|
383,444
|
|
|
|
784,155
|
|
|
|
(388,752
|
)
|
|
|
395,403
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(63,568
|
)
|
|
|
3,808
|
|
|
|
67,376
|
|
|
|
(61,204
|
)
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
847,904
|
|
|
$
|
(460,652
|
)
|
|
$
|
387,252
|
|
|
$
|
851,531
|
|
|
$
|
(449,956
|
)
|
|
$
|
401,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
22,044
|
|
|
$
|
29,391
|
|
|
$
|
28,169
|
|
|
$
|
22,545
|
|
|
$
|
21,157
|
|
|
$
|
46,604
|
|
Infectious diseases
|
|
|
722
|
|
|
|
935
|
|
|
|
360
|
|
|
|
360
|
|
|
|
360
|
|
|
|
900
|
|
Dermatology
|
|
|
7,147
|
|
|
|
9,430
|
|
|
|
9,180
|
|
|
|
8,918
|
|
|
|
3,890
|
|
|
|
10,781
|
|
Other products
|
|
|
15,043
|
|
|
|
20,162
|
|
|
|
20,260
|
|
|
|
19,863
|
|
|
|
19,753
|
|
|
|
65,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
44,956
|
|
|
|
59,918
|
|
|
|
57,969
|
|
|
|
51,686
|
|
|
|
45,160
|
|
|
|
123,755
|
|
License agreement
|
|
|
3,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,764
|
|
|
$
|
59,918
|
|
|
$
|
57,969
|
|
|
$
|
51,686
|
|
|
$
|
45,160
|
|
|
$
|
123,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2008 and 2007 was $18,066,000 and $17,481,000, respectively, of
which $15,702,000 and $14,646,000, 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 US 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. The
increase in the valuation allowance for the three months ended
March 31, 2008 was $4,300,000. Our effective tax rate for
the three months ended March 31, 2008 was affected by
pre-tax losses resulting from restructuring and impairment
charges of $8,001,000 in Argentina for which we do not expect to
realize income tax benefits, and pre-tax income resulting from
restructuring associated with the sale of assets in Asia of
$8,962,000 which we do not expect to be subject to tax in
certain jurisdictions. A provision for income taxes of
$7,651,000 was recorded for this period which primarily
represents the taxes payable on earnings in tax jurisdictions
outside the United States and interest on uncertain tax
positions.
During the quarter ended March 31, 2008, we recorded a net
pre-tax gain from discontinued operations from the sale of our
Infergen product line in the United States. This gain was
considered in determining the amount of income tax benefit to be
allocated to current year losses from continuing operations in
the United States. As a result, we recorded income tax expense
of $4,152,000 in discontinued operations in the quarter ended
March 31, 2008 and this same amount will be recorded as an
income tax benefit in continuing operations for the full year
2008. Of this amount, $1,610,000 was included in the provision
for income taxes in continuing operations for the quarter ended
March 31, 2008 based on an allocation of the full year
impact to the quarter.
At March 31, 2008 we had $120,406,000 of unrecognized tax
benefits (FIN 48), of which $6,093,000 would reduce our
effective tax rate, if recognized. Of the total unrecognized tax
benefits, $24,173,000 was recorded as an offset against a
valuation allowance. To the extent such portion of unrecognized
tax benefits is recognized at a time when a valuation allowance
no longer exists, the recognition would affect our tax rate.
Based on current discussions with the IRS, we believe it is
reasonably possible that $40,764,000 of unrecognized tax
benefits will be reversed within the next twelve months. We also
believe that it is reasonably possible that
non-U.S. unrecognized
tax benefits of $313,000 will reverse within the next twelve
months.
16
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Our continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. As of
March 31, 2008, we had recorded $8,622,000 for interest and
$2,139,000 for penalties. We accrued additional $462,000 of
interest during the quarter ended March 31, 2008.
We are currently under audit by the IRS for the 2005 and 2006
tax years. We are appealing adjustments that were proposed
during the audit of the 2002 through 2004 tax years in the
U.S. All years prior to 1997 are closed under the statute
in the U.S. Our significant subsidiaries are open to tax
examinations for years ending in 2001 and later.
|
|
9.
|
Common
Stock and Share Compensation
|
We apply SFAS 123(R), Share-Based Payment which
requires the measurement and recognition of compensation expense
for all share-based payment awards made to our employees and
directors, including employee stock options and employee stock
purchases related to the Employee Stock Purchase Plan, based on
estimated fair values. A summary of stock compensation expense
for our stock incentive plans is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Employee stock options
|
|
$
|
1,382
|
|
|
$
|
3,434
|
|
Restricted stock units
|
|
|
844
|
|
|
|
457
|
|
Performance stock units
|
|
|
222
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
66
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,514
|
|
|
$
|
3,917
|
|
|
|
|
|
|
|
|
|
|
Dividends: We did not pay dividends for either
the first quarter of 2008 or the first quarter of 2007.
|
|
10.
|
Commitments
and Contingencies
|
We are involved in several legal proceedings, including the
following matters (Valeant was formerly known as ICN
Pharmaceuticals, Inc.):
Securities
Class Actions:
SEC Investigation: We are the subject of a
Formal Order of Investigation with respect to events and
circumstances surrounding trading in our common stock, the
public release of data from our first pivotal Phase III
trial for taribavirin, statements made in connection with the
public release of data and matters regarding our stock option
grants since January 1, 2000 and our restatement of certain
historical financial statements announced in March 2008. In
September 2006, our board of directors established a Special
Committee to review our historical stock option practices and
related accounting, and informed the SEC of these efforts. We
have cooperated fully and will continue to cooperate with the
SEC in its investigation. We cannot predict the outcome of the
investigation.
Derivative Actions Related to Stock
Options: We are a nominal defendant in two
shareholder derivative lawsuits pending in state court in Orange
County, California, styled (i) Michael Pronko v.
Timothy C. Tyson et al., and (ii) Kenneth Lawson v.
Timothy C. Tyson et al. These lawsuits, which were filed on
October 27, 2006 and November 16, 2006, respectively,
purport to assert derivative claims on our behalf against
certain of our current
and/or
former officers and directors. The lawsuits assert claims for
breach of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment, and
violations of the California Corporations Code related to the
purported backdating of employee stock options. The plaintiffs
seek, among other things, damages, an accounting, the rescission
of stock options, and a constructive trust over amounts acquired
by the defendants who have exercised Valeant stock options. On
January 16, 2007, the court issued an order consolidating
the two cases before Judge Ronald L. Bauer. On February 6,
2007, the court issued a further order abating the Lawson action
due
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
to a procedural defect while the Pronko action proceeds to
conclusion. The plaintiff in the Pronko action filed an amended
complaint on February 6, 2008, which dismissed claims
against eighteen defendants. The remaining defendants moved to
dismiss the amended complaint on March 17, 2008 and a
hearing is currently scheduled for June 2, 2008.
We are a nominal defendant in a shareholder derivative action
pending in the Court of Chancery of the state of Delaware,
styled Sherwood v. Tyson, et. al., filed on March 20,
2007. This complaint also purports to assert derivative claims
on the Companys behalf for breach of fiduciary duties,
gross mismanagement and waste, constructive fraud and unjust
enrichment related to the alleged backdating of employee stock
options. The plaintiff seeks, among other things, damages, an
accounting, disgorgement, rescission
and/or
repricing of stock options, and imposition of a constructive
trust for the benefit of the Company on amounts by which the
defendants were unjustly enriched. The plaintiff has agreed to a
stay pending resolution of the Pronko action in California.
Argentina Antitrust Matter: In July 2004, we
were advised that the Argentine Antitrust Agency had issued a
notice unfavorable to us in a proceeding against our Argentine
subsidiary. The proceeding involves allegations that the
subsidiary in Argentina abused a dominant market position in
1999 by increasing its price on Mestinon in Argentina and not
supplying the market for approximately two months. The
subsidiary filed documents with the agency offering an
explanation justifying its actions, but the agency has now
rejected the explanation. The agency is collecting evidence
prior to issuing a new decision. Argentinean law permits a fine
to be levied of up to $5,000,000 plus 20% of profits realized
due to the alleged wrongful conduct. Based upon the size of the
transactions alleged to have violated the law, we do not expect
this matter to draw the maximum penalty.
Permax Product Liability Cases: On
February 8, 2007, we were served a complaint in a case
captioned Kathleen M. OConnor v. Eli
Lilly & Company, Valeant Pharmaceuticals
International, Amarin Corporation plc, Amarin Pharmaceuticals,
Inc., Elan Pharmaceuticals, Inc., and Athena Neurosciences,
Inc., Case No. 07 L 47 in the Circuit Court of the
17th Judicial Circuit, Winnebago County, Illinois. This
case, which has been removed to federal court in the Northern
District of Illinois, alleges that the use of Permax for
restless leg syndrome caused the plaintiff to have valvular
heart disease, and as a result, she suffered damages, including
extensive pain and suffering, emotional distress and mental
anguish. On February 14, 2008, Valeant filed its motion for
summary judgment, arguing that plaintiff did not use Permax
after February 25, 2004, when Valeant acquired the right to
market and sell Permax in the United States. On April 23,
2008, we were served a complaint in a case captioned Barbara M.
Shows v. Eli Lilly and Company, Elan Corporation, PLC,
Amarin Corporation, PLC, and Valeant Pharmaceuticals
International, Case
No. 2008-24P
in the Circuit Court of Jefferson Davis County, Mississippi. We
are in the process of reviewing this matter. Eli Lilly, holder
of the right granted by the FDA to market and sell Permax in the
United States, which right was licensed to Amarin and the
source of the manufactured product, has also been named in the
suits. Under an agreement between Valeant and Eli Lilly, Eli
Lilly will bear a portion of the liability, if any, associated
with these claims. Product liability insurance exists with
respect to these claims. Although it is expected that the
insurance proceeds will be sufficient to cover any material
liability which might arise from these claims, there can be no
assurance that defending against any future similar claims and
any resulting settlements or judgments will not, individually or
in the aggregate, have a material adverse affect on our
consolidated financial position, results of operation or
liquidity.
Former ICN Yugoslavia Employees: In December
2003, sixteen former employees of ICN Yugoslavia filed a
complaint in state court in Orange County, California.
Plaintiffs allege that we breached a promise by Milan Panic, who
allegedly offered plaintiffs full pay and benefits if they
boycotted the management installed by the Yugoslavian government
following its takeover of ICN Yugoslavia. Plaintiffs
initial complaint and first amended complaint were both
dismissed by the judge in March and October 2004, respectively.
However, plaintiffs appealed and the Court of Appeals reversed
the trial courts dismissal. Plaintiffs filed their second
amended complaint in January 2006, alleging only unjust
enrichment and constructive fraud. The parties subsequently
agreed to submit this matter to binding arbitration. On
December 28, 2007, the arbitrator ruled in favor of Valeant
on key threshold legal issues. A final order in favor of Valeant
was entered on March 27, 2008.
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Alfa Wasserman: On December 29, 2005,
Alfa Wassermann (Alfa) filed suit against our
Spanish subsidiary in the Commercial Court of Barcelona, Spain,
alleging that our Calcitonina Hubber Nasal 200 UI Monodosis
product infringes Alfas European patent EP 363.876 (ES
2.053.905) and demanded that we cease selling our product in the
Spanish market and pay damages for lost profits caused by
competition in the amount of approximately 9 million Euros.
We filed a successful counter-claim; however, Alfa has filed an
appeal. The Court of Appeals held a hearing in February 2008 and
we are awaiting a decision.
Spear Pharmaceuticals, Inc.: On
December 17, 2007, Spear Pharmaceuticals, Inc. and Spear
Dermatology Products, Inc. filed a complaint in federal court
for the District of Delaware, Case
No. 07-821,
against Valeant and investment firm William Blair &
Company, LLC. Plaintiffs allege that while William Blair was
engaged in connection with the possible sale of plaintiffs
generic tretinoin business, plaintiffs disclosed to William
Blair the development of generic Efudex in their product
pipeline. Plaintiffs further allege that William Blair, while
under confidentiality obligations to plaintiffs, shared such
information with Valeant and that Valeant then filed a Citizen
Petition with the FDA requesting that any abbreviated new drug
application for generic Efudex include a study on superficial
basal cell carcinoma. Arguing that Valeants Citizen
Petition caused the FDA to delay approval of their generic
Efudex, plaintiffs seek damages for Valeants alleged
breach of contract, trade secret misappropriation and unjust
enrichment, in addition to other causes of action against
William Blair. We believe this case is without merit and are
vigorously defending ourselves in this matter.
On April 11, 2008, the Food and Drug Administration (FDA)
approved an Abbreviated New Drug Application (ANDA)
for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals.
On April 11, 2008, the FDA also responded to our Citizen
Petition that was filed on December 21, 2004 and denied our
request that the FDA refrain from approving any ANDA for a
generic version of Efudex unless the application contains data
from an adequately designed comparative clinical study conducted
in patients with superficial basal cell carcinoma. On
April 25, 2008, Valeant filed an application for a
temporary restraining order (TRO) against Michael O. Leavitt and
Andrew C. Von Eschenbach, in their official capacities at the
FDA, in the United States District Court seeking to suspend the
FDAs approval of Spears ANDA. On May 1, 2008,
the Court granted the FDAs request to stay proceedings on
Valeants application for a TRO until May 14, 2008.
Spear Pharmaceuticals has agreed to suspend marketing, sales and
shipment activities for the duration of the stay.
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.
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the amounts of our segment
revenues and operating income for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
72,276
|
|
|
$
|
62,599
|
|
International
|
|
|
29,151
|
|
|
|
35,275
|
|
EMEA
|
|
|
80,486
|
|
|
|
70,059
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
181,913
|
|
|
|
167,933
|
|
Alliance revenues (including ribavirin royalties)
|
|
|
12,773
|
|
|
|
36,470
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
194,686
|
|
|
$
|
204,403
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
27,413
|
|
|
$
|
17,331
|
|
International
|
|
|
(2,653
|
)
|
|
|
273
|
|
EMEA
|
|
|
11,087
|
|
|
|
18,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,847
|
|
|
|
36,313
|
|
Corporate expenses(1)
|
|
|
(15,427
|
)
|
|
|
(15,960
|
)
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
20,420
|
|
|
|
20,353
|
|
Restructuring, asset impairments and dispositions(2)
|
|
|
12,664
|
|
|
|
(7,238
|
)
|
Research and development
|
|
|
(17,978
|
)
|
|
|
14,123
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
15,106
|
|
|
|
27,238
|
|
Interest income
|
|
|
4,946
|
|
|
|
4,511
|
|
Interest expense
|
|
|
(9,719
|
)
|
|
|
(10,952
|
)
|
Other, net
|
|
|
(3,252
|
)
|
|
|
1,136
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
minority interest
|
|
$
|
7,081
|
|
|
$
|
21,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense has been considered a corporate
cost as management excludes this item in assessing the financial
performance of individual business segments and considers it a
function of valuation factors that pertain to overall corporate
stock performance. |
|
(2) |
|
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. |
20
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth our total assets by segment as of
March 31, 2008 and December 31, 2007
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Total Assets
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
$
|
368,310
|
|
|
$
|
367,869
|
|
International
|
|
|
177,706
|
|
|
|
200,955
|
|
EMEA
|
|
|
550,110
|
|
|
|
493,452
|
|
Corporate
|
|
|
446,948
|
|
|
|
319,335
|
|
Research and Development Division
|
|
|
43,434
|
|
|
|
52,202
|
|
Discontinued operations
|
|
|
|
|
|
|
60,449
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,586,508
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our long-term assets by segment
as of March 31, 2008 and December 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Long-term Assets
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
$
|
287,651
|
|
|
$
|
285,712
|
|
International
|
|
|
46,497
|
|
|
|
57,510
|
|
EMEA
|
|
|
234,285
|
|
|
|
221,596
|
|
Corporate
|
|
|
113,902
|
|
|
|
110,484
|
|
Research and Development Division
|
|
|
21,964
|
|
|
|
24,288
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
704,299
|
|
|
$
|
699,590
|
|
|
|
|
|
|
|
|
|
|
21
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 ended
March 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Therapeutic Area/Product
|
|
2008
|
|
|
2007
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
Diastat
AcuDialtm
|
|
$
|
12,179
|
|
|
$
|
11,072
|
|
Mestinon®
|
|
|
11,531
|
|
|
|
10,538
|
|
Cesamet®
|
|
|
9,996
|
|
|
|
5,911
|
|
Librax®
|
|
|
3,582
|
|
|
|
3,667
|
|
Migranal®
|
|
|
2,556
|
|
|
|
3,036
|
|
Tasmar®
|
|
|
2,423
|
|
|
|
1,982
|
|
Dalmane®/Dalmadorm®
|
|
|
2,174
|
|
|
|
2,336
|
|
Zelapar®
|
|
|
1,939
|
|
|
|
195
|
|
Melleril
|
|
|
1,104
|
|
|
|
1,538
|
|
Other Neurology
|
|
|
12,799
|
|
|
|
15,689
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
60,283
|
|
|
|
55,964
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
Efudix/Efudex®
|
|
|
23,194
|
|
|
|
12,477
|
|
Kinerase®
|
|
|
5,610
|
|
|
|
8,378
|
|
Dermatixtm
|
|
|
3,471
|
|
|
|
2,771
|
|
Oxsoralen-Ultra®
|
|
|
2,745
|
|
|
|
3,883
|
|
Other Dermatology
|
|
|
7,020
|
|
|
|
8,013
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
42,040
|
|
|
|
35,522
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
Virazole®
|
|
|
5,496
|
|
|
|
5,519
|
|
Other Infectious Disease
|
|
|
4,954
|
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
Total Infectious Disease
|
|
|
10,450
|
|
|
|
10,674
|
|
|
|
|
|
|
|
|
|
|
Other therapeutic classes
|
|
|
|
|
|
|
|
|
Bisocard
|
|
|
6,825
|
|
|
|
4,694
|
|
Solcoseryl
|
|
|
6,285
|
|
|
|
5,347
|
|
Bedoyectatm
|
|
|
3,987
|
|
|
|
4,561
|
|
Nyal
|
|
|
2,388
|
|
|
|
1,763
|
|
MVI (multi-vitamin infusion)
|
|
|
2,258
|
|
|
|
2,482
|
|
Protamin
|
|
|
1,644
|
|
|
|
2,070
|
|
Espaven
|
|
|
1,076
|
|
|
|
1,862
|
|
Other products
|
|
|
44,677
|
|
|
|
42,994
|
|
|
|
|
|
|
|
|
|
|
Total other therapeutic classes
|
|
|
69,140
|
|
|
|
65,773
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
181,913
|
|
|
$
|
167,933
|
|
|
|
|
|
|
|
|
|
|
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
During the three months ended March 31, 2008 one customer
accounted for more than 10% of consolidated product sales.
During this period, sales to McKesson Corporation and its
affiliates were $29,828,000 in the United States, Canada,
and Mexico, representing 16% of our consolidated product sales.
We report the royalties received from the sale of ribavirin by
Schering-Plough separately from our specialty pharmaceuticals
product sales revenue. In 2007, we began presenting these
royalty revenues within a new category of revenues,
alliance revenue. The following table provides the
details of our alliance revenue in the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Ribavirin royalty
|
|
$
|
12,773
|
|
|
$
|
17,220
|
|
Licensing payment
|
|
|
|
|
|
|
19,200
|
|
Other
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
12,773
|
|
|
$
|
36,470
|
|
|
|
|
|
|
|
|
|
|
The licensing payment of $19,200,000 was received from
Schering-Plough as the initial payment to us in the licensing of
pradefovir. Alliance revenue for the three months ended
March 31, 2007 also included a $50,000 payment from an
unrelated third party for a license to certain intellectual
property assets.
23
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a multinational pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products.
Although historically we have focused most of our efforts on
neurology, dermatology, and infectious disease, our prescription
products also treat, among other things, neuromuscular
disorders, cancer, cardiovascular disease, diabetes and
psychiatric disorders. Our products are sold through three
pharmaceutical segments comprising: North America,
International (Latin America and Australasia) and EMEA (Europe,
Middle East and Africa). In addition, we receive alliance
revenue in the form of royalties from the sale of ribavirin by
Schering-Plough. We expect that this royalty revenue will
decline significantly in 2009 in that royalty payments from
Schering-Plough continue for European sales only until the
ten-year anniversary of the launch of the product, which varied
by country and started in May 1999. We expect that royalties
from Schering-Plough in Japan will continue after 2009.
Company
Strategy and Restructuring
In October 2007, our board of directors initiated a strategic
review (the 2008 Strategic Review) of our business
direction, geographic and commercial operations, product and
business portfolio, growth opportunities and acquisition
strategy. On March 26, 2008, our board of directors
approved a new strategic plan for our company. The key elements
of this strategy include the following:
Focus the business. We are restructuring our
business in order to focus on the pharmaceutical markets in our
core geographies of the United States, Mexico, Canada, Brazil
and Australia. We are pursuing plans to divest our operations in
markets outside of these core geographic areas, through sales of
subsidiaries, assets, or other strategic alternatives.
Maximize the pipeline. We expect to find
strategic partners to help us optimize the value of our two
late-stage development projects, retigabine, a potential
treatment for partial onset seizures in patients with epilepsy
and for neuropathic pain, and taribavirin, a potential treatment
for hepatitis C. We are identifying potential opportunities
for taribavirin in niche indications where there are significant
unmet medical needs and expect to utilize a partner if we pursue
a large phase III clinical development program in
hepatitis C.
Rebase and grow. With our focus on the
therapeutic areas of neurology and dermatology in our core
geographies, we plan to invest in our business and pursue
selective acquisitions in order to deliver returns to our
shareholders. Our strategic plan is designed to streamline our
business, reduce expenses and align our infrastructure with the
reduced scale of our operations.
Prior to the start of the 2008 Strategic Review, we reviewed our
portfolio for products and geographies that did not meet our
growth and profitability expectations and divested or
discontinued certain non-strategic products as a result. We sold
our rights to Infergen to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. In 2007, we also sold product rights to
Reptilase, Solcoseryl in Japan, our opthalmic business in
Holland, and certain other products. On March 3, 2008, we
sold certain of our subsidiaries and product rights in Asia to
Invida Pharmaceutical Holdings Pte. Ltd. in a transaction that
included certain of our subsidiaries, branch offices and
commercial rights in Singapore, the Philippines, Thailand,
Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau.
This transaction also included certain product rights in Japan.
On April 11, 2008, the Food and Drug Administration (FDA)
approved an Abbreviated New Drug Application (ANDA)
for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals.
On April 11, 2008, the FDA also responded to our Citizen
Petition that was filed on December 21, 2004 and denied our
request that the FDA refrain from approving any ANDA for a
generic version of Efudex unless the application contains data
from an adequately designed comparative clinical study conducted
in patients with superficial basal cell carcinoma. On
April 25, 2008, Valeant filed an application for a
temporary restraining order (TRO) against Michael O. Leavitt and
Andrew C. Von Eschenbach, in their official capacities at the
FDA, in the United States District Court seeking to suspend the
FDAs approval of Spears ANDA. On May 1, 2008,
the Court granted the FDAs request to stay proceedings on
Valeants application for a TRO until May 14, 2008.
Spear Pharmaceuticals has agreed to suspend marketing, sales and
24
shipment activities for the duration of the stay. If a
competitor is allowed to launch a generic version of our Efudex
product, our sales in the U.S. of Efudex will significantly
decline.
Specialty
Pharmaceuticals
Product sales from our pharmaceutical segments accounted for 93%
of our total revenue from continuing operations for the three
months ended March 31, 2008, compared with 82% for the
corresponding period in 2007, and increased $13,980,000 (8%) for
the three months ended March 31, 2008 over the same period
in 2007. The 8% increase in specialty pharmaceutical sales for
the three months ended March 31, 2008 was due to an 8%
benefit from foreign exchange fluctuations and a 1% price
increase, partly offset by a 1% decline in volume.
Clinical
Development
We seek to develop and commercialize innovative products for the
treatment of significant unmet medical needs, principally in the
areas of neurology and infectious disease. Research and
development expenses were $29,392,000 for the three months ended
March 31, 2008, compared to $20,990,000 for the same period
in 2007, reflecting an increase of $8,402,000 (40%). This
increase was largely driven by the expenditures for the
retigabine clinical development program in the period.
Alliance
Revenues
Alliance revenue for the three months ended March 31, 2008
consisted exclusively of $12,773,000 of ribavirin royalty
revenue from Schering-Plough. Alliance revenue for the three
months ended March 31, 2007 comprised the $19,200,000
pradefovir licensing payment from Schering-Plough, $17,220,000
of ribavirin royalties, and a separate licensing payment of
$50,000. Ribavirin royalty revenues decreased $4,447,000 (26%)
and accounted for 7% of our total revenues from continuing
operations for the three months ended March 31, 2008 as
compared to 8% in the similar three-month period in 2007. The
decrease in ribavirin royalties reflects Schering-Ploughs
market share losses in ribavirin sales and Roches
discontinuation of royalty payments to us in June 2007. We
expect ribavirin royalties to continue to decline in 2008. The
royalty will decline significantly in 2009 in that royalty
payments from Schering-Plough continue for European sales only
until the ten-year anniversary of the launch of the product,
which varied by country and started in May 1999. We expect that
royalties from Schering-Plough in Japan will continue after 2009.
Results
of Operations
As part of the 2008 Strategic Review, we announced on
March 27, 2008 that we would focus on the pharmaceutical
markets in the United States, Mexico, Canada, Brazil, and
Australia and intend to stop organizing our company by
geographic regions. In the three months ended March 31,
2008, however, we were still operating in our three reportable
pharmaceutical segments, comprising pharmaceuticals operations
in North America; International; and Europe, Middle East, and
Africa. In addition, we have a research and development
division. Certain financial information for our business
segments is set forth below. 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 11 of notes to consolidated
condensed financial statements included elsewhere in this
quarterly report.
25
The following tables compare revenues by reportable segments and
operating expenses for the three months ended March 31,
2008 and 2007 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
72,276
|
|
|
$
|
62,599
|
|
|
$
|
9,677
|
|
|
|
15
|
%
|
International
|
|
|
29,151
|
|
|
|
35,275
|
|
|
|
(6,124
|
)
|
|
|
(17
|
)%
|
EMEA
|
|
|
80,486
|
|
|
|
70,059
|
|
|
|
10,427
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
181,913
|
|
|
|
167,933
|
|
|
|
13,980
|
|
|
|
8
|
%
|
Alliance revenues (including ribavirin royalties)
|
|
|
12,773
|
|
|
|
36,470
|
|
|
|
(23,697
|
)
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
194,686
|
|
|
|
204,403
|
|
|
|
(9,717
|
)
|
|
|
(5
|
)%
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
54,890
|
|
|
|
46,901
|
|
|
|
7,989
|
|
|
|
17
|
%
|
Selling expenses
|
|
|
63,790
|
|
|
|
58,440
|
|
|
|
5,350
|
|
|
|
9
|
%
|
General and administrative expenses
|
|
|
26,106
|
|
|
|
26,115
|
|
|
|
(9
|
)
|
|
|
0
|
%
|
Research and development costs
|
|
|
29,392
|
|
|
|
20,990
|
|
|
|
8,402
|
|
|
|
40
|
%
|
Restructuring, asset impairments and dispositions
|
|
|
(12,664
|
)
|
|
|
7,238
|
|
|
|
(19,902
|
)
|
|
|
NM
|
|
Amortization expense
|
|
|
18,066
|
|
|
|
17,481
|
|
|
|
585
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
15,106
|
|
|
$
|
27,238
|
|
|
$
|
(12,132
|
)
|
|
|
(45
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
127,023
|
|
|
$
|
121,032
|
|
|
$
|
5,991
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
70
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not Meaningful
In the North America pharmaceuticals segment, revenues for the
three months ended March 31, 2008 were $72,276,000,
compared to $62,599,000 for the same period in 2007,
representing an increase of $9,677,000 (15%). The region
reported increases in sales of Efudex, Cesamet, and Zelapar,
which were partly offset by decreases in sales in the first
quarter of Kinerase and Oxsoralen-Ultra. Sales of Efudex in the
three months ended March 31, 2007 were low because of the
pull-through of inventory from our December 2006 launch of an
authorized generic version of Efudex in the U.S. The
reported growth of Cesamet reflects strong demand for Cesamet in
Canada. Product sales in the North America region were 40% of
total product sales in the three months ended March 31,
2008, compared with 37% in the three months ended March 31,
2007. The North America sales increase of 15% resulted from a
volume increase of 7%, a price increase of 5%, and a 3% benefit
from currency fluctuations in Canada.
In the International pharmaceuticals segment, revenues for the
three months ended March 31, 2008 were $29,151,000 compared
to $35,275,000 for the same period in 2007, a decrease of
$6,124,000 (17%). Our sales to our two largest wholesalers in
Mexico continue to be impacted by their reaction to the changes
we made in our distribution channel in 2006. In addition, the
decline in the International segment relates to our sale of
certain subsidiaries and business operations in Asia to Invida
on March 3, 2008. Our sales in the operations sold to
Invida were $4,140,000 in the three months ended March 31,
2007, compared with $1,059,000 in the two months ended
February 29, 2008. The International sales decrease of 17%
resulted from a 21% decrease in volume and a 1% price reduction,
partially offset by a 5% benefit from currency fluctuations.
In the EMEA pharmaceuticals segment, revenues for the three
months ended March 31, 2008 were $80,486,000, compared to
$70,059,000 for the same period in 2007, representing an
increase of $10,427,000 (15%). The region reported increases in
sales of Solcoseryl, Mestinon, and Bisocard, which were partly
offset by declines in sales of Kinerase, Protamin, and Efudex.
The EMEA sales increase resulted from a 15% benefit from
currency fluctuations and a 1% increase in volume, partly offset
by a 1% decline in price.
26
Gross Profit Margin (excluding
amortization): Gross profit margin on product
sales was 70% for the first quarter of 2008, compared with 72%
for the same period in 2007. The decrease in gross profit margin
primarily reflects increased inventory obsolescence charges.
Selling Expenses: Selling expenses were
$63,790,000 for the three months ended March 31, 2008,
compared to $58,440,000 for the same period in 2007. As a
percent of product sales, selling expenses were 35% for the
three months ended March 31, 2008 and March 31, 2007.
The increase in selling expenses results primarily from currency
impacts as well as increased promotional activity in support of
branded generic products in Central Europe, Kinerase and
neurology products in the United States.
General and Administrative Expenses: General
and administrative expenses were $26,106,000 for the three
months ended March 31, 2008, compared to $26,115,000 for
the same period in 2007, a decrease of $9,000 (0%). As a percent
of product sales, general and administrative expenses were 14%
for the three months ended March 31, 2008, compared to 16%
for the same period in 2007.
Included in general and administrative expenses in the three
months ended March 31, 2007 was a $3,800,000 expense for
the arbitration loss on the indemnification claim we had against
the former shareholders of Xcel Pharmaceuticals associated with
sales of Xcel products prior to our acquisition of the company.
This was partially offset by a $2,200,000 gain on the sale of an
ophthalmic business in Europe.
Research and Development: Research and
development expenses were $29,392,000 for the three months ended
March 31, 2008, compared to $20,990,000 for the same period
in 2007, an increase of $8,402,000 (40%). This increase was
largely driven by the expenditures for the retigabine clinical
development program in the period.
Restructuring
Charges:
2008
Restructuring
In October 2007, our board of directors initiated a strategic
review of our business direction, geographic operations, product
portfolio, growth opportunities and acquisition strategy. As
announced on March 27, 2008, we have completed this
strategic review and announced a strategic plan which will
include a restructuring program (the 2008
Restructuring). The 2008 Restructuring is expected to
reduce our geographic footprint and product focus by
restructuring our business in order to focus on the
pharmaceutical markets in our core geographies of the
United States, Mexico, Canada, Brazil and Australia. We are
pursuing plans to divest our operations in markets outside of
these core geographic areas through sales of subsidiaries,
assets or other strategic alternatives, to seek partners for
taribavirin and retigabine and to make selective acquisitions.
In December 2007, we signed an agreement with Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) to sell
Invida certain Valeant subsidiaries and product rights in Asia,
in a transaction that included certain of our subsidiaries,
branch offices and commercial rights in Singapore, the
Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China,
Hong Kong, Malaysia and Macau. This transaction also included
certain product rights in Japan. We closed this transaction on
March 3, 2008. The assets sold to Invida were classified as
held for sale as of December 31, 2007 in
accordance with SFAS 144. We received initial proceeds of
$37,855,000 and recorded a gain of $36,923,000 in this
transaction. We expect to receive additional proceeds in 2008 of
approximately $5,585,000 as a purchase price adjustment relating
to net asset value.
As of March 31, 2008, we classified our subsidiaries in
Argentina and Uruguay as held for sale in accordance
with SFAS 144. We are negotiating the sale of these
subsidiaries, which we expect to close in 2008. In the three
months ended March 31, 2008, we recorded an impairment
charge of $7,853,000 related to this sale.
The net restructuring, asset impairments and dispositions
benefit of $12,664,000 in the three months ended March 31,
2008 resulted from the gain of $36,923,000 in the transaction
with Invida, offset in part by restructuring charges of
$24,259,000. Restructuring charges incurred in the three months
ended March 31, 2008 included severance costs of
$6,742,000, contract cancellation and other cash costs of
$3,536,000, cash charges from the Invida transaction of
$1,350,000, a stock compensation charge for the accelerated
vesting of the stock options of our former chief executive
officer of $4,778,000 and an impairment charge of $7,853,000
related to the planned sale of our subsidiaries in Argentina and
Uruguay. The severance charges recorded in the 2008
Restructuring as of
27
March 31, 2008 were primarily for our former chief
executive officer and six other executives. The charges taken in
2007 for this 2008 Restructuring included $957,000 for executive
severances, $4,677,000 for professional service expenses and
$3,967,000 for contract termination and transaction costs
associated with the sale of our Asia businesses to Invida.
As of the filing date of this quarterly report on
Form 10-Q,
we are not able to estimate the total restructuring charges that
we will incur in the 2008 Restructuring.
2006
Restructuring
On April 3, 2006, we announced a restructuring program (the
2006 Restructuring) which was primarily focused on
our research and development and manufacturing operations. The
objective of the restructuring program as it related to research
and development activities was to focus our efforts and
expenditures on retigabine and taribavirin, our two late stage
projects in development. The restructuring program was designed
to rationalize our investments in research and development
efforts in line with our financial resources. In December 2006
we sold our HIV and cancer development programs and certain
discovery and pre-clinical assets to Ardea Biosciences, Inc.
(Ardea), with an option for us to reacquire rights
to commercialize the HIV program outside of the United States
and Canada upon Ardeas completion of Phase 2b trials. In
March 2007, we sold our former headquarters building in Costa
Mesa, California, where our former research laboratories were
located, for net proceeds of $36,758,000.
In the three months ended March 31, 2007, we recorded a
charge of $7,238,000 related to the 2006 Restructuring.
Severance charges recorded in the three months ended
March 31, 2007 for employees whose positions were
eliminated in the restructuring totaled $3,781,000. The charge
in the three months ended March 31, 2007 included
$2,050,000 related to 202 employees at our former
manufacturing facility in Humacao, Puerto Rico and $895,000
related to 10 employees in our sales and marketing
operations in Spain.
The objective of the 2006 Restructuring as it related to
manufacturing was to further rationalize our manufacturing
operations to reflect the regional nature of our existing
products and further reduce our excess capacity after
considering the delay in the development of taribavirin. The
impairment charges included the charges related to estimated
future losses expected upon the disposition of specific assets
related to our manufacturing operations in Switzerland and
Puerto Rico. We completed the 2006 Restructuring in June 2007
with the sale of our former manufacturing facilities in Humacao,
Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals
International.
The following table summarizes the restructuring costs recorded
in the three months ended March 31, 2008 and March 31,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Cumulative
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Total
|
|
|
|
2007
|
|
|
2008
|
|
|
Incurred
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-related charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances (contractual obligations)
|
|
$
|
957
|
|
|
$
|
6,742
|
|
|
$
|
7,699
|
|
Contract cancellation and other cash costs
|
|
|
8,644
|
|
|
|
4,886
|
|
|
|
13,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
9,601
|
|
|
|
11,628
|
|
|
|
21,229
|
|
Stock compensation
|
|
|
|
|
|
|
4,778
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
7,853
|
|
|
|
7,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
12,631
|
|
|
|
12,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
9,601
|
|
|
$
|
24,259
|
|
|
$
|
33,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006 Restructuring Program
|
|
|
|
|
Employee severances (approximately 480 employees,
cumulatively)
|
|
$
|
3,781
|
|
Contract cancellation and other cash costs
|
|
|
2,081
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
5,862
|
|
Impairment of manufacturing and research facilities
|
|
|
1,376
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
1,376
|
|
|
|
|
|
|
Total:
|
|
$
|
7,238
|
|
|
|
|
|
|
The $24,259,000 restructuring charge for the three months ended
March 31, 2008 represent charges of $13,643,000,
$9,956,000, $526,000, and $134,000 in the Corporate division and
the International, EMEA, and North America segments,
respectively. The restructuring charges for the three months
ended March 31, 2007 represent charges of $3,042,000,
$2,177,000 and $2,019,000 in respect of the North America and
EMEA segments and the Corporate division, respectively.
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 $3,766,000 restructuring accrual for the
2006 Restructuring, accrued as of March 31, 2008, relates
to ongoing contractual payments to Legacy Pharmaceuticals
International relating to the sale of our former sites in Basel,
Switzerland and Puerto Rico. These payment obligations last
until June 30, 2009. A summary of accruals and expenditures
of restructuring costs which will be paid in cash is as follows
(in thousands):
2006
Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
3,979
|
|
Charges to earnings
|
|
|
|
|
Cash paid
|
|
|
(213
|
)
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
3,766
|
|
|
|
|
|
|
2008
Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
8,521
|
|
Charges to earnings
|
|
|
11,628
|
|
Cash paid
|
|
|
(6,926
|
)
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
13,223
|
|
|
|
|
|
|
Amortization: Amortization expense was
$18,066,000 for the three months ended March 31, 2008,
compared to $17,481,000 for the three months ended
March 31, 2007, resulting in an increase of $585,000 (3%).
The increase is the result of the 2007 acquisition of product
rights for Kinerase, Nabilone and Melleril, offset in part by a
declining amortization expense for the rights to the ribavirin
royalty. The remaining $3,808,000 net intangible associated
with the ribavirin royalty will be fully amortized as of
June 30, 2008.
Other Income (expense), Net, Including Translation and
Exchange: Other income (expense), net, including
translation and exchange was an expense of $3,252,000 in the
three months ended March 31, 2008, compared to income of
$1,136,000 in the three months ended March 31, 2007. The
charges for translation in the three months ended March 31,
2008 were primarily in Europe and related to foreign currency
appreciation relative to the dollar.
29
Interest Expense, net: Interest expense net of
interest income decreased $1,668,000 (26%) during the three
months ended March 31, 2008, compared to the same period in
2007, primarily as a result of higher interest income on higher
cash and investment securities balances, partially offset by the
impact of lower interest rates.
Income Taxes: The tax provisions in the first
quarter of both 2008 and 2007 relate to the profits of our
foreign operations, foreign withholding taxes, and interest on
uncertain tax positions. Our U.S. operations, which include
our research and development activities, generate substantial
net operating losses for United States 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.
Income (loss) from Discontinued Operations, Net of
Taxes: Our income from discontinued operations in
the three months ended March 31, 2008 related to the
disposition of our Infergen operations. We recorded a net gain
of $23,396,000 from the sale of our Infergen operations to Three
Rivers Pharmaceuticals, LLC on January 14, 2008. Our loss
from discontinued operations in the three months ended
March 31, 2007 related primarily to our Infergen operations.
Liquidity
and Capital Resources
Cash and marketable securities totaled $519,259,000 at
March 31, 2008 compared to $361,487,000 at
December 31, 2007. The increase in cash of $157,772,000
resulted in part from the receipt of $70,800,000 from Three
Rivers Pharmaceuticals, LLC as the initial payment for our
Infergen rights, the $37,855,000 received from Invida for the
sale of certain of our businesses in Asia, and cash flow from
operations. Working capital (excluding assets held for sale and
assets of discontinued operations) was $639,790,000 at
March 31, 2008 compared to $522,764,000 at
December 31, 2007. The increase in working capital of
$117,026,000 primarily resulted from the increase in cash,
offset in part by a decrease in marketable securities, a
decrease in accounts receivable, and an increase in accrued
liabilities.
Cash provided by operating activities in continuing operations
is expected to be our primary source of funds for operations in
2008. During the three months ended March 31, 2008, cash
provided by operating activities in continuing operations
totaled $53,529,000 compared to $31,107,000 in the same period
in 2007, representing an increase of $22,422,000. The cash
provided by operating activities in continuing operations was a
result of the reduction in accounts receivable and the increase
in trade payables and accrued liabilities, offset in part by an
increase in inventories. The cash provided by operating
activities in continuing operations for the three months ended
March 31, 2007 included receipt of $19,200,000 related to
the pradefovir licensing payment from Schering-Plough.
Cash provided by investing activities in continuing operations
was $65,705,000 for the three months ended March 31, 2008
compared with cash provided by investing activities in
continuing operations of $4,568,000 for the same period in 2007,
an increase of $61,137,000. The cash provided by investing
activities in continuing operations for the three months ended
March 31, 2008 included the $37,855,000 we received from
the Invida transaction and $34,892,000 in proceeds from
investments, offset in part by capital expenditures of
$4,789,000. Cash provided by investing activities in
discontinued operations consisted of the $70,800,000 of cash
proceeds received as the initial payment in the sale of our
Infergen operations to Three Rivers Pharmaceuticals LLC. In
2007, cash provided by investing activities in continuing
operations included $36,758,000 from the sale of our former
Costa Mesa headquarters and research facility, and $1,686,000
for the sale of an ophthalmics business in Europe, offset in
part by cash used for product acquisitions of $31,325,000.
Cash used in financing activities in continuing operations was
$348,000 in the three months ended March 31, 2008. Cash
used in financing activities in continuing operations was
$2,992,000 in the three months ended March 31, 2007 and
principally consisted of payments of long-term debt of
$7,601,000, including the extinguishment of a mortgage in
Switzerland, partly offset by proceeds from stock options of
$3,855,000 and proceeds from the employee stock purchase plan of
$359,000. We did not pay dividends on common stock in the three
months ended March 31, 2008 and 2007.
30
In January 2005, we entered into an interest rate swap agreement
with respect to $150,000,000 principal amount of our
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
March 31, 2008, we have collateral of $5,035,000 comprising
marketable securities and included in other assets in the
accompanying balance sheet.
We believe that our existing cash and cash equivalents and funds
generated from operations will be sufficient to meet our
operating requirements at least through March 31, 2009, and
to provide cash needed to fund capital expenditures and our
clinical development program. While we have no current intent to
issue additional debt or equity securities, we may seek
additional debt financing or issue additional equity securities
to finance future acquisitions or for other purposes. We fund
our operating cash requirements primarily from cash provided by
operating activities. Our sources of liquidity are cash and cash
equivalent balances, cash flow from operations, and cash
provided by investing activities. As announced in our 2008
Restructuring, we intend to sell parts of our company and
partner elements of our pipeline. We expect to use the proceeds
to invest in an appropriate mix of internal investment, share
repurchase, acquisitions and debt reductions within the
provisions of our loan indentures.
We did not pay dividends for either the first quarter of 2008 or
the first quarter of 2007. Our board of directors will continue
to review our dividend policy. The amount and timing of any
future dividends will depend upon our financial condition and
profitability, the need to retain earnings for use in the
development of our business, contractual restrictions, including
covenants, and other factors. There are significant contractual
limitations on our ability to pay dividends under the terms of
the indenture governing our 7% senior notes due 2011.
Off-Balance
Sheet Arrangements
We do not use special purpose entities or other off-balance
sheet financing techniques except for operating leases disclosed
in our annual report on
Form 10-K.
Our 3% and 4% convertible subordinated notes include conversion
features that are considered off-balance sheet arrangements
under SEC requirements.
Products
in Development
Late
Stage Development of New Chemical Entities
Retigabine: We are developing retigabine as an
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine stabilizes hyper-excited neurons primarily
by opening neuronal potassium channels. The results of the key
Phase II study indicate that the compound is potentially
efficacious with a demonstrated reduction in monthly seizure
rates of 23% to 35% as adjunctive therapy in patients with
partial seizures. Response rates in the two higher doses were
statistically significant compared to placebo (p<0.001).
Following a Special Protocol Assessment by the FDA, two
Phase III trials of retigabine were initiated in 2005. One
Phase III trial (RESTORE 1; RESTORE stands for Retigabine
Efficacy and Safety Trial for partial Onset Epilepsy) was
conducted at approximately 50 sites, mainly in the Americas
(U.S., Central/South America); the second Phase III trial
(RESTORE 2) is being conducted at approximately 70 sites,
mainly in Europe.
We announced clinical data results for RESTORE 1 on
February 12, 2008. RESTORE 1 evaluated the 1200 mg
daily dose of retigabine (the highest dose in the RESTORE
program) versus placebo in patients taking stable doses of one
to three additional anti-epileptic drugs (AEDs).
Retigabine demonstrated statistically significant (p<0.001)
results on the primary efficacy endpoints important for
regulatory review by both the US Food and Drug Administration
(FDA) and the European Medicines Evaluation Agency
(EMEA).
The
intent-to-treat
(ITT) median reduction in
28-day total
partial seizure frequency from baseline to the end of the
double-blind period (the FDA primary efficacy endpoint), was
44.3% (n=151) and 17.5% (n=150) for the retigabine arm and
placebo arm of the trial, respectively. The responder rate,
defined as
³
50% reduction in
28-day total
partial seizure frequency during maintenance (the dual primary
efficacy endpoint required for the EMEA submission) was 55.5%
(n=119) and 22.6% (n=137) for the retigabine arm and the placebo
arm of the trial, respectively.
31
During RESTORE 1, 26.8% of patients in the retigabine arm and
8.6% of patients in the placebo arm withdrew due to adverse
events. The most common side effects associated with retigabine
in RESTORE 1 included dizziness, somnolence, fatigue, confusion,
dysarthria (slurring of speech), ataxia (loss of muscle
coordination), blurred vision, tremor, and nausea.
More details on the RESTORE 1 data announcement are provided in
our annual report on
Form 10-K
for the year ended December 31, 2007, filed on
March 17, 2008. See Item 7, Products in
Development. We expect to announce clinical data results for
RESTORE 2 in the second quarter of 2008.
Assuming successful completion of the Phase III trials and
regulatory approval, we hope to launch retigabine in the first
market by the end of 2009. We are seeking a partner to share the
investment and risk in the development of retigabine. A number
of standard supportive Phase I trials necessary for successful
registration of retigabine started in 2007. In March 2007 we
initiated development of a modified release formulation of
retigabine. In addition, in November 2007 we began enrolling
patients into a randomized, double-blind, placebo-controlled
phase IIa study to evaluate the efficacy and tolerability of
retigabine as a treatment for neuropathic pain resulting from
post-herpetic neuralgia. We anticipate completing enrollment at
the end of 2008.
External research and development expenses for retigabine for
the three months ended March 31, 2008 were $15,166,000,
compared with $9,042,000 for the same period in 2007.
Our rights to retigabine are subject to the Asset Purchase
Agreement between Meda Pharma Gmbh & Co KG (as
successor to Viatris Gmbh & Co KG) and Xcel
Pharmaceuticals, Inc. by which Xcel acquired the rights to
retigabine. The provisions of that agreement require milestone
payments of $8,000,000 upon acceptance of filing of the NDA and
$6,000,000 upon approval of the NDA. We expect to expense the
NDA filing milestone in 2008. In addition, earn out payments are
due to Meda on sales of retigabine. Depending on geographic
market and the presence or absence of competitive products
containing retigabine, royalty rates vary but are in all cases
less than 10%. In the event that we enter into arrangements
whereby we receive milestone or other payments from partners
regarding retigabine, we may also be liable to Meda for as much
as $5,250,000.
Taribavirin: Taribavirin (formerly referred to
as Viramidine) is a nucleoside (guanosine) analog that is
converted into ribavirin by adenosine deaminase in the liver and
intestine. We are developing taribavirin in oral form for the
treatment of hepatitis C.
Preclinical studies indicated that taribavirin, a prodrug of
ribavirin, has antiviral and immunological activities
(properties) similar to ribavirin. In 2006, we reported the
results of two pivotal Phase III trials for taribavirin.
The VISER (Viramidine Safety and Efficacy Versus Ribavirin)
trials included two co-primary endpoints: one for safety
(superiority to ribavirin in incidence of anemia) and one for
efficacy (non-inferiority to ribavirin in sustained viral
response, SVR). The results of the VISER trials met the safety
endpoint but did not meet the efficacy endpoint.
The studies demonstrated that
38-40% of
patients treated with taribavirin achieved SVR and that the drug
has a safety advantage over ribavirin, but that it was not
comparable to ribavirin in efficacy at the doses studied. We
believe that the results of the studies were significantly
impacted by the dosing methodology which employed a fixed dose
of taribavirin for all patients and a variable dose of ribavirin
based on a patients weight. Our analysis of the study
results led us to believe that the dosage of taribavirin, like
ribavirin, likely needs to be based on a patients weight
to achieve efficacy equal or superior to that of ribavirin.
Additionally we think that higher doses of taribavirin than
those studied in the VISER program may be necessary to achieve
our efficacy objectives.
Based on our analysis, we initiated a Phase IIb study to
evaluate the efficacy of taribavirin at 20, 25 and
30 mg/kg
in combination with pegylated interferon, as compared with
ribavirin in combination with pegylated interferon. In the VISER
program, taribavirin was administered in a fixed dose of
600 mg BID (approximately equivalent to
13-18 mg/kg).
The Phase IIb study is a U.S. multi-center, randomized,
parallel, open-label study in 278 treatment naïve, genotype
1 patients evaluating taribavirin at 20 mg/kg,
25 mg/kg, and 30 mg/kg per day in combination with
pegylated interferon alfa-2b. The control group is being
administered weight-based dosed ribavirin
(800/1,000/1,200/1,400 mg
daily) and pegylated interferon alfa-2b. Overall treatment
duration will be 48-weeks with a post-treatment
follow-up
32
period of 24-weeks. The primary endpoints for this study are
viral load reduction at treatment week 12 and anemia rates
throughout the study.
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study. The
12-week
early viral response (EVR) data from the Phase IIb study showed
comparable reductions in viral load for weight-based doses of
taribavirin and ribavirin. The anemia rate was statistically
significantly lower for patients receiving taribavirin in the
20mg/kg and 25mg/kg arms versus the ribavirin control arm. The
most common adverse events were fatigue, nausea, flu-like
symptoms, headache and diarrhea. The incidence rates among
treatment arms were generally comparable except with respect to
diarrhea, where diarrhea was approximately twice as common in
taribavirin patients as ribavirin patients. However, the
diarrhea was not treatment limiting for taribavirin or ribavirin
patients.
More details on the 12-week analysis of the taribavirin Phase
IIb study are provided in our annual report on
Form 10-K
for the year ended December 31, 2007, filed on
March 17, 2008. See Item 7, Products in
Development.
The timeline and path to regulatory approval of taribavirin
remains uncertain at this time. We are using the Phase IIb data
to explore the options for the continued role of taribavirin in
our portfolio, including consideration of partnering
opportunities. For the three months ended March 31, 2008,
external research and development expenses for taribavirin were
$2,746,000, compared with $1,587,000 for the comparable period
in 2007.
Other
Development Activities
Diastat Intranasal: Our product Diastat
AcuDial is a gel formulation of diazepam administered rectally
in the management of selected, refractory patients with
epilepsy, who require intermittent use of diazepam to control
bouts of increased seizure activity. In order to improve the
convenience of this product, we have initiated the development
of an intranasal delivery of diazepam. Our external research and
development expenses for Diastat Intranasal were $1,325,000 and
$46,000 for the three months ended March 31, 2008 and 2007,
respectively.
Foreign
Operations
Approximately 70% and 75% of our revenues from continuing
operations, which includes royalties, for the three months ended
March 31, 2008 and 2007, 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 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. Refer to
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations in our annual
report on Form 10-K for the year ended December 31,
2007 for a discussion of our critical accounting estimates.
Other
Financial Information
With respect to the unaudited condensed consolidated financial
information of Valeant Pharmaceuticals International for the
three months ended March 31, 2008 and 2007,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their report dated
May 7, 2008, appearing herein, states that they did not
audit and they do not express an opinion on that unaudited
condensed consolidated financial information. Accordingly, the
degree of reliance on
33
their report on such information should be restricted in light
of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 (the
Act) for their report on the unaudited condensed
consolidated financial information because that report is not a
report or a part of a registration
statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.
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 results from our first Phase III study for retigabine
may not be predictive of results from our second Phase III
study for retigabine and the results from the initial
12 weeks of our Phase IIb study for taribavirin may not be
predictive of the final results of the Phase IIb study or of any
subsequent clinical trial necessary for approval of taribavirin.
Thus we give no assurance that RESTORE 2 will meet either of its
clinical efficacy endpoints or that taribavirin will ultimately
meet its clinical efficacy or safety endpoints, that we will
conduct additional trials necessary for approval of taribavirin
or that, if we conduct such additional trials, the results will
lead to approval of taribavirin by the FDA or similar authority
or any foreign government.
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We have identified a material weakness in our internal control
over financial reporting that could adversely affect our stock
price and ability to prepare complete and accurate financial
statements in a timely manner.
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We are involved in several legal proceedings, including our
current SEC investigation and those other proceedings described
in Note 10 to notes to consolidated condensed financial
statements, any of which could result in substantial cost and
divert managements attention and resources.
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We may have to withdraw those products that cause, or are
alleged to cause, serious or widespread personal injury from the
market
and/or incur
significant costs, including payment of substantial sums in
damages.
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Our future growth will depend, in large part, upon our ability
or the ability of our partners or licensees to develop or obtain
and commercialize new products and new formulations of, or
indications for, current products.
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We can protect our products from generic substitution by third
parties only to the extent that our technologies are covered by
valid and enforceable patents, are effectively maintained as
trade secrets or are protected by data exclusivity. However, our
pending or future patent applications may not issue as patents.
Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties competing
products. The expiration of patent protection for ribavirin has
resulted in significant competition from generic substitutes and
declining royalty revenues and may negatively impact future
financial results.
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Trade secret protection is less effective than patent protection
because competitors may discover our technology or develop
parallel technology.
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34
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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 prior restructuring plan was, and the restructuring plan
resulting from our 2008 Strategic Review is, intended to improve
operational efficiencies and our competitiveness. If we are
unable to realize the benefits from our restructuring plans, our
business prospects may suffer and our operating results and
financial condition would be adversely 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. At March 31, 2008 we have in place foreign
currency hedge transactions to reduce our exposure to
variability in the Polish Zloty. We continue to evaluate the
possibility of entering into additional hedge arrangements.
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A significant part of our revenue is derived from products
manufactured by third parties. We rely on their quality level,
compliance with the FDA regulations or similar regulatory
requirements enforced by regulatory agencies in other countries
and continuity of supply. Any failure by them in these areas
could disrupt our product supply and negatively impact our
revenues.
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Our flexibility in maximizing commercialization opportunities
for our compounds may be limited by our obligations to
Schering-Plough. In November 2000, we entered into an agreement
that provides Schering-Plough with an option to acquire the
rights to up to three of our products intended to treat
hepatitis C that Schering-Plough designates prior to our
entering Phase 2 clinical trials and a right for first/last
refusal to license various compounds we may develop and elect to
license to others. Taribavirin was not subject to the option of
Schering-Plough, but it would be subject to their right of
first/last refusal if we elected to license it to a third party.
The interest of potential collaborators in obtaining rights to
our compounds or the terms of any agreement we ultimately enter
into for these rights may be hindered by our agreement with
Schering-Plough.
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To purchase our products, many patients rely on reimbursement by
third party payors such as insurance companies, HMOs and
government agencies. These third party payors are increasingly
attempting to contain costs by limiting both coverage and the
level of reimbursement of new drug products. The reimbursement
levels established by third party payors in the future may not
be sufficient for us to realize an appropriate return on our
investment in product development and our continued manufacture
and sale of existing drugs.
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All drugs have potential harmful side effects and can expose
drug manufacturers and distributors to liability. In the event
one or more of our products is found to have harmed an
individual or individuals, we may be responsible for paying all
or substantially all damages awarded. A successful product
liability claim against us could have a material negative impact
on our financial position and results of operations.
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35
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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
|
Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Mexican Peso, the Polish Zloty, the Swiss Franc and the Canadian
Dollar. We seek to manage our foreign currency exposure through
operational means by managing local currency revenues in
relation to local currency costs. We take steps to mitigate the
impact of foreign currency on the income statement, which
include hedging our foreign currency exposure.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally
include country risk, credit risk and legal risk and are not
discussed or quantified in the following analysis. At
March 31, 2008, the fair values of our financial
instruments were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional/
|
|
|
Assets (Liabilities)
|
|
|
|
Contract
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Undesignated hedges
|
|
$
|
86,270
|
|
|
$
|
58
|
|
|
$
|
58
|
|
Net investment hedges
|
|
$
|
45,000
|
|
|
$
|
(4,935
|
)
|
|
$
|
(4,935
|
)
|
Cash flow hedges
|
|
$
|
12,703
|
|
|
$
|
(979
|
)
|
|
$
|
(979
|
)
|
Fair value hedges
|
|
$
|
25,339
|
|
|
$
|
(24
|
)
|
|
$
|
(24
|
)
|
Interest rate swaps
|
|
$
|
150,000
|
|
|
$
|
4,444
|
|
|
$
|
4,444
|
|
Outstanding debt
|
|
$
|
780,000
|
|
|
$
|
(780,000
|
)
|
|
$
|
(710,760
|
)
|
We currently do not hold financial instruments for trading or
speculative purposes. Our financial assets are not subject to
significant interest rate risk due to their short duration. A
100 basis-point increase in interest rates affecting our
financial instruments would not have had a material effect on
our first quarter 2008 pretax earnings. In addition, we have
$780,000,000 of fixed rate debt as of March 31, 2008 that
requires U.S. dollar repayment. To the extent that we
require, as a source of debt repayment, earnings and cash flow
from some of our 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 $23,400,000 as of March 31,
2008.
36
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures. Based on their
evaluation, our chief executive officer and chief financial
officer concluded that as a result of the unremediated material
weakness discussed below, our disclosure controls and procedures
were not effective as of the end of the period covered by this
report.
As of March 31, 2008, management determined that we had an
unremediated material weakness in internal control over
financial reporting identified in the preparation of our annual
report on Form 10-K for the year ended December 31,
2007. We did not maintain a sufficient complement of personnel
in our foreign locations with the appropriate skills, training
and experience to identify and address the application of
generally accepted accounting principles and effective controls
with respect to locations undergoing change or experiencing
staff turnover. Further, the monitoring controls over accounting
for pension plans and product returns in foreign locations did
not operate at a sufficient level of precision to identify the
accounting errors in the foreign operations on a timely basis
and did not include a process for obtaining corroborating
information to support the analysis and conclusions regarding
individually significant transactions. This control deficiency
resulted in the restatement of our consolidated financial
statements as of and for the years ended December 31, 2006,
2005, 2004 and 2003 and for each of the three quarters in the
period ended September 30, 2007 affecting the completeness
and accuracy of revenues, accounts receivable, cost of goods
sold, inventory, general and administrative expenses, cash and
cash equivalents, marketable securities, other assets, income
taxes, deferred taxes, other liabilities, other comprehensive
income, discontinued operations, and accumulated deficit.
Additionally, this control deficiency could result in
misstatements of the aforementioned accounts and disclosures
that would result in a material misstatement of the consolidated
financial statements that would not be prevented or detected.
Remediation
Plan
We are in the process of identifying and implementing a plan to
address the material weakness in internal control over financial
reporting described above. Elements of our remediation plan are
expected to be accomplished over time. We are taking the
following actions to remediate the material weakness described
above:
|
|
|
|
|
We engaged professional actuarial and accounting consultants to
review our accounting for our foreign pension plans. Such review
was conducted for the first quarter of 2008 and will continue
for the foreseeable future. We have also developed modified
controls with regard to our accounting for pension obligations.
|
|
|
|
We have implemented enhancements to our accounting for product
returns and credit memos in foreign markets.
|
|
|
|
We have reviewed the qualifications and performance of our
accounting staff in key roles in our foreign locations and
identified some critical roles in certain foreign markets where
accounting staff will be retrained or new accounting staff will
be recruited. We have assigned qualified accounting staff from
Corporate and our North American offices to review accounting
procedures in certain foreign countries and have begun to
enhance our accounting staff in various foreign locales.
|
|
|
|
We have modified our revenue recognition procedures in Italy and
other locations in order to ensure that, when required by
specific circumstances, we recognize revenue on a cash basis.
|
|
|
|
We have implemented revised review procedures over tax
accounting.
|
37
In addition, we have completed a comprehensive strategic review
and announced a strategic plan. As announced on March 27,
2008, this strategic plan is expected to involve a significant
reduction in our geographic footprint and product focus, which
will have the effect of reducing the number of foreign locations
where remediation actions are required.
Management has developed a plan for the implementation of the
remediation procedures described above (to the extent not
already implemented), which has been discussed with our Finance
and Audit Committee. This committee will monitor our
implementation of remediation measures. We believe that the
controls that we are implementing will improve the effectiveness
of our internal control over financial reporting. As we improve
our internal control over financial reporting and implement
remediation measures, we may determine to supplement or modify
the remediation measures described above.
Changes
in Internal Control over Financial Reporting
During the quarter ended March 31, 2008, we implemented a
new enterprise resource planning system in certain countries
which will enable greater efficiencies in financial reporting
and will provide enhanced controls and analytical capabilities.
There have been no other changes in our internal control over
financial reporting during the quarter ended March 31, 2008
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
See Note 10 of notes to consolidated condensed financial
statements in Item 1 of Part I of this quarterly
report, which is incorporated herein by reference.
Our annual report on
Form 10-K
for the year ended December 31, 2007 includes a detailed
discussion of our risk factors. Pursuant to the instructions to
Form 10-Q,
we have provided below only those risk factors that are new or
that have been materially amended since the time that we filed
our most recent annual report on
Form 10-K.
Accordingly, the information presented below should be read in
conjunction with the risk factors and information disclosed in
our most recent
Form 10-K
and the other risks described in this
Form 10-Q.
The
current SEC investigation could adversely affect our business
and the trading price of our securities.
The SEC is conducting an investigation regarding events and
circumstances surrounding trading in our common stock and the
public release of data from our first pivotal Phase III
trial for taribavirin. In addition, the SEC requested
information regarding our restatement of certain historical
financial statements announced in March 2008, data regarding our
stock option grants since January 1, 2000 and information
about our pursuit in the Delaware Chancery Court of the return
of certain bonuses paid to Milan Panic, a former chairman and
chief executive officer, and others. In September 2006, our
board of directors established the Special Committee to review
our historical stock option practices and related accounting.
The Special Committee concluded its investigation in January
2007. We have briefed the SEC with the results of the Special
Committees investigation. We have cooperated fully and
will continue to cooperate with the SEC on its investigation. We
cannot predict the outcome of the investigation. In the event
that the investigation leads to SEC action against any current
or former officer or director, our business (including our
ability to complete financing transactions) and the trading
price of our securities may be adversely impacted. In addition,
if the SEC investigation continues for a prolonged period of
time, it may have an adverse impact on our business or the
trading price of our securities regardless of the ultimate
outcome of the investigation. In addition, the SEC inquiry has
resulted in the incurrence of significant legal expenses and the
diversion of managements attention from our business, and
this may continue, or increase, until the investigation is
concluded.
38
|
|
|
|
|
Exhibit
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended to date,
previously filed as Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of
Series A Participating Preferred Stock previously filed as
Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Certificate of Correction to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as
Exhibit 3.3 to the Registrants
Form 10-Q
for the quarter ended September 30, 2007, which is
incorporated herein by reference.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of the Registrant previously filed
as Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated February 25, 2008, which is incorporated herein by
reference.
|
|
10
|
.1**
|
|
Side Letter dated January 11, 2008 between Three Rivers
Pharmaceuticals, LLC and Valeant Pharmaceuticals North America,
previously filed as of Exhibit 10.28 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 and incorporated
herein by reference.
|
|
10
|
.2
|
|
Employment Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and J. Michael Pearson,
previously filed as of Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.3
|
|
Separation Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.4
|
|
Release Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.3 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
15
|
.1
|
|
Review Report of Independent Registered Public Accounting Firm.
|
|
15
|
.2
|
|
Awareness Letter of Independent Registered Public Accounting
Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer of Periodic Financial Reports pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350.
|
|
|
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report on
Form 10-Q
to be signed on its behalf by the undersigned thereunto duly
authorized.
Valeant Pharmaceuticals
International
Registrant
J. Michael Pearson
Chairman and Chief Executive Officer
Date: May 7, 2008
Peter J. Blott
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 7, 2008
40
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended to date,
previously filed as Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of
Series A Participating Preferred Stock previously filed as
Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Certificate of Correction to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as
Exhibit 3.3 to the Registrants
Form 10-Q
for the quarter ended September 30, 2007, which is
incorporated herein by reference.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of the Registrant previously filed
as Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated February 25, 2008, which is incorporated herein by
reference.
|
|
10
|
.1**
|
|
Side Letter dated January 11, 2008 between Three Rivers
Pharmaceuticals, LLC and Valeant Pharmaceuticals North America,
previously filed as of Exhibit 10.28 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 and incorporated
herein by reference.
|
|
10
|
.2
|
|
Employment Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and J. Michael Pearson,
previously filed as of Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.3
|
|
Separation Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.4
|
|
Release Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.3 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
15
|
.1
|
|
Review Report of Independent Registered Public Accounting Firm.
|
|
15
|
.2
|
|
Awareness Letter of Independent Registered Public Accounting
Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer of Periodic Financial Reports pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350.
|
|
|
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |