e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
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Delaware
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33-0628076
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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One Enterprise, Aliso Viejo, California
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92656
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(Address of principal executive
offices)
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(Zip
Code)
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Registrants telephone number, including area code:
(949) 461-6000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, $.01 par value (Including
associated preferred stock purchase rights)
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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 aggregate market value of the Registrants voting stock
held by non-affiliates of the Registrant on June 29, 2007,
the last business day of the Registrants most recently
completed second fiscal quarter based on the closing price of
the common stock on the New York Stock Exchange on such date,
was approximately $1,564,383,392.
The number of outstanding shares of the Registrants common
stock as of March 11, 2008 was 89,286,410.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information contained in Valeant Pharmaceuticals
Internationals definitive Proxy Statement for the 2008
annual meeting of stockholders is incorporated by reference into
Part III hereof.
Explanatory
Note
This annual report on
Form 10-K
includes the restatement of our consolidated financial
statements as of and for the years ended December 31, 2006
and 2005. This report also includes the restatement of the
selected financial data as of and for the years ended
December 31, 2006, 2005, 2004 and 2003 and the restatement
of the quarterly financial data in Part II, Item 8 for
the three-month periods ended March 31, 2006, June 30,
2006, September 30, 2006, December 31, 2006,
March 31, 2007, June 30, 2007 and September 30,
2007.
As announced in our current report on
Form 8-K
which we filed with the Securities and Exchange Commission, or
SEC, on March 3, 2008, we concluded that our previously
filed financial statements should no longer be relied upon due
to certain errors in the accounting for foreign operations which
were identified during the preparation process for this annual
report on
Form 10-K,
and primarily arose during the period January 1, 2002 to
September 30, 2007. These included errors impacting annual
periods prior to 2007 with a cumulative net charge to income
from continuing operations before income taxes of $3,851,000 as
of December 31, 2006. The errors also included items
originating in the first, second and third quarters of 2007 with
a net benefit to income from continuing operations before income
taxes of $1,761,000. These errors have been determined to be, in
the aggregate, material to the quarter and year ended
December 31, 2007 and to certain prior periods including
the year ended December 31, 2006, and therefore we are
restating our results for the years ended December 31,
2003, 2004, 2005 and 2006. The errors and the cumulative net
effect of the corrections through December 31, 2006 and for
the nine months ended September 30, 2007 are described as
follows and summarized in the table below:
i. Increase in reserves for anticipated product returns
based on historical trends and for certain credit memos in Latin
America, the cumulative effect of which is a reduction in
revenue of $3,953,000 and certain other adjustments of $127,000
through December 31, 2006 and $1,120,000 for the nine
months ended September 30, 2007;
ii. Decrease in revenues associated with sales to certain
customers in Italy where preexisting rights of return became
known in the fourth quarter of 2007, the cumulative effect of
which is a reduction of revenues of $290,000 through
December 31, 2006 and $1,550,000 for the nine months ended
September 30, 2007;
iii. Decrease in costs of goods sold related to bookkeeping
errors in recording inventory costing and manufacturing
variances in the UK and France, the cumulative effect of which
is a reduction in cost of goods sold and a corresponding
increase in gross profit of $4,710,000 for the nine months ended
September 30, 2007, with no effect prior to January 1,
2007;
iv. Changes in pension expense in UK, Netherlands,
Switzerland and Germany resulting from incorrect application of
Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions and Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, the cumulative effect of which is a decrease in
general and administrative expenses of $519,000 through
December 31, 2006 and an increase to general and
administrative expenses of $279,000 for the nine months ended
September 30, 2007; and
v. Changes in income tax expense resulting from the income
tax effects of the pre-tax adjustments described in i.-iv.
above, resulting in a reduction in income tax expense of
$1,331,000 through December 31, 2006 and an increase of
$611,000 for the nine months ended September 30, 2007.
Additionally, income tax expense increased due to corrections of
deferred income taxes in certain foreign locations, resulting in
a cumulative increase in income tax expense of $825,000 through
December 31, 2006.
2
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Nine Months
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Total
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Ended
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Additional
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September 30,
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Year Ended December 31,
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Income
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Income (Expense)
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2007
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2006
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2005
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2004
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2003
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Pre-2003
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(Expense)
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(In thousands)
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Returns reserve and credit memos in Latin America
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$
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(1,120
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$
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(1,554
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$
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(371
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$
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1,389
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$
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(121
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$
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(3,423
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$
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(5,200
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Reversal of revenue in Italy
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(1,550
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(290
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(1,840
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Cost of goods bookkeeping in the UK and France
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4,710
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4,710
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European pension accounting
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(279
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1,401
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(256
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(220
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391
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(797
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240
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Total impact before taxes
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1,761
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(443
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(627
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1,169
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270
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(4,220
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(2,090
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Tax effect on above
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(611
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204
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139
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(422
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(87
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1,497
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720
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Other deferred tax items
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(764
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(61
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(825
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Total impact of restatement
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$
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1,150
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$
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(1,003
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$
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(549
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$
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747
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$
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183
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$
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(2,723
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$
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(2,195
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The restatement and its impact on fiscal years ended
December 31, 2006 and 2005 are discussed in more detail in
Note 2 to our consolidated financial statements, which are
included herein.
While we have restated the unaudited quarterly information in
Part II, Item 8 and intend to amend and restate our
quarterly reports on
Form 10-Q
for the fiscal quarters ended March 31, June 30 and
September 30, 2007 and 2006, we have not amended and do not
intend to amend any of our other previously filed reports. As we
have previously announced, the consolidated financial statements
and related information contained in such previously filed
reports should no longer be relied upon.
Identification
of Material Weakness
In connection with this restatement, we identified a material
weakness in our disclosure controls and procedures and internal
controls over financial reporting as of December 31, 2007
and reported this to our Finance and Audit Committee. The
material weakness, which arose primarily as a result of our lack
of a sufficient complement of personnel in our foreign locations
and monitoring controls at the corporate level and is further
described below in Item 9A of this
Form 10-K,
resulted in the restatement of our prior period financial
information included in this report. We are in the process of
identifying and implementing a plan to address the material
weakness in internal control over financial reporting. This
remediation is discussed in more detail in Item 9A. For
this reason, the discussion and data set forth in this section
may not be comparable to discussions and data in our previously
filed reports.
3
Forward-Looking
Statements
In addition to current and historical information, this report
contains forward-looking statements. These statements relate to
our future operations, future ribavirin royalties, prospects,
potential products, developments and business strategies. Words
such as expects, anticipates,
intends, plans, should,
could, would, may,
will, believes, estimates,
potential, or continue or similar
language identify forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties. Our actual results may differ materially from
those contemplated by the forward-looking statements. Factors
that might cause or contribute to these differences include, but
are not limited to, those discussed in the sections of this
report entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and sections in other
documents filed with the Securities and Exchange Commission
(SEC), under similar captions. You should consider
these in evaluating our prospects and future financial
performance. These forward-looking statements are made as of the
date of this report. We disclaim any obligation to update or
alter these forward-looking statements in this report or the
other documents in which they are found, whether as a result of
new information, future events or otherwise, or any obligation
to explain the reasons why actual results may differ.
Aclotin, Bedoyecta, Bisocard, Cesamet, Dalmane/Dalmadorm,
Dermatix, Diastat, Diastat AcuDial, Efudex/Efudix, Espacil,
Espaven, Kinerase, Librax, Mestinon, Migranal, Nyal,
Oxsoralen/Oxsoralen-Ultra, Solcoseryl, Tasmar, Virazole and
Zelapar are trademarks or registered trademarks of Valeant
Pharmaceuticals International or its related companies or are
used under license. This annual report also contains trademarks
or trade names of other companies and those trademarks and trade
names are the property of their respective owners.
PART I
Introduction
We are an international pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products. Historically, our marketing and promotion efforts
focused on our Promoted Products, which consisted of products
marketed globally, regionally, or locally with annual sales in
excess of $5,000,000. Our products are currently sold in more
than 100 markets around the world.
Although historically we have focused most of our efforts on
neurology, dermatology, and infectious disease, our prescription
pharmaceutical 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, Asia, and Australasia) and EMEA
(Europe, Middle East, and Africa).
Strategic
Review and Restructuring
In October 2007, our board of directors initiated a strategic
review of our business direction, geographic and commercial
operations, product and business portfolio, growth
opportunities, and acquisition strategy. This strategic review,
which we refer to as the 2008 Strategic Review, is
still underway as of the date of this filing and we expect to
describe it in an announcement in late March 2008. We expect the
2008 Strategic Review to lead to significant changes in our
business and will include a restructuring program.
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. In
September 2007, we decided to sell our rights to Infergen. We
sold these rights to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. In 2007, we also sold product rights to
Reptilase, Solcoseryl in Japan, our ophthalmic business in
Holland, and certain other products. In December 2007, we signed
an agreement with Invida Pharmaceutical Holdings Pte. Ltd.
(Invida) to sell Invida certain of our subsidiaries
and product rights in Asia, in a transaction that includes
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
4
transaction also includes certain product rights in Japan. We
closed this transaction on March 3, 2008. The assets sold
to Invida have been classified as held for sale in
accordance with SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, as of December 2007.
We announced on February 4, 2008 that our board of
directors had appointed J. Michael Pearson to the position of
chief executive officer and chairman of our board of directors
effective February 1, 2008, the date of the resignation of
our former chief executive officer, Timothy C. Tyson. Robert A.
Ingram, who served as chairman prior to Mr. Pearsons
appointment, remains on our board of directors, serving as lead
director. Prior to joining Valeant as our chief executive
officer, Mr. Pearson was a director at McKinsey &
Company, where he had recently served as head of the global
pharmaceutical practice, as a member of its board of directors
and in various other capacities.
Our internet address is www.valeant.com. We post links on
our website to the following filings as soon as reasonably
practicable after they are electronically filed or furnished to
the SEC: annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendment to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Act of 1934.
All such filings are available through our website free of
charge. Our filings may also be read and copied at the
SECs Public Reference Room at 100 F. Street, NE,
Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy,
and information statements, and other information regarding
issuers that file electronically with the SEC. The address of
that site is www.sec.gov.
Retigabine
RESTORE 1 Data Announcement
On February 12, 2008, we reported results for retigabine in
RESTORE 1, the first of two Phase III pivotal trials using
retigabine as an adjunctive treatment for adult epilepsy
patients with refractory partial-onset seizures. 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.
Retigabine demonstrated statistically significant 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). More details on the RESTORE
1 data announcement are provided in Item 7, Products in
Development.
Taribavirin
12-week analysis of the Phase IIb study
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study. 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. 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. More details on the
taribavirin Phase IIb study announcement are provided in
Item 7, Products in Development. We are using the
data to explore the options for the continued role of
taribavirin in our portfolio, including consideration of
partnering opportunities.
Infergen
(Reported in Discontinued Operations)
On December 30, 2005, we acquired the U.S. and
Canadian rights to the hepatitis C drug Infergen from
InterMune. In September 2007, we decided to divest these
Infergen product rights and we sold them to Three Rivers
Pharmaceuticals, LLC on January 14, 2008. The results of
the Infergen operations and the related financial position have
been reflected as discontinued operations in the consolidated
financial statements in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The consolidated financial statements have been
reclassified to conform to discontinued operations presentation
for all historical periods presented.
5
Ribavirin
Royalties
Our royalties are derived from sales of ribavirin, a nucleoside
analog that we discovered. In 1995, Schering-Plough licensed
from us all oral forms of ribavirin for the treatment of chronic
hepatitis C. We also licensed ribavirin to Roche in 2003.
Roche discontinued royalty payments to us in June 2007 when the
European Patent Office revoked a ribavirin patent which would
have provided protection through 2017.
Ribavirin royalty revenues were $67,202,000, $81,242,000 and
$91,646,000 for the years ended December 31, 2007, 2006 and
2005, respectively, and accounted for 8%, 9% and 11% of our
total revenues in 2007, 2006 and 2005, respectively. Royalty
revenues in 2007, 2006 and 2005 were substantially lower than
those in prior years. This decrease had been expected and
relates to: 1) Roches discontinuation of royalty
payments to us in June 2007, 2) Schering-Ploughs
market share losses in ribavirin sales, 3) reduced sales in
Japan from a peak in 2005 driven by the launch of combination
therapy and 4) further market share gains by generic
competitors in the United States since they entered the market
in April 2004.
We expect ribavirin royalties to continue to decline in 2008.
The royalty will decline significantly in 2009 in that royalty
payments from Schering-Plough will continue for European sales
only until the ten-year anniversary of the launch of the
product, which varied by European country and started in May
1999. We expect that royalties from Schering-Plough in Japan
will continue after 2009.
6
The following table summarizes sales by major product for each
of the last three years (dollar amounts in thousands). It
includes any product with annualized sales of greater than
$10,000,000 and currently promoted products with annualized
sales of greater than $5,000,000. It is categorized by
therapeutic class.
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% Increase (Decrease)
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Therapeutic Class/Product
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2007
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2006
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2005
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07/06
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06/05
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(Restated)
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(Restated)
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Neurology
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Mestinon(P)
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$
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53,012
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$
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47,625
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$
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43,535
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11
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%
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9
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%
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Diastat AcuDial(P)
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51,264
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50,678
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47,631
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1
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%
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6
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%
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Cesamet(P)
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30,173
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18,985
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10,009
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59
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%
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90
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%
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Librax
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17,170
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14,835
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18,159
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16
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%
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(18
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)%
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Migranal(P)
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13,534
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11,592
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12,949
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17
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%
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(10
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)%
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Dalmane/Dalmadorm(P)
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11,432
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10,957
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12,277
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4
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%
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(11
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)%
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Tasmar(P)
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10,262
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6,534
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5,829
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57
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%
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12
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%
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Melleril(P)
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8,206
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6,431
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3,068
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28
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%
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110
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%
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Zelapar(P)
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5,747
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3,981
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44
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%
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NM
|
|
Other Neurology
|
|
|
66,677
|
|
|
|
63,033
|
|
|
|
57,431
|
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
267,477
|
|
|
|
234,651
|
|
|
|
210,888
|
|
|
|
14
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efudix/Efudex(P)
|
|
|
71,714
|
|
|
|
78,336
|
|
|
|
60,177
|
|
|
|
(8
|
)%
|
|
|
30
|
%
|
Kinerase(P)
|
|
|
30,126
|
|
|
|
28,929
|
|
|
|
22,265
|
|
|
|
4
|
%
|
|
|
30
|
%
|
Dermatix(P)
|
|
|
14,043
|
|
|
|
10,139
|
|
|
|
9,187
|
|
|
|
39
|
%
|
|
|
10
|
%
|
Oxsoralen-Ultra(P)
|
|
|
12,377
|
|
|
|
10,527
|
|
|
|
9,365
|
|
|
|
18
|
%
|
|
|
12
|
%
|
Other Dermatology
|
|
|
39,059
|
|
|
|
42,023
|
|
|
|
38,252
|
|
|
|
(7
|
)%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
167,319
|
|
|
|
169,954
|
|
|
|
139,246
|
|
|
|
(2
|
)%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virazole(P)
|
|
|
14,350
|
|
|
|
16,552
|
|
|
|
16,547
|
|
|
|
(13
|
)%
|
|
|
0
|
%
|
Other Infectious Disease
|
|
|
19,813
|
|
|
|
20,144
|
|
|
|
21,459
|
|
|
|
(2
|
)%
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infectious Disease
|
|
|
34,163
|
|
|
|
36,696
|
|
|
|
38,006
|
|
|
|
(7
|
)%
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other therapeutic classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedoyecta(P)
|
|
|
42,384
|
|
|
|
49,935
|
|
|
|
46,762
|
|
|
|
(15
|
)%
|
|
|
7
|
%
|
Solcoseryl(P)
|
|
|
23,749
|
|
|
|
18,916
|
|
|
|
18,983
|
|
|
|
26
|
%
|
|
|
(0
|
)%
|
Bisocard(P)
|
|
|
22,559
|
|
|
|
15,927
|
|
|
|
12,847
|
|
|
|
42
|
%
|
|
|
24
|
%
|
M.V. I. (multi-vitamin infusion)(P)
|
|
|
11,708
|
|
|
|
13,350
|
|
|
|
7,602
|
|
|
|
(12
|
)%
|
|
|
76
|
%
|
Nyal(P)
|
|
|
11,060
|
|
|
|
10,216
|
|
|
|
13,747
|
|
|
|
8
|
%
|
|
|
(26
|
)%
|
Espaven(P)
|
|
|
8,458
|
|
|
|
11,147
|
|
|
|
9,258
|
|
|
|
(24
|
)%
|
|
|
20
|
%
|
Protamin(P)
|
|
|
6,924
|
|
|
|
6,384
|
|
|
|
6,047
|
|
|
|
8
|
%
|
|
|
6
|
%
|
Other products
|
|
|
189,969
|
|
|
|
214,386
|
|
|
|
228,483
|
|
|
|
(11
|
)%
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other therapeutic classes
|
|
|
316,811
|
|
|
|
340,261
|
|
|
|
343,729
|
|
|
|
(7
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
785,770
|
|
|
$
|
781,562
|
|
|
$
|
731,869
|
|
|
|
1
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Promoted Product sales
|
|
$
|
453,082
|
|
|
$
|
427,141
|
|
|
$
|
368,085
|
|
|
|
6
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(P) |
Promoted Products with annualized sales greater than $5,000,000.
|
NM Not meaningful
7
Neurology
Total sales of our neurology products accounted for 34% of our
product sales from continuing operations for the year ended
December 31, 2007. Products in this therapeutic category
include:
|
|
|
Diastat/Diastat AcuDial |
|
Diastat and Diastat AcuDial are gel formulations of diazepam
administered rectally in the management of selected, refractory
patients with epilepsy, who require intermittent use of diazepam
to control bouts of increased seizure activity. Diastat and
Diastat AcuDial are the only products approved by the Food and
Drug Administration (FDA) for treatment of such
conditions outside of hospital situations. We acquired the
rights to Diastat and Diastat AcuDial as part of the Xcel
acquisition (see Acquisitions). |
|
Mestinon |
|
Mestinon is an orally active cholinesterase inhibitor used in
the treatment of myasthenia gravis, a chronic neuromuscular,
autoimmune disorder that causes varying degrees of fatigable
weakness involving the voluntary muscles of the body. |
|
Cesamet |
|
Cesamet is a synthetic cannabinoid. It is indicated for the
management of severe nausea and vomiting associated with cancer
chemotherapy. |
|
Librax |
|
Librax is a combination within a single capsule formulation of
the antianxiety action of Librium and the
anticholinergic/spasmolytic effects of Quarzan. It is used as
adjunctive therapy in the treatment of peptic ulcer and in the
treatment of irritable bowel syndrome (irritable colon, spastic
colon, mucous colitis) and acute enterocolitis. |
|
Dalmane/Dalmadorm |
|
Dalmane/Dalmadorm is a sedative/anxiolytic indicated for the
treatment of insomnia and anxiety. |
|
Migranal |
|
Migranal is a nasal spray indicated for the treatment of acute
migraine headaches. We acquired the rights to Migranal as part
of the Xcel acquisition (see Acquisitions). |
|
Tasmar |
|
Tasmar is used in the treatment of Parkinsons disease as
an adjunct to levodopa/carbidopa therapy. We acquired the global
rights to Tasmar from F. Hoffmann-La Roche in 2004. |
|
Melleril |
|
Melleril is used in the treatment of schizophrenia. We acquired
the rights to Melleril in Brazil and Argentina from Novartis. |
|
Zelapar |
|
Zelapar is a once-daily adjunct therapy for Parkinsons
disease patients being treated with levodopa/carbidopa who
exhibit deterioration in the quality of their response to this
therapy. We acquired the U.S. rights to Zelapar in our
acquisition of Amarin Pharmaceuticals in 2004 and licensed the
marketing rights in certain additional countries in 2006. |
8
Dermatology
Total sales of our dermatology products accounted for 21% of our
product sales from continuing operations for the year ended
December 31, 2007. Products in this therapeutic category
include:
|
|
|
Efudex/Efudix |
|
Efudex/Efudix is indicated for the treatment of multiple actinic
or solar keratoses and superficial basal cell carcinoma. It is
sold as a topical solution and cream, and provides effective
therapy for multiple lesions. |
|
Kinerase |
|
Kinerase is a range of science-based, over-the-counter cosmetic
products that helps skin look smoother, younger and healthier.
Kinerase contains the synthetic plant growth factor
N6-furfuryladenine which has been shown to slow the changes that
naturally occur in the cell aging process in plants. Kinerase
helps to diminish the appearance of fine lines and wrinkles. |
|
Oxsoralen-Ultra |
|
Oxsoralen-Ultra is indicated for the treatment of severe
psoriasis and mycosis fungoides and is used along with
ultraviolet light radiation. |
|
Dermatix |
|
Dermatix is used to flatten and soften scars, to reduce
scar-associated discoloration in old or new scars and to prevent
abnormal scar formation. |
Infectious
Disease
Total sales of our infectious disease products accounted for 5%
of our product sales from continuing operations for the year
ended December 31, 2007. Products in this therapeutic
category include Virazole.
|
|
|
Virazole |
|
Virazole is our brand name for ribavirin, a synthetic nucleoside
with antiviral activity. It is indicated for the treatment of
hospitalized infants and young children with severe lower
respiratory tract infections due to respiratory syncytial virus.
Virazole has also been approved for various other indications in
countries outside the United States including herpes zoster,
genital herpes, chickenpox, hemorrhagic fever with renal
syndrome, measles and influenza. |
Other
therapeutic classes
Total sales of products in other therapeutic classes constituted
40% of our product sales from continuing operations for the year
ended December 31, 2007 and encompass a broad range of
ancillary products which are sold through our existing
distribution channels. The Promoted Products in this category
are as follows:
|
|
|
Bedoyecta |
|
Bedoyecta is a brand of vitamin B complex (B1, B6 and B12
vitamins) products. Bedoyecta products act as energy improvement
agents for fatigue related to age or chronic diseases, and as
nervous system maintenance agents to treat neurotic pain and
neuropathy. |
|
Solcoseryl |
|
Solcoseryl is a line of products used for treating dry wounds,
minor injuries, venous ulcers and chilblain. |
|
Bisocard |
|
Bisocard is a Beta-blocker. It is indicated to treat
hypertension and angina pectoris. |
|
M.V.I. |
|
M.V.I., multi-vitamin infusion, is a hospital dietary supplement
used in treating trauma and burns. |
9
|
|
|
Nyal |
|
Nyal is an over-the-counter line of products covering various
non-steroidal anti-inflammatory agents, analgesics and
antipyretics. Nyal products are used to treat coughs, colds and
associated symptoms. |
|
Espaven |
|
Espaven is a digestion improvement and anti-flatulent agent. It
is most often used by pediatricians in infant dyspepsia syndrome. |
|
Protamin |
|
Protamin is used to neutralize heparin. |
Acquisitions
In 2007, we acquired product rights in the United States, Europe
and Argentina for aggregate consideration of $40,803,000, of
which $36,184,000 was cash consideration. In the United States,
we acquired a
paid-up
license for Kinetin and Zeatin, the active ingredients in the
Kinerase product line, 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 Canada and the United States, for $13,582,000. We acquired
the rights to certain products in Poland, Argentina and Spain
for $1,602,000 in cash consideration and $449,000 in other
consideration.
In 2006, we acquired rights to new product lines in Poland and
the UK. In Poland we acquired the rights to a number of branded
generic products for nominal cash consideration. In the UK we
acquired exclusive rights to distribute certain dermatological
skin care products from Intendis AG, including Finacea,
Skinoren, Scheriproct, and Ultrabase. In 2006, we also acquired
the rights to Zelapar in Canada and Mexico. We had acquired the
rights to Zelapar in the United States as part of the Amarin
acquisition in 2004 and launched the product in the United
States in 2006. In 2006, we also acquired from Novartis the
rights to Melleril in Argentina, having acquired the rights to
this product in Brazil in 2005.
On December 30, 2005, we acquired the U.S. and
Canadian rights to the hepatitis C drug Infergen from
InterMune. We paid InterMune $120,000,000 in cash at the
closing. Subsequently, we paid InterMune a non-contingent
milestone payment of $2,585,000 in January 2007 and a $5,000,000
contingent milestone in July 2007 which we recorded as goodwill.
In September 2007, we decided to divest these Infergen product
rights and we sold them to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. The results of the Infergen operations
and the related financial position have been reflected as
discontinued operations in the consolidated financial statements
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The
consolidated financial statements have been reclassified to
conform to discontinued operations presentation for all
historical periods presented.
On March 1, 2005, we acquired Xcel Pharmaceuticals, Inc.
(Xcel), a specialty pharmaceutical company focused
on the treatment of disorders of the central nervous system, for
$280,000,000 in cash, plus expenses of $5,435,000. Under the
terms of the purchase agreement, we paid an additional
$7,470,000 as a post-closing working capital adjustment. The
Xcel acquisition expanded our existing neurology product
portfolio with four products that are sold within the United
States, and retigabine, a late-stage clinical product candidate
that is an adjunctive treatment for partial-onset seizures in
patients with epilepsy.
See Note 4 of notes to consolidated financial statements
for further discussion of these acquisitions.
Research
and Development
With our restructured research and development organization, we
no longer conduct discovery research to identify new compounds.
Instead, we focus on the development of products through
clinical trials. We currently have two compounds in late-stage
clinical development: retigabine and taribavirin.
Our research and development expenses for the years ended
December 31, 2007, 2006 and 2005 were $98,025,000,
$105,442,000 and $114,100,000. The reduction in research and
development expenses in 2007 compared with 2006 is principally
due to the discontinuation of our discovery operations and the
sale of the pradefovir rights to Schering-Plough, partly offset
by the increase in clinical development expense for retigabine.
As of December 31, 2007, there were 132 employees
involved in our research and development efforts.
10
Products
Under Development
Late
Stage Development of New Chemical Entities
Retigabine: We are developing retigabine as an
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine is believed to have a unique mechanism of
action. Retigabine stabilizes hyper-excited neurons primarily by
opening neuronal potassium channels. Retigabine has undergone
several Phase II clinical trials which included more than
600 patients in several dose-ranging studies compared to
placebo. 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. The first patient in the RESTORE 1 trial was
enrolled in September 2005. We completed the enrollment of
patients in RESTORE 1 and RESTORE 2 in July 2007 and November
2007, respectively.
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 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). See Item 7, Products in
Development for further discussion of the RESTORE 1 data
announcement.
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.
Assuming successful completion of the Phase III trials and
approval by the FDA and European Medicines Evaluation Agency, we
expect to launch retigabine in the first market by late 2009. We
will seek a partner to ensure we maximize the market potential
of the compound. External research and development expenses for
retigabine were $43,650,000 and $27,391,000 in 2007 and 2006,
respectively. 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 April 2007 we
filed an IND for the treatment of post herpetic neuralgia, a
common form of neuropathic pain. Following review, the FDA has
allowed Valeant to proceed with this Phase IIa clinical trial
and we began enrolling patients in November 2007.
Taribavirin: Taribavirin (formerly referred to
as Viramidine) is a nucleoside (guanosine) analog that is
converted into ribavirin by adenosine deaminase in the liver and
intestine. We are developing taribavirin in oral form for the
treatment of hepatitis C.
Preclinical studies indicated that taribavirin, a
liver-targeting analog of ribavirin, has antiviral and
immunological 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
11
believe that the results of the studies were significantly
impacted by the dosing methodology which employed a fixed dose
of taribavirin for all patients and a variable dose of ribavirin
based on a patients weight. Our analysis of the study
results leads us to believe that the dosage of taribavirin, like
ribavirin, likely needs to be based on a patients weight
to achieve efficacy equal or superior to that of ribavirin.
Additionally we think that higher doses of taribavirin than
those studied in the VISER program may be necessary to achieve
our efficacy objectives.
Based on our analysis, we initiated a Phase IIb study to
evaluate the efficacy of taribavirin at 20, 25 and 30 mg/kg
in combination with pegylated interferon. A ribavirin control
arm also is included in the study. The primary efficacy
parameter is the proportion of responders at treatment week 12;
additional efficacy and safety assessments will occur throughout
the duration of the study. Enrollment into this study was
completed in October 2007.
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study. 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. 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. More details on the
taribavirin Phase IIb study announcement are provided in
Item 7, Products in Development. We are using the
data to explore the options for the continued role of
taribavirin in our portfolio, including consideration of
partnering opportunities.
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. Our external research and development expenses
for taribavirin were $8,115,000 and $16,133,000 for 2007 and
2006, respectively
Other
Development Activities
Diastat Intranasal: Our product Diastat
AcuDial is a gel formulation of diazepam administered rectally
in the management of selected, refractory patients with
epilepsy, who require intermittent use of diazepam to control
bouts of increased seizure activity. In order to improve the
convenience of this product, we have initiated the development
of an intranasal delivery of diazepam. Our external research and
development expenses for Diastat Intranasal were $1,425,000 and
$70,000 for 2007 and 2006, respectively.
Licenses
and Patents (Proprietary Rights)
Data
and Patent Exclusivity
We rely on a combination of regulatory and patent rights to
protect the value of our investment in the development of our
products.
A patent is the grant of a property right which allows its
holder to exclude others from, among other things, selling the
subject invention in, or importing such invention into, the
jurisdiction that granted the patent. In both the United States
and the European Union, patents expire 20 years from the
date of application.
In the United States, for five years from the date of the first
United States regulatory FDA approval of a new drug compound,
only the pioneer drug company can use the data obtained at the
pioneers expense. No generic drug company may submit an
application for approval of a generic drug relying on the data
used by the pioneer for approval during this five-year period.
A similar data exclusivity scheme exists in the European Union,
whereby only the pioneer drug company can use data obtained at
the pioneers expense for up to eight years from the date
of the first approval of a drug by the European Agency for the
Evaluation of Medicinal Products (EMEA) and no
generic drug can be marketed for ten years from the approval of
the innovator product. Under both the United States and the
European Union data exclusivity programs, products without
patent protection can be marketed by others so long as they
repeat the clinical trials necessary to show safety and efficacy.
12
Exclusivity
Rights with Respect to Retigabine and Taribavirin
We own a United States composition of matter patent (which will
expire in 2013) directed to retigabine without regard to
crystalline form; we anticipate that this patent will be
extended to 2018 upon approval of retigabine pursuant to the
Hatch-Waxman Act. We also own two United States patents (both of
which will expire in 2018) that are directed to specific
crystalline forms of retigabine. In addition, we own a number of
United States patents and pending applications, with expiration
dates ranging from 2016 to 2023, directed to the use of
retigabine to treat a variety of disease indications. We also
own several patents and pending applications in foreign
countries with expiration dates ranging from 2012 to 2024.
We own a United States patent (which will expire in
2018) directed to a method of treating a viral infection
using a genus of compounds that includes taribavirin. We also
own a United States patent (which will expire in 2020) that
specifically claims the use of taribavirin to treat
hepatitis C infection. If taribavirin receives regulatory
approval, these patents may be eligible for patent term
extensions. To the extent permitted in foreign jurisdictions, we
are pursuing the foreign patent rights that correspond to our
United States patents.
Upon regulatory approval, we expect to obtain five years of data
exclusivity in the United States and eight years in Europe for
retigabine and taribavirin. We have various issued patents or
pending applications in foreign countries. These patents or
patent applications, if issued, have expiration dates ranging
from 2012 to 2023.
Exclusivity
with Respect to Ribavirin
Royalty payments from Schering-Plough do not depend on the
existence of a patent. We expect ribavirin royalties to continue
to decline in 2008 as a result of market competition between
Roche and Schering-Plough. The royalty will decline
significantly in 2009 in that royalty payments from
Schering-Plough will continue for European sales only until the
ten-year anniversary of the launch of the product, which varied
by European country and started in May 1999. Royalties from
Schering-Plough in Japan will continue after 2009.
Generic ribavirin was launched in the United States in the first
half of 2004. Under our agreement with Roche, upon the entry of
generics into the United States, Roche ceased paying royalties
on sales in the United States. Roche discontinued paying
royalties to us for ribavirin sales in Europe in June 2007 when
the Opposition Division of the European Patent Office revoked a
patent covering ribavirin. In the past few years, royalties from
Roche represented approximately 10% of our ribavirin royalties.
Government
Regulations
We are subject to licensing and other regulatory control by the
FDA, other federal and state agencies, the EMEA and other
comparable foreign governmental agencies.
FDA approval must be obtained in the United States, EMEA
approval must be obtained for countries that are part of the
European Union and approval must be obtained from comparable
agencies in other countries prior to marketing or manufacturing
new pharmaceutical products for use by humans.
Obtaining FDA approval for new products and manufacturing
processes can take a number of years and involve the expenditure
of substantial resources. To obtain FDA approval for the
commercial sale of a therapeutic agent, the potential product
must undergo testing programs on animals, the data from which is
used to file an IND with the FDA. In addition, there are three
phases of human testing: Phase I consists of safety tests for
human clinical experiments, generally in normal, healthy people;
Phase II programs expand safety tests and are conducted in
people who are sick with the particular disease condition that
the drug is designed to treat; and Phase III programs are
greatly expanded clinical trials to determine the effectiveness
of the drug at a particular dosage level in the affected patient
population. The data from these tests is combined with data
regarding chemistry, manufacturing and animal toxicology and is
then submitted in the form of a New Drug Application or NDA to
the FDA. The preparation of an NDA requires the expenditure of
substantial funds and the commitment of substantial resources.
The review by the FDA can take up to several years. If the FDA
determines that the drug is safe and effective, the NDA is
approved. A similar process exists in the European Union and in
other countries. See Item 1A Risk Factors for
risks associated with government regulation of our business.
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Manufacturers of drug products are required to comply with
manufacturing regulations, including current good manufacturing
regulations enforced by the FDA and similar regulations enforced
by regulatory agencies outside the United States. In addition,
we are subject to price control restrictions on our
pharmaceutical products in many countries in which we operate.
Environmental
Regulation
We are subject to national, state, and local environmental laws
and regulations, including those governing the handling and
disposal of hazardous wastes, wastewater, solid waste and other
environmental matters. Our development and manufacturing
activities involve the controlled use of hazardous materials.
Marketing
and Customers
Our five major geographic markets are: the United States,
Mexico, Poland, Canada, and Germany. During the year ended
December 31, 2007, we derived approximately 68% of our
sales from these markets. We currently promote our
pharmaceutical products to physicians, hospitals, pharmacies and
wholesalers through our own sales force and sell through
wholesalers. In some limited markets, we additionally sell
directly to physicians, hospitals and large drug store chains
and we sell through distributors in countries where we do not
have our own sales staff. As part of our marketing program for
pharmaceuticals, we use direct mailings, advertise in trade and
medical periodicals, exhibit products at medical conventions and
sponsor medical education symposia.
Competition
Our competitors include specialty and large pharmaceutical
companies, biotechnology companies, OTC companies, academic and
other research and development institutions and generic
manufacturers, both in the United States and abroad. In
addition, our cosmeceutical Kinerase products also face
competition from manufacturers of non-prescription cosmetic
products. Our competitors are pursuing the development of
pharmaceuticals that target the same diseases and conditions
that we are targeting in neurology, infectious disease and
dermatology.
Products being developed by our competitors to treat epilepsy
include, but are not limited to:
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Eisais rufinamide, which has been submitted to the FDA for
review for the treatment of partial onset epilepsy and
Lennox-Gastaut Syndrome (LGS), having received European approval
for the treatment of LGS in January 2007, and
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UCBs lacosamide (previously Schwarz) filed for approval
with the EMEA and FDA in 2007. Extended release versions of
approved anti-epileptic drugs (AEDs) have been filed and
currently under review include include Lamictal aXR by GSK and
Keppra XR by UCB.
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AEDs in Phase III development for the treatment of epilepsy
include carisbamate by Ortho-McNeil, Inc. and brivaracetam by
UCB. There are many AEDs in Phase II development for the
treatment of epilepsy.
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Products being developed by our competitors to treat
hepatitis C include, but are not limited to:
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Interferons or immunomodulators being developed by
Novartis/Human Genome Sciences, Inc., Intarcia Therapeutics,
Inc., Anadys, and SciClone Pharmaceuticals, Inc.;
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IMPDH inhibitors being developed by Roche and Vertex
Pharmaceuticals Incorporated; and
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Protease or polymerase inhibitors being developed by InterMune,
Vertex Pharmaceuticals Incorporated/Johnson & Johnson,
Schering-Plough, Novartis A.G., Wyeth/Viropharma Inc. and Idenix
Pharmaceuticals, Inc.
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The success of any of our competitors products or products
in development could hurt our expected revenues for retigabine
and taribavirin, if approved.
We sell a broad range of products, and competitive factors vary
by product line and geographic area in which the products are
sold.
14
We also face increased competition from manufacturers of generic
pharmaceutical products when patents covering certain of our
currently marketed products expire or are successfully
challenged. We currently have two significant products, Efudex
and Cesamet, which do not currently have generic competition but
neither of which are protected by patent or regulatory
exclusivity. Sales of Efudex and Cesamet in the aggregate were
$101,887,000 and $97,321,000 in 2007 and in 2006, respectively.
On October 12, 2007, we settled a patent infringement
lawsuit with Kali Laboratories, Inc. regarding Kalis
submission of an Abbreviated New Drug Application
(ANDA) with the FDA seeking approval for a generic
version of Diastat (a diazepam rectal gel). Under the terms of
this settlement, we agreed that Valeant would allow Kali to
introduce a generic version of Diastat and Diastat AcuDial on or
after September 1, 2010, or earlier under certain
circumstances.
Manufacturing
We currently operate four manufacturing plants. We had reduced
the number of manufacturing sites in our global manufacturing
and supply chain network from 15 sites in 2003 to six sites by
the end of 2006 and subsequently in June 2007, we sold our
former manufacturing facilities in Basel, Switzerland and Puerto
Rico to Legacy Pharmaceuticals International, reducing the
number of sites in our network to four.
All of our manufacturing facilities that require certification
from the FDA or foreign agencies have obtained such approval.
We also subcontract the manufacturing of certain of our
products, including products manufactured under the rights
acquired from other pharmaceutical companies. Generally,
acquired products continue to be produced for a specific period
of time by the selling company. During that time, we integrate
the products into our own manufacturing facilities or initiate
toll manufacturing agreements with third parties.
In 2008, we estimate that approximately 47% of our products and
approximately 67% of our product sales will be produced by third
party manufacturers under toll manufacturing arrangements.
The principal raw materials used by us for our various products
are purchased in the open market. Most of these materials are
available from several sources. We have not experienced any
significant shortages in supplies of such raw materials.
Employees
As of December 31, 2007, we had 3,001 employees. These
employees include 795 in production, 1,652 in sales and
marketing, 132 in research and development, and 422 in general
and administrative positions. Collective bargaining exists for
some employees in a number of markets. Substantially all the
employees in Europe are covered by national labor laws which
establish the rights of employees, including the amount of wages
and benefits paid and, in certain cases, severance and similar
benefits. We currently consider our relations with our employees
to be good and have not experienced any work stoppages,
slowdowns or other serious labor problems that have materially
impeded our business operations.
Product
Liability Insurance
We have had product liability insurance to cover damages
resulting from the use of our products since March 2005. Prior
to 2005, we obtained product liability insurance coverage only
for certain products. We have in place clinical trial insurance
in the major markets where we conduct clinical trials.
Foreign
Operations
Approximately 74%, 74% and 75% of our revenues from continuing
operations, which includes royalties, for the years ended
December 31, 2007, 2006 and 2005, respectively, were
generated from operations or otherwise earned outside the United
States. All of our foreign operations are subject to risks
inherent in conducting business abroad, including price and
currency exchange controls, fluctuations in the relative values
of currencies, political
15
instability and restrictive governmental actions including
possible nationalization or expropriation. Changes in the
relative values of currencies may materially affect our results
of operations.
You should consider carefully the following risk factors,
together with all of the other information included or
incorporated in this annual report on
Form 10-K.
Each of these risk factors, either alone or taken together,
could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an
investment in our securities. There may be additional risks that
we do not presently know of or that we currently believe are
immaterial which could also impair our business and financial
position.
The
results from our first Phase III study for retigabine may
not be predictive of results from our second Phase III
study for retigabine.
The Phase III clinical program for retigabine consists of
two studies, RESTORE 1 and RESTORE 2. We reported in February
2008 that RESTORE 1 had met its clinical efficacy endpoints for
both US FDA and EU CHMP (see Part II, Item 7,
Products in Development). RESTORE 2 results are not
expected to be available until the second quarter of 2008 and
the results of RESTORE 1 may not be predictive of the
results of RESTORE 2. Thus we give no assurance that RESTORE 2
will meet either of its clinical efficacy endpoints.
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.
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study (see Part II,
Item 7, Products in Development). These results may
not be predictive of the final results of the full 72-week study
or of any subsequent clinical trial necessary for the approval
of taribavirin. Thus we give no assurance that taribavirin will
ultimately meet its clinical efficacy or safety endpoints, that
we will conduct additional trials necessary for approval or
that, if we conduct such additional trials, the results will
lead to approval of taribavirin by the FDA or similar authority
or any foreign government.
If our
products cause, or are alleged to cause, serious or widespread
personal injury, we may have to withdraw those products from the
market and/or incur significant costs, including payment of
substantial sums in damages.
Even in well designed clinical trials, the potential of a drug
to cause serious or widespread personal injury may not be
apparent. In addition, the existence of a correlation between
use of a drug and serious or widespread personal injury may not
be apparent until it has been in widespread use for some period
of time. Particularly when a drug is used to treat a disease or
condition which is complex and the patients are taking multiple
medications, such correlations may indicate, but do not
necessarily indicate, that the drug has caused the injury;
nevertheless we may decide to, or regulatory authorities may
require that we, withdraw the drug from the market
and/or we
may incur significant costs, including the potential of paying
substantial damages. Withdrawals of products from the market
and/or
incurring significant costs, including the requirement to pay
substantial damages in personal injury cases, would materially
affect our business and results of operation.
If we,
our partners or licensees cannot successfully develop or obtain
future products and commercialize those products, our growth
would be delayed.
Our future growth will depend, in large part, upon our ability
or the ability of our partners or licensees to develop or obtain
and commercialize new products and new formulations of, or
indications for, current products. We are engaged in an active
development program involving compounds which we may
commercially develop in the future. We are in clinical trials
for retigabine and taribavirin. Partners or licensees may also
help us develop these and other product candidates in the future
and are responsible for developing other product candidates that
have been licensed to or acquired by them. The process of
successfully commercializing products is time consuming,
expensive and unpredictable. There can be no assurance that we,
our partners or our licensees will be able to develop
16
or acquire new products, successfully complete clinical trials,
obtain regulatory approvals to use these products for proposed
or new clinical indications, manufacture the potential products
in compliance with regulatory requirements or in commercial
volumes, or gain market acceptance for such products. In
addition, changes in regulatory policy for product approval
during the period of product development and regulatory agency
review of each submitted new application may cause delays or
rejections. It may be necessary for us to enter into other
licensing arrangements with other pharmaceutical companies in
order to market effectively any new products or new indications
for existing products. There can be no assurance that we will be
successful in entering into such licensing arrangements on terms
favorable to us or at all.
There can be no assurance that the clinical trials of any of our
product candidates, including retigabine and taribavirin, will
be successful, that the product candidates will be granted
approval to be marketed for any of the indications being sought
or that any of the product candidates will result in a
commercially successful product.
We
have identified a material weakness in our internal control over
financial reporting that could adversely affect our stock price
and ability to prepare complete and accurate financial
statements in a timely manner.
We have identified a material weakness in our internal control
over financial reporting as of December 31, 2007. The
material weakness, which arose primarily as a result of our lack
of a sufficient complement of personnel in our foreign locations
and monitoring controls at the corporate level, is further
described in Item 9A of this annual report on
Form 10-K.
Because of the foregoing, we concluded that certain financial
statements, earnings press releases and similar communications
should no longer be relied upon and that certain of our
financial statements would need to be restated. We also
concluded that our disclosure controls and procedures were not
effective as of December 31, 2007.
We are taking steps to remediate this material weakness and to
improve our disclosure controls and procedures. We may, however,
identify additional or future material weaknesses or
deficiencies. If we fail to remediate the identified or any
future material weakness or deficiency, or to maintain our
disclosure controls and procedures at the reasonable assurance
level, our financial statements and related disclosure could
contain material misstatements, the preparation and filing of
our financial statements and related filings could be delayed,
and substantial costs and resources may be required to remediate
any weaknesses or deficiencies or to improve our disclosure
controls and procedures. If we cannot produce reliable and
timely financial statements, investors could lose confidence in
our reported financial information, the market price of our
stock could decline significantly, we may be unable to comply
with certain covenants in our debt agreements or obtain
additional financing on acceptable terms, and our business and
financial condition could be harmed.
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 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.
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Third
parties may be able to sell generic forms of our products or
block the sales of our products if our intellectual property
rights or data exclusivity rights do not sufficiently protect
us; patent rights of third parties may also be asserted against
us.
Our success depends in part on our ability to obtain and
maintain meaningful exclusivity protection for our products and
product candidates in key markets throughout the world via
patent protection
and/or data
exclusivity protection. The patent positions of pharmaceutical,
biopharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. We
will be able to protect our products from generic substitution
by third parties only to the extent that our technologies are
covered by valid and enforceable patents, effectively maintained
as trade secrets or protected by data exclusivity. However, our
currently pending or future patent applications may not issue as
patents. Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties from producing
generic substitutes for our products. Lastly, data exclusivity
schemes vary from country to country and may be limited or
eliminated as governments seek to reduce pharmaceutical costs by
increasing the speed and ease of approval of generic products.
In order to protect or enforce patent
and/or data
exclusivity rights, we may initiate patent litigation against
third parties, and we may be similarly sued by others. We may
also become subject to interference proceedings conducted in the
patent and trademark offices of various countries to determine
the priority of inventions. The defense and prosecution, if
necessary, of intellectual property and data exclusivity actions
are costly and divert technical and management personnel from
their normal responsibilities. We may not prevail in any of
these suits. An adverse determination of any litigation or
defense proceeding, resulting in a finding of non-infringement
or invalidity of our patents, or a lack of protection via data
exclusivity, may allow the entry of generic substitutes for our
products.
Furthermore, because of the substantial amount of discovery
required in connection with such litigation, there is a risk
that some of our confidential information could be compromised
by disclosure during such litigation. In addition, during the
course of this kind of litigation, there could be public
announcements of the results of hearings, motions or other
interim proceedings or developments in the litigation. If
securities analysts or investors perceive these results to be
negative, it could have a substantial negative effect on the
trading price of our securities.
The existence of a patent will not necessarily protect us from
competition. Competitors may successfully challenge our patents,
produce similar drugs that do not infringe our patents or
produce drugs in countries that do not respect our patents. No
patent can protect its holder from a claim of infringement of
another patent. Therefore, our patent position cannot and does
not provide an assurance that the manufacture, sale or use of
products patented by us would not infringe a patent right of
another.
While we know of no actual or threatened claim of infringement
that would be material to us, there can be no assurance that
such a claim will not be asserted. If such a claim is asserted,
there can be no assurance that the resolution of the claim would
permit us to continue producing the relevant product on
commercially reasonable terms.
Products
representing a significant amount of our revenue are not
protected by patent or data exclusivity rights.
Some of the products we sell have no meaningful exclusivity
protection via patent or data exclusivity rights. These products
represent a significant amount of our revenues. Without
exclusivity protection, competitors face fewer barriers in
introducing competing products. The introduction of competing
products could adversely affect our results of operations and
financial condition.
If
retigabine and taribavirin do not become approved and
commercially successful products, our ability to generate future
growth in revenue and earnings will be adversely
affected.
We focus our development activities on areas in which we have
particular strengths, such as the antiviral and neurology areas.
The outcome of any development program is highly uncertain.
Products in clinical trials may fail to yield a commercial
product, or a product may be approved by the FDA yet not be a
commercial success. Success in preclinical and early stage
clinical trials may not necessarily translate into success in
large-scale clinical trials.
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In addition, we will need to obtain and maintain regulatory
approval in order to market retigabine and taribavirin. Even if
they appear promising in large-scale Phase III clinical
trials, regulatory approval may not be achieved. The results of
clinical trials are susceptible to varying interpretations that
may delay, limit or prevent approval or result in the need for
post-marketing studies. In addition, changes in regulatory
policy for product approval during the period of product
development and FDA review of a new application may cause delays
or rejection. Even if we receive regulatory approval, this
approval may include limitations on the indications for which we
can market a product, thereby reducing the size of the market
that we would be able to address or our product may not be
chosen by physicians for use by their patients. There is no
guarantee that we will be able to satisfy the needed regulatory
requirements, and we may not be able to generate significant
revenue, if any, from retigabine and taribavirin.
We are
subject to uncertainty related to health care reform measures
and reimbursement policies.
The levels at which government authorities, private health
insurers, HMOs and other organizations reimburse the cost of
drugs and treatments related to those drugs will impact the
successful commercialization of our drugs. We cannot be sure
that reimbursement in the United States or elsewhere will be
available for any drugs we may develop or, if already available,
will not be decreased in the future. Also, we cannot be sure
that reimbursement amounts will not reduce the demand for, or
the price of, our drugs. If reimbursement is not available or is
available only on a limited basis, we may not be able to obtain
a satisfactory financial return on the manufacture and
commercialization of existing and future drugs. Third-party
payors may not establish and maintain price levels sufficient
for us to realize an appropriate return on our investment in
product development or our continued manufacture and sale of
existing drug products.
We are
subject to price control restrictions on our pharmaceutical
products in the majority of countries in which we
operate.
Jurisdictions outside of the United States may enact price
control restrictions or increase the price control restrictions
that currently exist. A significant portion of the sales of our
products are in Europe, a market in which price increases are
controlled, and in some instances, reductions are imposed. Our
future sales and gross profit could be materially adversely
affected if we are unable to obtain appropriate price increases,
or if our products are subject to price reductions.
The
matters relating to the Special Committees review of our
historical stock option granting practices and the restatement
of our consolidated financial statements have resulted in
increased litigation and regulatory proceedings against us and
could have a material adverse effect on us.
In September 2006, our board of directors appointed a Special
Committee, which consisted solely of independent directors, to
conduct a review of our historical stock option granting
practices and related accounting during the period from 1982
through July 2006. The Special Committee identified a number of
occasions on which the exercise prices for stock options granted
to certain of our directors, officers and employees were set
using closing prices of our common stock with dates different
than the actual approval dates, resulting in additional
compensation charges. To correct these and other accounting
errors, we amended our annual report on
Form 10-K
for the year ended December 31, 2005 and our quarterly
reports on
Form 10-Q
for the quarters ended March 31, 2006 and June 30,
2006 to restate the consolidated financial statements contained
in those reports.
Our historical stock option granting practices and the
restatement of our prior financial statements have exposed us to
greater risks associated with litigation and regulatory
proceedings. We are a nominal defendant in two shareholder
derivative lawsuits pending in the state court in Orange County,
California, which assert claims related to our historic stock
option practices. In addition, the SEC has opened a formal
inquiry into our historical stock option grant practices. We
cannot assure you that this current litigation, the SEC inquiry
or any future litigation or regulatory action will result in the
same conclusions reached by the Special Committee. The conduct
and resolution of these matters will be time consuming,
expensive and distracting from the conduct of our business.
Furthermore, if we are subject to adverse findings in any of
these matters, we could be required to pay damages or penalties
or have other remedies imposed upon us which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
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If
competitors develop vaccines or more effective or less costly
drugs for our target indications, our business could be
seriously harmed.
Many of our competitors, particularly large pharmaceutical
companies, have substantially greater financial, technical and
human resources than we do. Many of our competitors spend
significantly more on research and development related
activities than we do. Others may succeed in developing products
that are more effective than those currently marketed or
proposed for development by us. Progress by other researchers in
areas similar to those being explored by us may result in
further competitive challenges. In addition, academic
institutions, government agencies, and other public and private
organizations conducting research may seek patent protection
with respect to potentially competitive products. They may also
establish exclusive collaborative or licensing relationships
with our competitors.
Obtaining
necessary government approvals is time consuming and not
assured.
FDA approval must be obtained in the United States and approval
must be obtained from comparable agencies in other countries
prior to marketing or manufacturing new pharmaceutical products
for use by humans. Obtaining FDA approval for new products and
manufacturing processes can take a number of years and involves
the expenditure of substantial resources. Numerous requirements
must be satisfied, including preliminary testing programs on
animals and subsequent clinical testing programs on humans, to
establish product safety and efficacy. No assurance can be given
that we will obtain approval in the United States, or any other
country, of any application we may submit for the commercial
sale of a new or existing drug or compound. Nor can any
assurance be given that if such approval is secured, the
approved labeling will not have significant labeling
limitations, or that those drugs or compounds will be
commercially successful.
Furthermore, changes in existing regulations or adoption of new
regulations could prevent or delay us from obtaining future
regulatory approvals or jeopardize existing approvals, which
could significantly increase our costs associated with obtaining
approvals and negatively impact our market position.
If we
or our third-party manufacturers are unable to manufacture our
products or the manufacturing process is interrupted due to
failure to comply with regulations or for other reasons, the
manufacture of our products could be interrupted.
We manufacture and have contracted with third parties to
manufacture some of our drug products, including products under
the rights acquired from other pharmaceutical companies.
Manufacturers are required to adhere to current good
manufacturing (cGMP) regulations enforced by the FDA
or similar regulations required by regulatory agencies in other
countries. Compliance with the FDAs cGMP requirements
applies to both drug products seeking regulatory approval and to
approved drug products. Our manufacturing facilities and those
of our contract manufacturers must be inspected and found to be
in full compliance with cGMP standards before approval for
marketing.
Our dependence upon others to manufacture our products may
adversely affect our profit margins and our ability to develop
and obtain approval for our products on a timely and competitive
basis, if at all. Our failure or that of our contract
manufacturers to comply with cGMP regulations or similar
regulations outside of the United States can result in
enforcement action by the FDA or its foreign counterparts,
including, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the
government to renew marketing applications and criminal
prosecution. In addition, delays or difficulties with our
contract manufacturers in producing, packaging, or distributing
our products could adversely affect the sales of our current
products or introduction of other products.
In addition to regulatory compliance risks, our contract
manufacturers in the United States and in other countries are
subject to a wide range of business risks, such as seizure of
assets by governmental authorities, natural disasters, and
domestic and international economic conditions. Were any of our
contract manufacturers not able to manufacture our products
because of regulatory, business or any other reasons, the
manufacture of our products would be interrupted. This could
have a negative impact on our sales, financial condition and
competitive position.
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Many
of our key processes, opportunities and expenses are a function
of existing national and/or local government regulation.
Significant changes in regulations could have a material adverse
impact on our business.
The process by which pharmaceutical products are approved is
lengthy and highly regulated. Our multi-year clinical trials
programs are planned and executed to conform to these
regulations, and once begun, can be difficult and expensive to
change should the regulations regarding approval of
pharmaceutical products significantly change.
In addition, we depend on patent law and data exclusivity to
keep generic products from reaching the market in our
evaluations of the development of our products. In assessing
whether we will invest in any development program, or license a
product from a third party, we assess the likelihood of patent
and/or data
exclusivity under the laws and regulations then in effect. If
those schemes significantly change in a large market, or across
many smaller markets, our ability to protect our investment may
be adversely affected.
Appropriate tax planning requires that we consider the current
and prevailing national and local tax laws and regulations, as
well as international tax treaties and arrangements that we
enter into with various government authorities. Changes in
national/local tax regulations or changes in political
situations may limit or eliminate the effects of our tax
planning and could result in unanticipated tax expenses.
Our
business, financial condition and results of operations are
subject to risks arising from the international scope of our
operations.
We conduct a significant portion of our business outside the
United States. Including ribavirin royalties, approximately 74%
of our revenues from continuing operations were generated
outside the United States during the years ended
December 31, 2007 and 2006. We sell our pharmaceutical
products in more than 100 countries around the world and employ
approximately 2,400 individuals in countries other than the
United States. The international scope of our operations may
lead to volatile financial results and difficulties in managing
our operations because of, but not limited to, the following:
|
|
|
|
|
difficulties and costs of staffing, severance and benefit
payments and managing international operations;
|
|
|
|
exchange controls, currency restrictions and exchange rate
fluctuations;
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
the burden of complying with multiple and potentially
conflicting laws;
|
|
|
|
the geographic, time zone, language and cultural differences
between personnel in different areas of the world;
|
|
|
|
market share and product sales in certain markets being
dependent on actions by and relationships with key distributors;
|
|
|
|
greater difficulty in collecting accounts receivables in and
moving cash out of certain geographic regions;
|
|
|
|
the need for a significant amount of available cash from
operations to fund our business in a number of geographic and
economically diverse locations; and
|
|
|
|
political, social and economic instability in emerging markets
in which we currently operate.
|
In addition, we have identified a material weakness in internal
control over financial reporting as of December 31, 2007
related to not maintaining a sufficient complement of personnel
in our foreign locations with the appropriate skills, training
and experience to identify and address the application of
U.S. generally accepted accounting principles. 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. The existence of a material weakness or deficiency
in internal control over financial reporting could have a
material adverse affect on us. See the risk factor above
captioned We have identified a material weakness in our
internal control over financial reporting that could adversely
affect our stock price and ability to prepare financial
statements in a timely manner.
21
Cash
earned by our foreign subsidiaries is held at those subsidiaries
and transferring that cash to the United States would likely
have a negative impact on our earnings.
A substantial portion of our cash balances and reserves result
from the operations of, and are held by, our subsidiaries
outside of the United States. The income in these countries has
been taxed in the various countries where it was earned, but it
has not been subject to tax in the United States. Income tax
expense has been calculated on the basis that foreign earnings
will be indefinitely invested in
non-U.S. assets.
If we find it necessary to utilize the cash reserves of our
foreign subsidiaries to finance our research and development and
other activities in the United States, our income generated in
foreign countries will become subject to taxation in the United
States. Given the net operating loss carryforwards that we have
available to offset income in the United States, it is unlikely
in the near term that we would incur significant cash
obligations to pay tax on repatriated foreign earnings. However,
repatriating our cash resources from foreign jurisdictions would
likely increase income tax expense in our financial statements
which would significantly reduce our earnings. It would also use
our net operating loss carryforwards, which would increase
future cash obligations to pay taxes on U.S. income.
Much of our operating cash flow is earned outside of the United
States.
We are
involved in various legal proceedings that could adversely
affect us.
We are involved in several legal proceedings, including those
described in Note 16 of notes to the consolidated financial
statements. Defending against claims and any unfavorable legal
decisions, settlements or orders could have a material adverse
effect on us.
Existing
and future audits by, or other disputes with, taxing authorities
may not be resolved in our favor.
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved in our favor and could
have an adverse effect on our reported effective tax rate and
after-tax cash flows.
Difficulties
in completing, financing and integrating acquisitions could have
a material adverse impact on our future growth.
We intend to pursue a strategy of targeted expansion through the
acquisition of compatible businesses and product lines and the
formation of strategic alliances, joint ventures and other
business combinations. There can be no assurance that we will
successfully complete or finance any future acquisition or
investment or that any acquisitions that we do complete will be
completed at prices or on terms that prove to be advantageous to
us. Failure in integrating the operations of companies that we
have acquired or may acquire in the future may have a material
adverse impact on our operating results, financial condition and
future growth.
Due to
the large portion of our business conducted outside the United
States, we have significant foreign currency risk.
We sell products in many countries that are susceptible to
significant foreign currency risk. In some of these markets we
sell products for U.S. Dollars. While this eliminates our
direct currency risk in such markets, it increases our risk that
we could lose market share to competitors because if a local
currency is devalued significantly, it becomes more expensive
for customers in that market to purchase our products in
U.S. Dollars.
Our
stockholder rights plan and anti-takeover provisions of our
charter documents could provide our board of directors with the
ability to delay or prevent a change in control of
us.
Our stockholder rights plan, provisions of our certificate of
incorporation, bylaws and the Delaware General Corporation Law
provide our board of directors with the ability to deter hostile
takeovers or delay, deter or prevent a change in control of the
company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current
market prices.
22
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. The board of directors can also use issuances of
preferred or common stock to deter a hostile takeover or change
in control of the Company.
We are
subject to a consent order with the Securities and Exchange
Commission.
We are subject to a consent order with the SEC, which
permanently enjoins us from violating securities laws and
regulations. The consent order also precludes protection for
forward-looking statements under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 with
respect to forward-looking statements we made prior to
November 28, 2005. The existence of the permanent
injunction under the consent order, and the lack of protection
under the safe harbor with respect to forward-looking statements
we made prior to November 28, 2005 may limit our
ability to defend against future allegations.
We are
subject to fraud and abuse and similar laws and
regulations, and a failure to comply with such regulations or
prevail in any litigation related to noncompliance could harm
our business.
Pharmaceutical and biotechnology companies have faced lawsuits
and investigations pertaining to violations of health care
fraud and abuse laws, such as the federal false
claims act, the federal anti-kickback statute, and other state
and federal laws and regulations. If any such actions are
instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of
significant fines or other sanctions.
If we
do not realize the expected benefits from our restructuring
plans, our business prospects may suffer and our operating
results and financial condition would be adversely
affected.
Our prior restructuring plan was, and the restructuring plan
expected from our 2008 Strategic Review will be, intended to
improve operational efficiencies and our competitiveness. If we
are unable to realize the benefits from our restructuring plans,
our business prospects may suffer and our operating results and
financial condition would be adversely affected.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our major facilities are in the following locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or
|
|
|
Square
|
|
Location
|
|
Purpose
|
|
Leased
|
|
|
Footage
|
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
Aliso Viejo, California
|
|
Corporate headquarters
|
|
|
Leased
|
|
|
|
109,948
|
|
Montreal, Canada
|
|
Offices and manufacturing facility
|
|
|
Owned
|
|
|
|
94,119
|
|
Latin America
|
|
|
|
|
|
|
|
|
|
|
Mexico City, Mexico
|
|
Offices and manufacturing facility
|
|
|
Owned
|
|
|
|
286,411
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
Rzeszow, Poland
|
|
Offices and manufacturing facility
|
|
|
Owned
|
|
|
|
446,661
|
|
In our opinion, facilities occupied by us are more than adequate
for present requirements, and our current equipment is
considered to be in good condition and suitable for the
operations involved.
|
|
Item 3.
|
Legal
Proceedings
|
See Note 16 of notes to consolidated financial statements.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
23
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(symbol: VRX). As of March 10, 2008 there were 4,681
holders of record of our common stock.
The following table sets forth, for the periods indicated the
high and low sales prices of our common stock on the New York
Stock Exchange Composite Transactions reporting
system.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Fiscal Quarters
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First
|
|
$
|
18.06
|
|
|
$
|
16.65
|
|
|
$
|
19.77
|
|
|
$
|
15.85
|
|
Second
|
|
$
|
18.69
|
|
|
$
|
15.44
|
|
|
$
|
18.20
|
|
|
$
|
16.06
|
|
Third
|
|
$
|
17.61
|
|
|
$
|
15.48
|
|
|
$
|
20.46
|
|
|
$
|
15.81
|
|
Fourth
|
|
$
|
15.79
|
|
|
$
|
10.65
|
|
|
$
|
20.34
|
|
|
$
|
16.32
|
|
Performance
Graph
The following graph compares the cumulative total return on our
common stock with the cumulative return on the Standard and
Poors Mid Cap 400 Index (S&P Mid Cap 400
Index) and a 10-Stock Custom Composite Index (the
Custom Composite Index) for the five years ended
December 31, 2007. The Custom Composite consists of
Allergan, Inc., Biovail Corporation, Cephalon, Inc., Forest
Laboratories, Inc., Gilead Sciences, Inc., King Pharmaceuticals,
Inc., Medicis Pharmaceutical Corporation, Mylan Laboratories
Inc., Shire Pharmaceuticals Group plc and Watson
Pharmaceuticals, Inc.
Based on
reinvestment of $100 beginning on December 31,
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-02
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
|
Dec-06
|
|
|
Dec-07
|
Valeant Pharmaceuticals International
|
|
|
|
100
|
|
|
|
|
236
|
|
|
|
|
251
|
|
|
|
|
175
|
|
|
|
|
169
|
|
|
|
|
117
|
|
S&P Mid Cap 400 Index
|
|
|
|
100
|
|
|
|
|
134
|
|
|
|
|
154
|
|
|
|
|
172
|
|
|
|
|
187
|
|
|
|
|
200
|
|
Custom Composite Index
|
|
|
|
100
|
|
|
|
|
133
|
|
|
|
|
122
|
|
|
|
|
149
|
|
|
|
|
172
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
In June 2007, our board of directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200,000,000 of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts as we see appropriate. The number of shares to be
purchased and the timing of such purchases are subject to
various factors, which may include the price of our common
stock, general market conditions, corporate requirements,
including restrictions in our debt covenants, and alternate
investment opportunities. The share repurchase program may be
modified or discontinued at any time. The total number of shares
repurchased pursuant to this program was 6,490,690 as of
December 31, 2007. We have used $99,557,000 to repurchase
these shares. We have not repurchased any shares between
January 1, 2008 and March 17, 2008.
We did not purchase any shares of common stock during the year
ended December 31, 2007 other than purchases under the
stock repurchase program. Set forth below is the information
regarding shares repurchased under the stock repurchase program
during the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
|
|
Total Number
|
|
|
Average
|
|
|
|
|
|
of Shares that
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Aggregate
|
|
|
May Yet Be
|
|
Period
|
|
Purchased
|
|
|
Per Share
|
|
|
Consideration
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
6/1/07 6/30/07
|
|
|
1,600,000
|
|
|
$
|
17.17
|
|
|
$
|
27,507
|
|
|
$
|
172,493
|
|
7/1/07 7/31/07
|
|
|
2,100,000
|
|
|
$
|
16.95
|
|
|
$
|
63,137
|
|
|
$
|
136,863
|
|
8/1/07 8/31/07
|
|
|
1,022,600
|
|
|
$
|
16.08
|
|
|
$
|
79,599
|
|
|
$
|
120,401
|
|
9/1/07 10/31/07
|
|
|
0
|
|
|
|
NM
|
|
|
$
|
79,599
|
|
|
$
|
120,401
|
|
11/1/07 11/30/07
|
|
|
1,598,090
|
|
|
$
|
11.24
|
|
|
$
|
97,590
|
|
|
$
|
102,410
|
|
12/1/07 12/31/07
|
|
|
170,000
|
|
|
$
|
11.55
|
|
|
$
|
99,557
|
|
|
$
|
100,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Share Repurchases
|
|
|
6,490,690
|
|
|
$
|
15.32
|
|
|
$
|
99,557
|
|
|
$
|
100,443
|
|
NM Not meaningful.
Dividend
Policy
We did not declare and did not pay dividends in 2007. We
declared and paid cash dividends of $.0775 for the first and
second quarters of 2006. We also paid cash dividends of $.0775
per share in the first quarter of 2006 for the dividend declared
in the fourth quarter of 2005. Our board of directors will
continue to review our dividend policy. There are significant
contractual limitations on our ability to pay future dividends
under the terms of the indenture governing our 7% senior
notes due 2011.
25
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data are derived from our
financial statements. The consolidated statement of operations
data for the years ended December 31, 2007, 2006 and 2005
and the consolidated balance sheet data as of December 31,
2007 and 2006 have been derived from our audited financial
statements included elsewhere in this annual report on
Form 10-K.
The consolidated statement of operations data for the years
ended December 31, 2006 and 2005 and the consolidated
balance sheet data as of December 31, 2006 are derived from
the audited restated consolidated financial statements,
including the notes thereto, appearing elsewhere in this report.
The data as of December 31, 2005, 2004, and 2003 and for
the years ended December 31, 2004 and 2003 has been derived
from unaudited restated financial statements which are not
included in this
Form 10-K.
As described in Note 2 to the audited financial statements
referred to above, our consolidated financial statements have
been restated to correct certain accounting errors. These errors
resulted in benefits (charges) to net income of ($1,003,000),
($549,000), $747,000, and 183,000 for the years ended
December 31, 2006, 2005, 2004, and 2003, respectively.
Additionally, the cumulative effect of the related charges to
net income for periods prior to 2003 was ($2,723,000).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(In thousands except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
785,770
|
|
|
$
|
781,562
|
|
|
$
|
731,869
|
|
|
$
|
609,212
|
|
|
$
|
518,477
|
|
Alliance revenue (including ribavirin royalties)(1)
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
91,646
|
|
|
|
76,427
|
|
|
|
167,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
872,222
|
|
|
|
862,804
|
|
|
|
823,515
|
|
|
|
685,639
|
|
|
|
685,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
233,094
|
|
|
|
238,141
|
|
|
|
222,358
|
|
|
|
200,543
|
|
|
|
184,704
|
|
Selling expenses
|
|
|
259,324
|
|
|
|
244,757
|
|
|
|
232,316
|
|
|
|
196,642
|
|
|
|
166,740
|
|
General and administrative expenses
|
|
|
111,721
|
|
|
|
114,583
|
|
|
|
108,508
|
|
|
|
99,662
|
|
|
|
111,244
|
|
Research and development costs
|
|
|
98,025
|
|
|
|
105,442
|
|
|
|
114,100
|
|
|
|
92,858
|
|
|
|
45,344
|
|
Acquired in-process research and development(2)
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
|
|
11,770
|
|
|
|
117,609
|
|
Gain on litigation settlements(3)
|
|
|
|
|
|
|
(51,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges and asset impairment(4)
|
|
|
23,176
|
|
|
|
138,181
|
|
|
|
1,253
|
|
|
|
19,344
|
|
|
|
|
|
Amortization expense
|
|
|
71,567
|
|
|
|
65,276
|
|
|
|
68,832
|
|
|
|
59,303
|
|
|
|
38,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
796,907
|
|
|
|
854,830
|
|
|
|
873,766
|
|
|
|
680,122
|
|
|
|
664,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
75,315
|
|
|
|
7,974
|
|
|
|
(50,251
|
)
|
|
|
5,517
|
|
|
|
21,741
|
|
Other income (loss), net including translation and exchange
|
|
|
1,060
|
|
|
|
1,152
|
|
|
|
(6,358
|
)
|
|
|
141
|
|
|
|
4,727
|
|
Loss on early extinguishment of debt(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,892
|
)
|
|
|
(12,803
|
)
|
Interest income
|
|
|
17,792
|
|
|
|
12,610
|
|
|
|
13,169
|
|
|
|
12,432
|
|
|
|
8,888
|
|
Interest expense
|
|
|
(42,878
|
)
|
|
|
(43,726
|
)
|
|
|
(40,326
|
)
|
|
|
(49,265
|
)
|
|
|
(36,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
51,289
|
|
|
|
(21,990
|
)
|
|
|
(83,766
|
)
|
|
|
(51,067
|
)
|
|
|
(13,592
|
)
|
Provision for income taxes(6)
|
|
|
25,233
|
|
|
|
34,824
|
|
|
|
55,073
|
|
|
|
69,062
|
|
|
|
41,335
|
|
Minority interest
|
|
|
2
|
|
|
|
3
|
|
|
|
287
|
|
|
|
233
|
|
|
|
11,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
26,054
|
|
|
|
(56,817
|
)
|
|
|
(139,126
|
)
|
|
|
(120,362
|
)
|
|
|
(66,690
|
)
|
Income (loss) from discontinued operations, net of tax(7)
|
|
|
(32,240
|
)
|
|
|
(751
|
)
|
|
|
(49,566
|
)
|
|
|
(33,544
|
)
|
|
|
9,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
|
$
|
(153,906
|
)
|
|
$
|
(57,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations basic
|
|
$
|
0.28
|
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
|
$
|
(1.43
|
)
|
|
$
|
(0.80
|
)
|
Discontinued operations
|
|
|
(0.35
|
)
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.40
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.83
|
)
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations diluted
|
|
$
|
0.28
|
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
|
$
|
(1.43
|
)
|
|
$
|
(0.80
|
)
|
Discontinued operations
|
|
|
(0.35
|
)
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.40
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.83
|
)
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
|
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
309,365
|
|
|
$
|
325,376
|
|
|
$
|
224,294
|
|
|
$
|
221,943
|
|
|
$
|
409,420
|
|
Working capital(8)
|
|
|
522,764
|
|
|
|
464,909
|
|
|
|
342,351
|
|
|
|
566,295
|
|
|
|
985,804
|
|
Total assets
|
|
|
1,494,262
|
|
|
|
1,505,692
|
|
|
|
1,515,539
|
|
|
|
1,522,349
|
|
|
|
1,912,879
|
|
Total debt(6)
|
|
|
784,207
|
|
|
|
787,433
|
|
|
|
788,934
|
|
|
|
794,068
|
|
|
|
1,121,145
|
|
Stockholders equity(1)(2)(3)(4)(5)(6)(7)(8)
|
|
|
414,103
|
|
|
|
430,390
|
|
|
|
435,558
|
|
|
|
471,538
|
|
|
|
584,328
|
|
Notes to
Selected Financial Data:
|
|
|
(1) |
|
Alliance revenue in 2007 included a $19,200,000 milestone
payment received from Schering-Plough related to the
outlicensing of pradefovir and a $50,000 payment from a third
party for the license of certain intellectual property. Alliance
revenue prior to 2007 consisted exclusively of royalties from
Schering-Plough and Roche on their sales of ribavirin. |
|
(2) |
|
In connection with our acquisitions, portions of the purchase
price are allocated to acquired in-process research and
development on projects that, as of the acquisition date, had
not yet reached technological feasibility and had no alternative
future use. Such costs are charged to research and development
expense as of the date of the acquisition. In March 2005 we
acquired Xcel for approximately $280,000,000 of which
$126,399,000 was allocated to in-process research and
development costs and charged to expense. In February 2004, we
acquired from Amarin Corporation plc its
U.S.-based
subsidiary, Amarin Pharmaceuticals, Inc., and all of that
subsidiarys U.S. product rights. The total
consideration paid for Amarin was $40,000,000. In August 2003,
we repurchased the 20% publicly held minority interest in
Ribapharm, Inc. for an aggregate total purchase price of
$207,658,000. In connection with these acquisitions, we expensed
$11,770,000 and $117,609,000 of in-process research and
development in the years ended December 31, 2004 and 2003,
respectively. |
|
(3) |
|
In 2006, we recorded a gain on litigation settlement from
litigation with a former chief executive officer, Milan Panic,
of $17,550,000 relating to Ribapharm bonuses. We also recorded a
gain on litigation settlement from litigation with the Republic
of Serbia of $34,000,000 relating to the ownership and
operations of a joint venture we formerly participated in known
as Galenika. |
|
(4) |
|
In 2004, we incurred an expense of $19,344,000 related to our
manufacturing and rationalization plan. Our manufacturing sites
were tested for impairment resulting in an impairment of asset
value on three of the sites. Accordingly, we wrote these sites
down to their fair value and recorded asset impairment charges
of $18,000,000 and severance charges of $1,344,000 in the year
ended December 31, 2004. In 2005 we made the decision to
dispose of another manufacturing plant in China which resulted
in an asset impairment charge of $2,322,000. In 2005, we also
recorded net gains of approximately $1,816,000 resulting from
the sale of the manufacturing plants in the United States,
Argentina and Mexico. |
|
|
|
In 2006, we incurred an expense of $138,181,000 relating to the
2006 Restructuring. The expense included employee severance
costs (259 employees) of $16,997,000, abandoned software
and other capital assets of $22,178,000, asset impairment
charges relating to fixed assets at two manufacturing facilities
and our former headquarters and research facility of $97,344,000
and contract cancellation and other cash charges of $1,662,000. |
|
|
|
In 2007, we incurred restructuring expenses of $23,176,000. In
the first half of 2007, we incurred a restructuring expense of
$13,575,000 relating to the completion of the 2006
Restructuring, comprising employee severance costs of $5,130,000
contract cancellation costs of $3,115,000, the elimination of
accumulated foreign currency translation adjustments of
$2,891,000 and asset impairment charges relating to the two
manufacturing facilities of $2,439,000. On February 28,
2008, we announced that a strategic review initiated by our
board of directors in October 2007 resulted in plans for a new
restructuring program. Charges for this restructuring program
incurred in 2007 were $9,601,000, comprising $957,000 in
executive severances, $4,676,000 for professional service |
27
|
|
|
|
|
expenses, and $3,968,000 for contract termination and
transaction costs associated with the sale of our Asia
businesses. |
|
|
|
(5) |
|
In May and July 2004, we repurchased $326,000,000 aggregate
principal amount of our
61/2% Convertible
Subordinated Notes due 2008. In connection with these
repurchases, we recorded a loss on early extinguishment of debt
of $19,892,000 for the year ended December 31, 2004. |
|
|
|
In November 2003, we completed an offering of $240,000,000
aggregate principal amount of 3.0% Convertible Subordinated
Notes due 2010 and $240,000,000 aggregate principal amount of
4.0% Convertible Subordinated Notes due 2013. We used
proceeds from this offering to retire $139,589,000 aggregate
principal amount of our
61/2% Convertible
Subordinated Notes due 2008, resulting in a loss on early
extinguishment of debt of $12,803,000. In December 2003, we
issued $300,000,000 aggregate principal amount of
7.0% Senior Notes due 2011. |
|
(6) |
|
The tax provision in 2005 included a net charge of $27,368,000
associated with an Internal Revenue Service examination of our
U.S. tax returns for the years 1997 to 2001 (including
interest). The tax provision in 2007 includes a net credit of
$21,521,000 to partially reverse the 2005 charge, as a result of
resolving many of the issues raised during the examination
through an appeals process. In 2007, 2006, 2005 and 2004, we
recorded valuation allowances of $53,106,000, $28,106,000,
$39,862,000 and $85,427,000 against our deferred tax asset to
recognize the uncertainty of realizing the benefits of our
accumulated U.S. and state net operating losses and
research credits. In 2007 the increase in the
U.S. valuation allowance was offset by liabilities for
uncertain tax positions of $60,095,000, with a net decrease of
the valuation allowance of $6,989,000. In 2007 we also recorded
valuation allowances of $7,615,000 to recognize the uncertainty
of realizing the benefits of foreign net operating losses. As of
December 31, 2007, the valuation allowances totaled
$159,710,000. In addition to these factors, the tax provision in
2005 does not reflect tax benefits for certain of the amounts of
acquired in-process research and development charged to expense. |
|
(7) |
|
In September 2007, we reclassified our Infergen operations as
discontinued operations. The consolidated financial statements
have been reclassified for all historical periods presented. The
loss from discontinued operations in 2007 was primarily related
to Infergen. In 2006, the loss from discontinued operations was
related to Infergen, partly offset by the partial release of
$5,648,000 from a reserve for our environmental liability
related to our former biomedical facility. |
|
|
|
On December 30, 2005, we acquired the U.S. and
Canadian rights to Infergen from InterMune. In this transaction,
we charged $47,200,000 to acquired in-process research and
development. As a result of the reclassification of the Infergen
operations to discontinued operations, this charge was
classified as an expense within discontinued operations. |
|
|
|
During 2002, we decided to divest our Russian pharmaceuticals
segment, biomedical segment, raw materials business and
manufacturing capability in Central Europe, our photonics
business and the Circe unit. The loss from discontinued
operations in 2004 and the income from discontinued operations
in 2003 relate to the disposition of these businesses. |
|
(8) |
|
Working capital in 2007 and 2006 excludes $66,247,000 and
$124,821,000, respectively, of assets held for sale. |
28
Below is a summary of the specific income statement accounts as
reported and as affected by the restatement for each of the four
years ended December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
783,279
|
|
|
$
|
732,240
|
|
|
$
|
607,824
|
|
|
$
|
518,598
|
|
Adjustment
|
|
|
(1,717
|
)
|
|
|
(371
|
)
|
|
|
1,388
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
781,562
|
|
|
$
|
731,869
|
|
|
$
|
609,212
|
|
|
$
|
518,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
115,857
|
|
|
$
|
108,252
|
|
|
$
|
99,443
|
|
|
$
|
111,635
|
|
Adjustment
|
|
|
(1,274
|
)
|
|
|
256
|
|
|
|
219
|
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
114,583
|
|
|
$
|
108,508
|
|
|
$
|
99,662
|
|
|
$
|
111,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations, before interest, taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
8,417
|
|
|
$
|
(49,624
|
)
|
|
$
|
4,348
|
|
|
$
|
21,471
|
|
Adjustment
|
|
|
(443
|
)
|
|
|
(627
|
)
|
|
|
1,169
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
7,974
|
|
|
$
|
(50,251
|
)
|
|
$
|
5,517
|
|
|
$
|
21,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes and minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(21,547
|
)
|
|
$
|
(83,139
|
)
|
|
$
|
(52,236
|
)
|
|
$
|
(13,862
|
)
|
Adjustment
|
|
|
(443
|
)
|
|
|
(627
|
)
|
|
|
1,169
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(21,990
|
)
|
|
$
|
(83,766
|
)
|
|
$
|
(51,067
|
)
|
|
$
|
(13,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
34,264
|
|
|
$
|
55,151
|
|
|
$
|
68,640
|
|
|
$
|
41,248
|
|
Adjustment
|
|
|
560
|
|
|
|
(78
|
)
|
|
|
422
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
34,824
|
|
|
$
|
55,073
|
|
|
$
|
69,062
|
|
|
$
|
41,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(55,814
|
)
|
|
$
|
(138,577
|
)
|
|
$
|
(121,109
|
)
|
|
$
|
(66,873
|
)
|
Adjustment
|
|
|
(1,003
|
)
|
|
|
(549
|
)
|
|
|
747
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(56,817
|
)
|
|
$
|
(139,126
|
)
|
|
$
|
(120,362
|
)
|
|
$
|
(66,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(56,565
|
)
|
|
$
|
(188,143
|
)
|
|
$
|
(154,653
|
)
|
|
$
|
(57,527
|
)
|
Adjustment
|
|
|
(1,003
|
)
|
|
|
(549
|
)
|
|
|
747
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
|
$
|
(153,906
|
)
|
|
$
|
(57,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Below is a summary of the earnings per share information as
reported and as affected by the restatement for each of the four
years ended December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Basic loss per share as previously reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.60
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.44
|
)
|
|
$
|
(0.80
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.40
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.61
|
)
|
|
$
|
(2.05
|
)
|
|
$
|
(1.84
|
)
|
|
$
|
(0.69
|
)
|
Basic income (loss) per share adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
|
|
From discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
|
|
Basic loss per share as restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
|
$
|
(1.43
|
)
|
|
$
|
(0.80
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.40
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.83
|
)
|
|
$
|
(0.69
|
)
|
Diluted loss per share as previously reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.60
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.44
|
)
|
|
$
|
(0.80
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.40
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.61
|
)
|
|
$
|
(2.05
|
)
|
|
$
|
(1.84
|
)
|
|
$
|
(0.69
|
)
|
Diluted income (loss) per share adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
|
|
From discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
|
|
Diluted loss per share as restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
|
$
|
(1.43
|
)
|
|
$
|
(0.80
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.40
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.83
|
)
|
|
$
|
(0.69
|
)
|
30
Below is a summary of the balance sheet account information as
reported and as affected by the restatement and certain
adjustments for changes in balance sheet classification for each
of the four years ended December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
326,002
|
|
|
$
|
224,856
|
|
|
$
|
222,590
|
|
|
$
|
410,019
|
|
Adjustment
|
|
|
(626
|
)
|
|
|
(562
|
)
|
|
|
(647
|
)
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
325,376
|
|
|
$
|
224,294
|
|
|
$
|
221,943
|
|
|
$
|
409,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
9,743
|
|
|
$
|
10,210
|
|
|
$
|
238,918
|
|
|
$
|
463,962
|
|
Adjustment
|
|
|
627
|
|
|
|
563
|
|
|
|
648
|
|
|
|
(1,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
10,370
|
|
|
$
|
10,773
|
|
|
$
|
239,566
|
|
|
$
|
462,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
227,452
|
|
|
$
|
187,987
|
|
|
$
|
171,860
|
|
|
$
|
162,402
|
|
Adjustment
|
|
|
(301
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
227,151
|
|
|
$
|
187,992
|
|
|
$
|
171,860
|
|
|
$
|
162,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
16,398
|
|
|
$
|
30,205
|
|
|
$
|
23,076
|
|
|
$
|
13,863
|
|
Adjustment
|
|
|
|
|
|
|
(11,260
|
)
|
|
|
(4,941
|
)
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
16,398
|
|
|
$
|
18,945
|
|
|
$
|
18,135
|
|
|
$
|
14,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
8,071
|
|
|
$
|
6,447
|
|
|
$
|
1,973
|
|
|
$
|
15,587
|
|
Adjustment
|
|
|
479
|
|
|
|
589
|
|
|
|
96
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
8,550
|
|
|
$
|
7,036
|
|
|
$
|
2,069
|
|
|
$
|
15,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
21,514
|
|
|
$
|
25,342
|
|
|
$
|
|
|
|
$
|
|
|
Adjustment
|
|
|
(296
|
)
|
|
|
379
|
|
|
|
901
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
21,218
|
|
|
$
|
25,721
|
|
|
$
|
901
|
|
|
$
|
1,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
53,555
|
|
|
$
|
43,176
|
|
|
$
|
40,160
|
|
|
$
|
49,618
|
|
Adjustment
|
|
|
372
|
|
|
|
11,813
|
|
|
|
5,348
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
53,927
|
|
|
$
|
54,989
|
|
|
$
|
45,508
|
|
|
$
|
50,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
226
|
|
|
$
|
71,141
|
|
|
$
|
23,894
|
|
|
$
|
27,994
|
|
Adjustment
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
226
|
|
|
$
|
71,136
|
|
|
$
|
23,894
|
|
|
$
|
27,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
142,532
|
|
|
$
|
140,839
|
|
|
$
|
127,587
|
|
|
$
|
115,928
|
|
Adjustment
|
|
|
4,173
|
|
|
|
2,488
|
|
|
|
1,827
|
|
|
|
2,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
146,705
|
|
|
$
|
143,327
|
|
|
$
|
129,414
|
|
|
$
|
118,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
39,818
|
|
|
$
|
47,324
|
|
|
$
|
20,472
|
|
|
$
|
14,962
|
|
Adjustment
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
39,646
|
|
|
$
|
47,324
|
|
|
$
|
20,472
|
|
|
$
|
14,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
3,255
|
|
|
$
|
8,208
|
|
|
$
|
13,823
|
|
|
$
|
1,835
|
|
Adjustment
|
|
|
450
|
|
|
|
139
|
|
|
|
102
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
3,705
|
|
|
$
|
8,347
|
|
|
$
|
13,925
|
|
|
$
|
1,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
18,182
|
|
|
$
|
16,371
|
|
|
$
|
14,429
|
|
|
$
|
18,422
|
|
Adjustment
|
|
|
6,324
|
|
|
|
1,359
|
|
|
|
1,693
|
|
|
|
(2,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
24,506
|
|
|
$
|
17,730
|
|
|
$
|
16,122
|
|
|
$
|
15,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
18,343
|
|
|
$
|
23,118
|
|
|
$
|
32,056
|
|
|
$
|
19,731
|
|
Adjustment
|
|
|
(5,657
|
)
|
|
|
(4,078
|
)
|
|
|
(4,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
12,686
|
|
|
$
|
19,040
|
|
|
$
|
27,908
|
|
|
$
|
19,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(848,467
|
)
|
|
$
|
(770,350
|
)
|
|
$
|
(560,722
|
)
|
|
$
|
(380,044
|
)
|
Adjustment
|
|
|
(3,345
|
)
|
|
|
(2,342
|
)
|
|
|
(1,793
|
)
|
|
|
(2,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(851,812
|
)
|
|
$
|
(772,692
|
)
|
|
$
|
(562,515
|
)
|
|
$
|
(382,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
19,458
|
|
|
$
|
(21,541
|
)
|
|
$
|
4,711
|
|
|
$
|
(33,860
|
)
|
Adjustment
|
|
|
(1,518
|
)
|
|
|
3,956
|
|
|
|
3,724
|
|
|
|
3,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
17,940
|
|
|
$
|
(17,585
|
)
|
|
$
|
8,435
|
|
|
$
|
(30,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Restatement
of Prior Period Financial Information
This annual report on
Form 10-K
includes the restatement of our consolidated financial
statements as of and for the years ended December 31, 2006
and 2005. This report also includes the restatement of the
selected financial data as of and for the years ended
December 31, 2006, 2005, 2004 and 2003 and the restatement
of the quarterly financial data in Part II, Item 8 for
the three-month periods ended March 31, 2006, June 30,
2006, September 30, 2006, December 31, 2006,
March 31, 2007, June 30, 2007 and September 30,
2007.
As announced in our current report on
Form 8-K
which we filed with the Securities and Exchange Commission, or
SEC, on March 3, 2008, we concluded that our previously
filed financial statements should no longer be relied upon due
to certain errors in the accounting for foreign operations which
were identified during the preparation process for this annual
report on
Form 10-K
and primarily arose during the period January 1, 2002 to
September 30, 2007. These included errors impacting annual
periods prior to 2007 with a cumulative net charge to income
from continuing operations before income taxes of $3,851,000 as
of December 31, 2006. The errors also included items
originating in the first, second and third quarters of 2007 with
a net benefit to income from continuing operations before income
taxes of $1,761,000. These errors have been determined to be, in
the aggregate, material to the quarter and year ended
December 31, 2007 and to certain prior periods including
the year ended December 31, 2006, and therefore we are
restating our results for the years ended December 31,
2003, 2004, 2005 and 2006. The errors and the cumulative net
effect of the corrections through December 31, 2006 and for
the nine months ended September 30, 2007 are described as
follows and summarized in the table below:
i. Increase in reserves for anticipated product returns
based on historical trends and for certain credit memos in Latin
America, the cumulative effect of which is a reduction in
revenue of $3,953,000 and certain other adjustments of $127,000
through December 31, 2006 and $1,120,000 for the nine
months ended September 30, 2007;
ii. Decrease in revenues associated with sales to certain
customers in Italy where preexisting rights of return became
known in the fourth quarter of 2007, the cumulative effect of
which is a reduction of revenues of $290,000 through
December 31, 2006 and $1,550,000 for the nine months ended
September 30, 2007;
iii. Decrease in costs of goods sold related to bookkeeping
errors in recording inventory costing and manufacturing
variances in the UK and France, the cumulative effect of which
is a reduction in cost of goods sold and a corresponding
increase in gross profit of $4,710,000 for the nine months ended
September 30, 2007, with no effect prior to January 1,
2007;
iv. Changes in pension expense in UK, Netherlands,
Switzerland and Germany resulting from incorrect application of
Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions and Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, the cumulative effect of which is a decrease in
general and administrative expenses of $519,000 through
December 31, 2006 and an increase to general and
administrative expenses of $279,000 for the nine months ended
September 30, 2007; and
v. Changes in income tax expense resulting from the income
tax effects of the pre-tax adjustments described in i.-iv.
above, resulting in a reduction in income tax expense of
$1,331,000 through December 31, 2006 and an increase of
$611,000 for the nine months ended September 30, 2007.
Additionally, income tax expense increased due to corrections of
deferred income taxes in certain foreign locations, resulting in
a cumulative increase in income tax expense of $825,000 through
December 31, 2006.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Income
|
|
Income (Expense)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Pre-2003
|
|
|
(Expense)
|
|
|
|
(In thousands)
|
|
|
Returns reserve and credit memos in Latin America
|
|
$
|
(1,120
|
)
|
|
$
|
(1,554
|
)
|
|
$
|
(371
|
)
|
|
$
|
1,389
|
|
|
$
|
(121
|
)
|
|
$
|
(3,423
|
)
|
|
$
|
(5,200
|
)
|
Reversal of revenue in Italy
|
|
|
(1,550
|
)
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,840
|
)
|
Cost of goods bookkeeping in the UK and France
|
|
|
4,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,710
|
|
European pension accounting
|
|
|
(279
|
)
|
|
|
1,401
|
|
|
|
(256
|
)
|
|
|
(220
|
)
|
|
|
391
|
|
|
|
(797
|
)
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact before taxes
|
|
|
1,761
|
|
|
|
(443
|
)
|
|
|
(627
|
)
|
|
|
1,169
|
|
|
|
270
|
|
|
|
(4,220
|
)
|
|
|
(2,090
|
)
|
Tax effect on above
|
|
|
(611
|
)
|
|
|
204
|
|
|
|
139
|
|
|
|
(422
|
)
|
|
|
(87
|
)
|
|
|
1,497
|
|
|
|
720
|
|
Other deferred tax items
|
|
|
|
|
|
|
(764
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
|
|
$
|
1,150
|
|
|
$
|
(1,003
|
)
|
|
$
|
(549
|
)
|
|
$
|
747
|
|
|
$
|
183
|
|
|
$
|
(2,723
|
)
|
|
$
|
(2,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restatement and its impact on fiscal years ended
December 31, 2006 and 2005 are discussed in more detail in
Note 2 to our consolidated financial statements, which are
included herein.
While we have restated the unaudited quarterly information in
Part II, Item 8 and intend to amend and restate our
quarterly reports on
Form 10-Q
for the fiscal quarters ended March 31, June 30 and
September 30, 2007 and 2006, we have not amended and do not
intend to amend any of our other previously filed reports. As we
have previously announced, the consolidated financial statements
and related information contained in such previously filed
reports should no longer be relied upon.
Amounts appearing in Managements Discussion and Analysis
of Financial Condition and Results of Operations as of and for
the years ended December 31, 2006 and 2005 reflect the
effects of the restatement as described above.
Identification
of Material Weakness
In connection with this restatement, we identified a material
weakness in our disclosure controls and procedures and internal
control over financial reporting as of December 31, 2007
and reported this to our Finance and Audit Committee. The
material weakness, which arose primarily as a result of our lack
of a sufficient complement of personnel in our foreign locations
and monitoring controls at the corporate level and is further
described below in Item 9A of this
Form 10-K,
resulted in the restatement of our prior period financial
information included in this report. We are in the process of
identifying and implementing a plan to address the material
weakness in internal control over financial reporting. This
remediation is discussed in more detail in Item 9A. For
this reason, the discussion and data set forth in this section
may not be comparable to discussions and data in our previously
filed reports.
Company
Overview
Introduction
We are an international pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products. Historically, our marketing and promotion efforts
focused on our Promoted Products, which consisted of products
marketed globally, regionally, or locally with annual sales in
excess of $5,000,000. Our products are currently sold in more
than 100 markets around the world.
Although historically we have focused most of our efforts on
neurology, dermatology, and infectious disease, our prescription
pharmaceutical 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, Asia, and Australasia) and EMEA
(Europe, Middle East, and Africa).
34
Strategic
Review and Restructuring
In October 2007, our board of directors initiated a strategic
review of our business direction, geographic and commercial
operations, product and business portfolio, growth opportunities
and acquisition strategy. This strategic review, which we refer
to as the 2008 Strategic Review, is still underway
as of the date of this filing and we expect to describe it in an
announcement in late March 2008. We expect the 2008 Strategic
Review to lead to significant changes in our business and will
include a restructuring program.
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. In
September 2007, we decided to sell our rights to Infergen. We
sold these rights to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. In 2007, we also sold product rights to
Reptilase, Solcoseryl in Japan, our ophthalmic business in
Holland, and certain other products. 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 includes
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 includes certain product rights in Japan.
We closed this transaction on March 3, 2008. The assets
sold to Invida have been classified as held for sale
in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, as of December
2007.
We announced on February 4, 2008 that our board of
directors had appointed J. Michael Pearson to the position of
chief executive officer and chairman of our board of directors
effective February 1, 2008, the date of the resignation of
our former chief executive officer, Timothy C. Tyson. Robert A.
Ingram, who served as chairman prior to Mr. Pearsons
appointment, remains on our board of directors, serving as lead
director. Prior to joining Valeant as our chief executive
officer, Mr. Pearson was a director at McKinsey &
Company, where he had served as head of the global
pharmaceutical practice, as a member of its board of directors
and in various other capacites.
Retigabine
RESTORE 1 Data Announcement
On February 12, 2008 we reported results for retigabine in
RESTORE 1, the first of two Phase III pivotal trials using
retigabine as an adjunctive treatment for adult epilepsy
patients with refractory partial-onset seizures. 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.
Retigabine demonstrated statistically significant 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). More details on the RESTORE
1 data announcement are provided in Item 7, Products in
Development.
Taribavirin
12-week analysis of the Phase IIb study
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study. 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. 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. More details on the
taribavirin Phase IIb study announcement are provided in
Item 7, Products in Development. We are using the
data to explore the options for the continued role of
taribavirin in our portfolio, including consideration of
partnering opportunities.
Infergen
(Reported in Discontinued Operations)
On December 30, 2005, we acquired the U.S. and
Canadian rights to the hepatitis C drug Infergen from
InterMune. In September 2007, we decided to divest these
Infergen product rights and we sold them to Three Rivers
Pharmaceuticals, LLC on January 14, 2008. 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
35
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The consolidated financial
statements have been reclassified to conform to discontinued
operations presentation for all historical periods presented.
Ribavirin
Royalties
Our royalties are derived from sales of ribavirin, a nucleoside
analog that we discovered. In 1995, Schering-Plough licensed
from us all oral forms of ribavirin for the treatment of chronic
hepatitis C. We also licensed ribavirin to Roche in 2003.
Roche discontinued royalty payments to us in June 2007 when the
European Patent Office revoked a ribavirin patent which would
have provided protection through 2017.
Ribavirin royalty revenues were $67,202,000, $81,242,000 and
$91,646,000 for the years ended December 31, 2007, 2006 and
2005, respectively, and accounted for 8%, 9% and 11% of our
total revenues in 2007, 2006 and 2005, respectively. Royalty
revenues in 2007, 2006 and 2005 were substantially lower than
those in prior years. This decrease had been expected and
relates to: 1) Roches discontinuation of royalty
payments to us in June 2007, 2) Schering-Ploughs
market share losses in ribavirin sales, 3) reduced sales in
Japan from a peak in 2005 driven by the launch of combination
therapy and 4) further market share gains by generic
competitors in the United States since they entered the market
in April 2004.
We expect ribavirin royalties to continue to decline in 2008.
The royalty will decline significantly in 2009 in that royalty
payments from Schering-Plough will continue for European sales
only until the ten-year anniversary of the launch of the
product, which varied by European country and started in May
1999. We expect that royalties from Schering-Plough in Japan
will continue after 2009.
Specialty
Pharmaceuticals
Product sales from our specialty pharmaceuticals segment
accounted for 90% of our total revenues from continuing
operations for the year ended December 31, 2007, compared
to 91% for 2006. Product sales increased for the year ended
December 31, 2007 compared with 2006 by $4,208,000.
Our current product portfolio comprises approximately 352
branded products, with approximately 1,974 stock keeping units.
We market our products globally through a marketing and sales
force consisting of approximately 1,652 employees. We focus
our sales, marketing and promotion efforts on the Promoted
Products within our product portfolio. We have identified these
Promoted Products as offering the best potential return on
investment. The majority of our Promoted Products are in our
three targeted therapeutic areas. Promoted Products in other
therapeutic areas have characteristics and regional or local
market positions that also offer significant growth and returns
on marketing investments.
Our future growth is expected to be driven primarily by the
commercialization of new products, growth of our existing
products, and business development. Our Promoted Products
accounted for 58% and 55% of our specialty pharmaceutical
product sales for the years ended December 31, 2007 and
2006, respectively. Sales of our Promoted Products increased
$25,941,000 (6%) in the year ended December 31, 2007
compared to 2006.
We have experienced generic challenges and other competition to
our products, as well as pricing challenges through government
imposed price controls and reductions, and expect these
challenges to continue in 2008 and beyond.
Research
and Development
We are developing product candidates, including two clinical
stage programs, retigabine and taribavirin, which target large
market opportunities. Retigabine is being developed as an
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Taribavirin is a pro-drug of ribavirin, for the
treatment of chronic hepatitis C in treatment-naive
patients in conjunction with a pegylated interferon.
Epilepsy
There are more than 50 million people worldwide who have
epilepsy, with approximately 6 million people afflicted
with the disease in the United States, the European Union, and
Japan. The majority of all epilepsy patients
36
are adequately and appropriately treated with the first or
second AED they try. However approximately 30% of patients with
epilepsy do not respond adequately to existing therapies despite
trying multiple different AEDs. These patients are considered to
have refractory epilepsy, thus representing the greatest unmet
need in epilepsy treatment.
Chronic
Hepatitis C
Worldwide, approximately 170 million individuals are
infected with the hepatitis C virus. In the United States
alone, 3-4 million individuals are infected. Current
therapies consist of pegylated interferon alfa and ribavirin
with a sustained virological response ranging as high as 54% to
56%.
Acquisitions
In 2007, we acquired product rights in the United States,
Europe, and Argentina for aggregate consideration of
$40,803,000, of which $36,184,000 was cash consideration. In the
United States, we acquired a
paid-up
license for Kinetin and Zeatin, the active ingredients in the
Kinerase product line, 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 Canada and the United States, for $13,582,000. We acquired
the rights to certain products in Poland, Argentina and Spain
for $1,602,000 in cash consideration and $449,000 in other
consideration.
In 2006, we acquired rights to new product lines in Poland and
the UK. In Poland we acquired the rights to a number of branded
generic products for nominal cash consideration. In the UK we
acquired exclusive rights to distribute certain dermatological
skin care products from Intendis AG, including Finacea,
Skinoren, Scheriproct and Ultrabase. In 2006, we also acquired
the rights to Zelapar in Canada and Mexico. We had acquired the
rights to Zelapar in the United States as part of the Amarin
acquisition in 2004 and launched the product in the United
States in 2006. In 2006, we also acquired from Novartis the
rights to Melleril in Argentina, having acquired the rights to
this product in Brazil in 2005.
On December 30, 2005, we acquired the U.S. and
Canadian rights to the hepatitis C drug Infergen from
InterMune. We paid InterMune $120,000,000 in cash at the
closing. Subsequently, we paid InterMune a non-contingent
milestone payment of $2,585,000 in January 2007 and a $5,000,000
contingent milestone in July 2007 which we recorded as goodwill.
In September 2007, we decided to divest these Infergen product
rights and we sold them to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. The results of the Infergen operations
and the related financial position have been reflected as
discontinued operations in the consolidated financial statements
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The
consolidated financial statements have been reclassified to
conform to discontinued operations presentation for all
historical periods presented.
On March 1, 2005, we acquired Xcel Pharmaceuticals, Inc.
(Xcel), a specialty pharmaceutical company focused
on the treatment of disorders of the central nervous system, for
$280,000,000 in cash, plus expenses of $5,435,000. Under the
terms of the purchase agreement, we paid an additional
$7,470,000 as a post-closing working capital adjustment. The
Xcel acquisition expanded our existing neurology product
portfolio with four products that are sold within the United
States, and retigabine, a late-stage clinical product candidate
that is an adjunctive treatment for partial-onset seizures in
patients with epilepsy.
See Note 4 of notes to consolidated financial statements
for further discussion of these acquisitions.
37
Results
of Operations
We have three specialty pharmaceutical segments comprising our
pharmaceuticals operations in North America, International
(Latin America, Asia and Australasia) and Europe, Middle East,
and Africa (EMEA). In addition, we have a research and
development division. Certain financial information for our
business segments is set forth below (in thousands). This
discussion of our results of operations should be read in
conjunction with the consolidated financial statements included
elsewhere in this document. For additional financial information
by business segment, see Note 17 of notes to consolidated
financial statements included elsewhere in this document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
276,671
|
|
|
$
|
264,393
|
|
|
$
|
232,342
|
|
International
|
|
|
201,310
|
|
|
|
239,597
|
|
|
|
219,319
|
|
EMEA
|
|
|
307,789
|
|
|
|
277,572
|
|
|
|
280,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
785,770
|
|
|
|
781,562
|
|
|
|
731,869
|
|
Alliance revenues (including ribavirin royalties)
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
91,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
872,222
|
|
|
$
|
862,804
|
|
|
$
|
823,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
100,855
|
|
|
|
90,359
|
|
|
|
69,286
|
|
International
|
|
|
34,189
|
|
|
|
71,697
|
|
|
|
65,407
|
|
EMEA
|
|
|
55,700
|
|
|
|
45,822
|
|
|
|
35,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,744
|
|
|
|
207,878
|
|
|
|
170,630
|
|
Corporate expenses
|
|
|
(75,525
|
)
|
|
|
(75,382
|
)
|
|
|
(54,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
115,219
|
|
|
|
132,496
|
|
|
|
115,892
|
|
Restructuring charges and asset impairment
|
|
|
(23,176
|
)
|
|
|
(138,181
|
)
|
|
|
(1,253
|
)
|
Gain on litigation settlement
|
|
|
|
|
|
|
51,550
|
|
|
|
|
|
Research and development
|
|
|
(16,728
|
)
|
|
|
(37,891
|
)
|
|
|
(38,491
|
)
|
Acquired IPR&D
|
|
|
|
|
|
|
|
|
|
|
(126,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income (loss)
|
|
|
75,315
|
|
|
|
7,974
|
|
|
|
(50,251
|
)
|
Interest income
|
|
|
17,792
|
|
|
|
12,610
|
|
|
|
13,169
|
|
Interest expense
|
|
|
(42,878
|
)
|
|
|
(43,726
|
)
|
|
|
(40,326
|
)
|
Other, net
|
|
|
1,060
|
|
|
|
1,152
|
|
|
|
(6,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
$
|
51,289
|
|
|
$
|
(21,990
|
)
|
|
$
|
(83,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007 Compared to 2006
Specialty Pharmaceutical Revenues: Total
consolidated revenues increased $9,418,000 for the year ended
December 31, 2007 compared with 2006. Total specialty
pharmaceutical product sales increased $4,208,000 (1%) for the
year ended December 31, 2007 over 2006. Specialty
pharmaceutical product sales in 2007 included a 5% favorable
impact from foreign exchange rate fluctuations and a 1%
aggregate increase in price, partly offset by a 5% reduction in
volume. A significant factor that contributed to this reduction
was the sales decline in Mexico, partly offset by sales
increases in Central Europe, Canada, and the United Kingdom. The
reported sales declines in Mexico were also impacted by
accounting reserves for product returns and credits memos. The
reported sales for the year ended December 31, 2007 include
$4,144,000 for products divested in 2007 (Reptilase, Solcoseryl
in Japan and our
38
former ophthalmic business in the Netherlands), compared to
$15,403,000 of revenue reported for these products in 2006.
Approximately 58% of our total pharmaceutical revenues resulted
from sales of Promoted Products in 2007. We define Promoted
Products as being those that we promote with annual sales of
greater than $5,000,000. Worldwide sales of Promoted Products
totaled $453,082,000 in 2007, an increase of $25,941,000 or 6%
over 2006. The increased sales in Promoted Products were
partially offset by declines in sales of non-promoted products.
In our North America pharmaceuticals segment, revenues for the
year ended December 31, 2007 increased $12,278,000 (5%)
over 2006. This increase reflects the growth in Cesamet sales in
Canada, a full year of Zelapar sales in the United States, and
sales increases in Librax, Kinerase, and Migranal. Cesamet sales
were primarily in Canada. These sales increases were offset by
sales decreases of Efudex, Imovane, and Limbitrol. Decreases in
Efudex sales were expected and were a result of our launch of an
authorized generic in December 2006. The increase in North
American pharmaceutical sales for the year ended
December 31, 2007 was due to a 7% percent increase in price
and a 1% positive contribution from the appreciation of the
Canadian Dollar, offset by a 3% decline in volume.
In our International pharmaceuticals segment, revenues for the
year ended December 31, 2007 decreased $38,287,000 (16%).
The decrease was due to the reduced shipments to our largest
wholesalers in Mexico who had ceased making payments to us
because they felt disadvantaged by changes we made in our
distribution channel in 2006. This situation continued to impact
sales in the fourth quarter of 2007 and affected most of our
products in Mexico. Results in Mexico were also impacted by
increased reserves for returns and discounts. Reptilase sales in
2007 decreased $5,337,000 because we stopped selling Reptilase
with the sale of our Basel, Switzerland manufacturing plant in
June 2007. International sales in 2007 reflected an 18%
reduction in volume, partly offset by a 2% benefit from foreign
currency.
In our EMEA pharmaceuticals segment, revenues for the year ended
December 31, 2007 were $307,789,000, an increase of
$30,217,000 (11%). The increase in the value of currencies in
the region relative to the U.S. Dollar contributed
$25,743,000 to revenues in the region in 2007. Sales of Nabilone
(Cesamet) in the United Kingdom and Spain were $3,462,000 in
2007. We acquired these product rights in January 2007. Sales of
the dermatology products licensed from Intendis, including
Finacea, were $2,885,000 in 2007, compared with $498,000 in
2006. We licensed these products in September 2006. Much of the
segments growth was in Central and Eastern Europe and the
United Kingdom. Sales of Promoted Products in 2007 were
$127,128,000 compared to $99,948,000 in 2006, an increase of
$27,180,000 (27%). The increases in revenues from higher
Promoted Product sales and stronger European currencies were
partly offset by reductions in sales of non-promoted products.
Sales in several European countries were also negatively
affected by pricing policies imposed by governmental
authorities. EMEA sales in 2007 were impacted by a 9% positive
contribution from currency fluctuations and a 5% increase in
volume, offset by a 3% aggregate reduction in prices.
Alliance Revenue (including Ribavirin
royalties): Alliance revenue in the year ended
December 31, 2007 included a licensing payment of
$19,200,000 which we received in the first quarter of 2007 from
Schering-Plough as a payment for the license to pradefovir. In
September 2007, we announced an agreement with Schering-Plough
and Metabasis which returned all pradefovir rights to Metabasis.
We retained the $19,200,000 licensing payment but expect to
receive no future income from pradefovir. Alliance revenue in
2007 also included $50,000 paid to us by an unrelated third
party in the first quarter of 2007 for certain intellectual
property assets. Alliance revenue in 2006 consisted exclusively
of ribavirin royalties.
Ribavirin royalties for the year ended December 31, 2007
were $67,202,000 compared to $81,242,000 for 2006, a decrease of
$14,040,000 (17%). Ribavirin royalty revenues decreased due to
(i) Roches discontinuation of royalty payments to us
in June 2007, (ii) Schering-Ploughs market share
losses in ribavirin sales, and (iii) reduced sales in Japan
from a peak in 2005 driven by the launch of combination therapy.
We expect ribavirin royalties to continue to decline in 2008.
The royalty will decline significantly in 2009 in that royalty
payments from Schering-Plough will continue for European sales
only until the ten-year anniversary of the launch of the
product, which varied by European country and started in May
1999. We expect royalties from Schering-Plough in Japan will
continue after 2009.
39
Gross Profit Margin (excluding
amortization): Gross profit margin was impacted
in 2007 by increases in reserves for returns and discounts in
Mexico. Gross profit calculations exclude amortization which is
discussed below. Gross profits by segment are as follows (dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
07/06
|
|
|
06/05
|
|
|
Gross Profits (Specialty Pharmaceuticals Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
232,654
|
|
|
$
|
220,834
|
|
|
$
|
186,561
|
|
|
|
5
|
%
|
|
|
18
|
%
|
% of product sales
|
|
|
84
|
%
|
|
|
84
|
%
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
International
|
|
|
133,656
|
|
|
|
161,970
|
|
|
|
152,195
|
|
|
|
(17
|
)%
|
|
|
6
|
%
|
% of product sales
|
|
|
66
|
%
|
|
|
68
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
186,366
|
|
|
|
160,617
|
|
|
|
170,755
|
|
|
|
16
|
%
|
|
|
(6
|
)%
|
% of product sales
|
|
|
61
|
%
|
|
|
58
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Gross Profits
|
|
|
552,676
|
|
|
|
543,421
|
|
|
|
509,511
|
|
|
|
2
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of product sales
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
Selling Expenses: Selling expenses were
$259,324,000 for the year ended December 31, 2007 compared
to $244,757,000 for 2006, an increase of $14,567,000 (6%). As a
percent of product sales, selling expenses were 33% for the year
ended December 31, 2007 and 31% for the corresponding
period in 2006. The increase in selling expense reflects
increased promotional activities related to the newly launched
products in Central Europe and the United Kingdom. Selling
expense in 2007 included a $2,776,000 bad debt provision for
Mexico, sales force severance costs of $2,680,000 in Germany,
Italy, and Latin America, and a $2,059,000 bad debt provision in
Austria.
General and Administrative Expenses: General
and administrative expenses were $111,721,000 for the year ended
December 31, 2007 compared to $114,583,000 for 2006, a
decrease of $2,862,000 (2%). General and administrative expenses
included $8,708,000 in stock-based compensation expenses, a
reduction of $4,989,000 from the corresponding expenses recorded
in general and administrative expenses in 2006. General and
administrative expenses in 2007 included information technology
improvements, legal, and business development costs,
professional service fees, and a payroll tax withholding charge
related to a former executive. As a percent of product sales,
general and administrative expenses were 14% for the year ended
December 31, 2007 compared to 15% for 2006.
Research and Development: Research and
development expenses were $98,025,000 for the year ended
December 31, 2007 compared with $105,442,000 for 2006, a
reduction of $7,417,000 (7%). The decrease in research and
development expenses was primarily attributable to the
completion of the VISER clinical trials for taribavirin and
savings from our strategic restructuring program including the
divestment of our discovery operations in December 2006. On
January 9, 2007, we licensed the development and
commercialization rights to pradefovir to Schering-Plough, who
subsequently returned these rights to Metabasis after the
results of a long-term preclinical study was released. On
December 21, 2006, we sold our HIV and cancer development
programs and certain discovery and preclinical assets to Ardea,
with an option for us to reacquire rights outside of the
United States and Canada to commercialize the compound
being developed in the HIV program upon Ardeas completion
of Phase IIb trials. Research and development expenses in 2006
included a $7,000,000 milestone payment related to the
development of retigabine. It is expected that clinical
development expenses will decline in 2008 as a result of the
completion of the Phase III clinical trials with retigabine.
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.
40
Amortization: Amortization expense was
$71,567,000 for the year ended December 31, 2007 compared
to $65,276,000 for 2006, an increase of $6,291,000 (10%). The
increase was primarily due to amortization of intangibles
acquired with the acquisition of the Kinerase product rights and
Nabilone in the United Kingdom and Spain, offset in part by a
decrease in the amortization of a royalty intangible which was
acquired in the Ribapharm acquisition and is being amortized on
an accelerated basis. We expect this royalty intangible to be
fully amortized in June 2008. Additionally, in 2007, we recorded
asset impairment charges on a product sold in Spain in the
amount of $310,000. In 2006, we recorded asset impairment
charges on certain products sold in the Spain in the amount of
$1,075,000.
Gain on Litigation Settlement: Litigation
settlements contributed significantly to operating profit in
2006. The recoveries in 2006 included the settlement with the
Republic of Serbia relating to the ownership and operations of a
joint venture we formerly participated in known as Galenika of
$34,000,000 of which $28,000,000 was received in 2006, and the
settlement of litigation with a former chief executive officer,
Milan Panic relating to Ribapharm bonuses, for which we received
$20,000,000 and recorded a gain from litigation of $17,550,000
in 2006.
Restructuring Charges and Asset
Impairments: In 2007 and 2006 we incurred
$23,176,000 and $138,181,000, respectively, in restructuring
charges relating to severance charges, contract cancellations,
and asset impairments.
Restructuring
Charge Detail
2007
Restructuring Charges
In 2007 we recorded a restructuring charge of $23,176,000 which
consisted of $13,575,000 for the 2006 Restructuring and
$9,601,000 for the restructuring program that will be announced
in connection with the 2008 Strategic Review.
In December 2007 we signed an agreement with Invida to sell
certain subsidiaries and product rights in Asia, in a
transaction that includes certain Valeant subsidiaries, branch
offices, and commercial rights in Singapore, the Philippines,
Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong,
Malaysia, and Macau. We closed this transaction March 3,
2008. This transaction also included certain product rights in
Japan. In 2007, we recognized $3,968,000 in contract termination
and transaction costs as restructuring charges in support of
this transaction. The assets related to this transaction were
classified as held for sale in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, in December 2007.
2008 Strategic Review and 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. This 2008
Strategic Review is still underway as of the date of this filing
and we expect to describe it in an announcement in late March
2008. We expect the 2008 Strategic Review to lead to significant
changes in our business and will include a restructuring
program. The charges taken in 2007 for this 2008 restructuring
include $957,000 for certain executive severances, $4,676,000
for professional service expenses for management consultants
assisting with the Strategic Review, and the $3,968,000 contract
termination and transaction costs associated with the sale of
our Asia businesses and product rights to Invida.
We expect additional restructuring charges in 2008. We have
accounted for severance costs pursuant to
SFAS No. 112, Employers Accounting for
Post-employment Benefits and SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. As a result, we have incurred severance
obligations of $8,345,000 related to the severance of our former
chief executive officer in 2008 that will be recorded in the
first quarter of 2008. This severance will include $3,676,000 in
cash consideration.
March
2006 June 2007 Restructuring Charges
On April 3, 2006, we announced a restructuring program to
reduce costs and accelerate earnings growth (the 2006
Restructuring). The 2006 Restructuring was primarily
focused on our research and development and manufacturing
operations. The objective of this restructuring program as it
related to research and development activities was to focus our
efforts and expenditures on two late stage projects currently in
development. In December 2006 we sold our HIV and cancer
development programs and certain discovery and pre-clinical
assets to Ardea Biosciences, Inc. (Ardea), with an
option for us to reacquire rights outside of the United States
and Canada
41
to commercialize the compound being developed in the HIV program
upon Ardeas completion of Phase IIb trials. In March 2007,
we sold our former headquarters building in Costa Mesa,
California, where our former research laboratories were located,
for net proceeds of $36,758,000.
The objective of the 2006 Restructuring as it related to
manufacturing was to further rationalize our manufacturing
operations to reflect the regional nature of our existing
products and further reduce our excess capacity after
considering the delay in the development of taribavirin. In
December 2006, we transferred our former factories in Basel,
Switzerland and Puerto Rico to a held for sale
classification in accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. In June
2007, we sold these manufacturing facilities and the related
inventories to Legacy Pharmaceuticals International for
aggregate proceeds of $29,500,000, of which $12,000,000 was
received as consideration for inventories sold to Legacy
Pharmaceuticals International and $17,500,000 was received as
consideration for the manufacturing facilities. The transaction
also included transition payment obligations of $6,000,000 to be
paid by Valeant to Legacy Pharmaceuticals International over a
24-month
period as well as capital expenditure obligations of $650,000 to
be incurred by us. The sale of these manufacturing facilities to
Legacy Pharmaceuticals International in June 2007 completed the
2006 Restructuring.
The charges in the 2006 Restructuring included impairment
charges resulting from the sale of our former headquarters
facility, discovery and pre-clinical operations equipment, and
our former manufacturing facilities in Puerto Rico and Basel,
Switzerland. The restructuring included the reduction of
approximately 850 employees, the majority of whom work in
the two manufacturing facilities sold to Legacy Pharmaceuticals
International. As of December 31, 2007, employee severance
costs in the 2006 Restructuring have been recorded for
approximately 490 employees and no severance payments have
been recorded for the remaining employees who transferred to
Legacy Pharmaceuticals International.
The 2006 Restructuring also rationalized selling, general and
administrative expenses primarily through consolidation of the
management functions in fewer administrative groups to achieve
greater economies of scale. Management and administrative
responsibilities for our regional operations in Australia,
Africa and Asia, which had previously been managed as a separate
business unit, were combined in 2006 with those of other regions.
We recorded a restructuring provision for the 2006 Restructuring
of $13,575,000 in 2007, compared with $138,181,000 for 2006.
Severance charges recorded as part of this restructuring program
were $22,127,000.
Abandoned software and other capital assets included an expense
of $20,453,000 in 2006 relating to an Enterprise Resource
Planning (ERP) project, which was discontinued in March 2006. It
also included $632,000 of cash-related charges.
Restructuring
Charge Details (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Cumulative
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Incurred
|
|
|
2006 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances
|
|
$
|
5,130
|
|
|
$
|
16,997
|
|
|
$
|
22,127
|
|
Contract cancellation and other cash costs
|
|
|
3,115
|
|
|
|
1,662
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
8,245
|
|
|
|
18,659
|
|
|
|
26,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
22,178
|
|
|
|
22,178
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
2,891
|
|
|
|
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
2,439
|
|
|
|
97,344
|
|
|
|
99,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
5,330
|
|
|
|
119,522
|
|
|
|
124,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
13,575
|
|
|
$
|
138,181
|
|
|
$
|
151,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008 Restructuring Program
|
|
|
|
|
Employee severances
|
|
$
|
957
|
|
Contract cancellation and other cash costs
|
|
|
8,644
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
9,601
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
9,601
|
|
|
|
|
|
|
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 $3,979,000 restructuring accrual for the
2006 Restructuring, accrued as of December 31, 2007,
relates to ongoing contractual payments to Legacy
Pharmaceuticals International relating to the sale of our former
manufacturing 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
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
19,291
|
|
Cash paid
|
|
|
(14,075
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2006
|
|
|
5,216
|
|
|
|
|
|
|
Charges to earnings
|
|
|
8,245
|
|
Transition and capital expenditure payment obligations
|
|
|
6,813
|
|
Cash paid
|
|
|
(16,295
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
3,979
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
9,601
|
|
Cash paid
|
|
|
(1,080
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
8,521
|
|
|
|
|
|
|
Other Income, Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was income of $1,060,000 for the year
ended December 31, 2007 compared with income of $1,152,000
for 2006. In both 2007 and 2006 the amounts represent primarily
the effects of translation gains and losses in Europe and Latin
America. Translation and exchange gains are primarily related to
U.S. Dollar denominated assets and liabilities at our
foreign currency denominated subsidiaries.
Interest Expense and Income: Interest income
increased $5,182,000 during the year ended December 31,
2007 compared to 2006 due to higher cash balances. Interest
expense decreased $848,000 during the year ended
December 31, 2007 compared to 2006, due to lower interest
rates associated with our variable rate debt.
Income Taxes: We recorded tax expense of
$25,233,000 in 2007 and $34,824,000 in 2006. This occurred
primarily because no tax benefits were recorded for the
U.S. operating losses. In 2007, income tax expense was also
increased by recording valuation allowances of $7,615,000 for
foreign deferred tax assets, and it was reduced by $21,521,000
as a result of settling the IRS examination issues for the years
ended December 31, 1997 through 2001. In 2007 and 2006, the
effective rate was also affected by the pre-tax losses resulting
from restructuring, and asset
43
impairment charges in Asia and Puerto Rico of $15,430,000 and
$37,223,000, respectively, for which no tax benefit was recorded.
In 2007 and 2006, we recorded valuation allowances against the
deferred tax assets associated with the U.S. tax benefits
we will receive as income tax loss carryforwards are offset
against U.S. taxable income in future years. In 2007 we
also recorded valuation allowances against
non-U.S. deferred
tax assets. These reserves were recorded since we cannot be
certain that sufficient taxable income will be generated to
utilize the tax benefits of the losses and credits before they
expire. In 2007, the valuation allowance was reduced for amounts
that were recorded as uncertain tax positions. As of
December 31, 2007 the valuation allowance against deferred
tax assets totaled $159,710,000. The valuation allowance also
has the effect of deferring certain amounts that would normally
impact the effective tax rate.
Loss from Discontinued Operations: The loss
from discontinued operations was $32,240,000 in 2007 compared to
a loss of $751,000 for 2006. The losses in 2007 and 2006 related
to our Infergen business. In 2006, the loss related to the
Infergen operations of $8,290,000 was offset in part by the
reduction of $5,648,000 in an environmental reserve for the
discontinued biomedical facility. The cost of goods sold of
discontinued operations in 2007 included a technology transfer
payment of $5,259,000 made to the future manufacturer of
Infergen.
Year
Ended December 31, 2006 Compared to 2005
Specialty Pharmaceutical
Revenues: Approximately 55% of our total
pharmaceutical revenues resulted from sales of Promoted Products
in 2006. Worldwide sales of Promoted Products totaled
$427,141,000 in 2006, an increase of $59,056,000 or 16% over
2005. The increased sales in Promoted Products were partially
offset by declines in sales of non-promoted products.
In our North America pharmaceuticals segment, revenues for the
year ended December 31, 2006 increased $32,051,000 (14%)
over 2005. This increase reflects the $14,336,000 increase in
Efudex sales, the full year of Xcel products compared with ten
months in 2005 and the growth in Cesamet sales in Canada. Efudex
sales increases resulted from a combination of factors,
including the launch at the end of the year of our generic
version of the product, changes in wholesaler buying patterns,
and price increases taken earlier in the year. These volume
increases were partially offset by volume decreases of
non-promoted products. The increase in North American
pharmaceutical sales for the year ended December 31, 2006
was due to a 5% percent increase in volume, an 8% increase in
price, and a 1% percent positive contribution from the
appreciation of the Canadian Dollar.
In our International pharmaceuticals segment, revenues for the
year ended December 31, 2006 increased $20,278,000. Sales
of Promoted Products in the region totaled $122,769,000 in 2006,
an increase of $14,075,000 (13%) over 2005. Revenues from
Bedoyecta, which is our highest revenue product in Mexico, were
$49,935,000 in 2006, an increase of $3,173,000 (7%) over 2005
reflecting a successful
direct-to-consumer
marketing campaign. The increases in revenues were partially
offset by volume decreases of non-promoted products. On a net
basis, the increase in sales in the International segment was
primarily impacted by price increases and reduced discounts to
wholesalers. International sales in 2006 resulted from an
aggregate 10% price increase, a 1% reduction in volume, and a
negligible currency impact.
In our EMEA pharmaceuticals segment, revenues for the year ended
December 31, 2006 were $277,572,000, a decrease of
$2,636,000. The increase in the value of currencies in the
region relative to the U.S. Dollar contributed $4,570,000
to revenues in the region in 2006. Sales of Promoted Products in
2006 were $99,948,000 compared to $90,332,000 in 2005 an
increase of $9,616,000 (11%). The increases in revenues from
higher promoted product sales and stronger European currencies
were offset by reductions in sales of non-promoted products.
Sales in several European countries were also negatively
affected by pricing policies imposed by governmental
authorities. EMEA sales in 2006 were impacted by a 2% positive
contribution from currency fluctuations, a 3% reduction in
volume, and a negligible change in aggregate prices.
Ribavirin Royalties: Ribavirin royalties from
Schering-Plough and Roche for the year ended December 31,
2006 were $81,242,000 compared to $91,646,000 for 2005, a
decrease of $10,404,000 (11%). 2006 ribavirin royalty revenues
decreased due to (i) competitive dynamics between Roche and
Schering-Plough in Europe, as Roches version of ribavirin,
Copegus, gained market share over Schering-Ploughs version
of ribavirin, Rebetol, (ii) reduced
44
sales in Japan from a peak in 2005 driven by the launch of
combination therapy there, and (iii) further gains in
market share by generic competitors in the United States.
Gross Profit Margin: Our gross profit margin
was 70% in 2006 and 2005. Gross profit calculations exclude
amortization which is discussed below. Consolidated cost of
goods sold in 2006 included a provision of $1,256,000 related to
employee stock options and purchase programs following the
implementation of SFAS 123(R).
Selling Expenses: Selling expenses were
$244,757,000 for the year ended December 31, 2006 compared
to $232,316,000 for 2005, an increase of $12,441,000 (5%). As a
percent of product sales, selling expenses were 31% for the year
ended December 31, 2006 and 32% for the year ended
December 31, 2005. Included in selling expenses for the
year ended December 31, 2005 were severance charges of
$3,000,000 related to the sales force restructuring in Europe.
This increase reflects our increased promotional efforts
primarily in North America and Latin America and includes costs
related to new product launches and line extensions. Selling
expenses in 2006 included a provision of $3,390,000 related to
employee stock options and purchase programs following the
implementation of SFAS 123(R).
General and Administrative Expenses: General
and administrative expenses were $114,583,000 for the year ended
December 31, 2006 compared to $108,508,000 for 2005, an
increase of $6,075,000 (6%). As a percent of product sales,
general and administrative expenses were 15% for the years ended
December 31, 2006 and December 31, 2005. General and
administrative expenses in 2006 included a provision of
$13,697,000 related to employee stock options and purchase
programs following the implementation of SFAS 123(R).
Research and Development: Research and
development expenses were $105,442,000 for the year ended
December 31, 2006 compared with $114,100,000 for 2005, a
reduction of $8,658,000 (8%). The decrease in research and
development expenses was primarily attributable to the
completion of the VISER Phase III clinical trials for
taribavirin, the completion of Phase II clinical trials for
pradefovir, and the strategic restructuring announced
April 3, 2006. Research and development expenses in 2006
included a $7,000,000 milestone payment related to the
development of retigabine. Research and development expenses in
2006 included a provision of $2,505,000 related to employee
stock options and purchase programs following the implementation
of SFAS 123(R).
Amortization: Amortization expense was
$65,276,000 for the year ended December 31, 2006 compared
to $68,832,000 for 2005, a decrease of $3,556,000 (5%). The
decrease was primarily due to the decrease in the amortization
of a royalty intangible which was acquired in the Ribapharm
acquisition and is being amortized on an accelerated basis.
Additionally, in 2006, we recorded asset impairment charges on
certain products sold in Spain in the amount of $1,075,000. In
2005, we recorded asset impairment charges on certain products
primarily sold in the UK, Germany and Spain in the amount of
$7,400,000.
Gain on Litigation Settlement: Litigation
settlements contributed significantly to operating profit in
2006. The recoveries in 2006 included the settlement with the
Republic of Serbia relating to the ownership and operations of a
joint venture we formerly participated in known as Galenika of
$34,000,000 of which $28,000,000 was received in 2006, and the
settlement of litigation with the former Chief Executive
Officer, Milan Panic relating to Ribapharm bonuses, for which we
received $20,000,000 and recorded a gain from litigation of
$17,550,000 in 2006.
Restructuring Charges and Asset
Impairments: In 2006 we incurred $138,181,000 in
restructuring charges relating to severance charges, contract
cancellations, and asset impairments. In 2005 we made the
decision to dispose of a manufacturing plant in China which
resulted in an asset impairment charge of $2,322,000. In 2005 we
also recorded net gains of approximately $1,800,000 resulting
from the sale of the manufacturing plants in the U.S., Argentina
and Mexico.
Acquired In-Process Research and Development
(IPR&D): We did not incur IPR&D charges
in 2006. In 2005, we expensed $126,399,000 as IPR&D in
connection with the acquisition of Xcel. The amounts expensed as
IPR&D represent our estimate of fair value of purchased
in-process technology for projects that, as of the acquisition
dates, had not yet reached technological feasibility and had no
alternative future use.
We estimated the fair value of the IPR&D in connection with
the acquisition of Xcel based on the use of a discounted cash
flow model (including an estimate of future sales at an average
gross margin of 80%). For each
45
project, the estimated after-tax cash flows (using a tax rate of
35%) were probability weighted to take account of the stage of
completion and risks surrounding the successful development and
commercialization. The assumed tax rate is our estimate of the
effective statutory tax rate for an acquisition of similar types
of assets. The cash flows were discounted to a present value
using a discount rate of 18%, which represents our risk adjusted
after tax weighted average cost of capital for each product. We
estimated we would incur future research and development costs
of approximately $50,000,000 to complete the retigabine
IPR&D project.
Other Income, Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was income of $1,152,000 for the year
ended December 31, 2006 compared with a loss of $6,358,000
in 2005. In both 2006 and 2005 the amounts represent primarily
the effects of translation gains and losses in Europe and Latin
America. Translation and exchange gains are primarily related to
U.S. Dollar denominated assets and liabilities at our
foreign currency denominated subsidiaries.
Interest Expense and Income: Interest expense
increased $3,400,000 during the year ended December 31,
2006 compared to 2005, due to higher interest rates associated
with our variable rate debt. Interest income decreased $559,000
during the year ended December 31, 2006 compared to 2005
due primarily to lower cash balances.
Income Taxes: Despite reporting losses from
continuing operations, we recorded tax expense of $34,824,000 in
2006 and $55,073,000 in 2005. This occurred primarily because no
tax benefits are recorded for the U.S. operating losses. In
2006, the effective rate was also affected by the pre-tax losses
resulting from restructuring in Puerto Rico of $37,223,000 for
which no tax benefit was recorded. The valuation allowance also
has the effect of deferring certain amounts that would normally
impact the effective tax rate. In addition, the 2005 Xcel
IPR&D charge of $126,399,000 was not deductible for tax
purposes, resulting in higher effective tax rates for the year.
Tax expense in 2005 was also impacted by a charge of $27,368,000
resulting from an Internal Revenue Service examination of our
U.S. tax returns for the years 1997 to 2001 and taxes
imposed on the repatriation of foreign earnings of $4,500,000.
In 2006 and 2005 we recorded valuation allowances against the
deferred tax assets associated with the U.S. tax benefits
we will receive as income tax losses are offset against
U.S. taxable income in future years. The reserve was
recorded since we cannot be certain that sufficient
U.S. taxable income will be generated to utilize the tax
benefits before they expire. As of December 31, 2006 the
valuation allowance against deferred tax assets totaled
$161,713,000. The valuation allowance also has the effect of
deferring certain amounts that would normally impact the
effective rate.
Loss from Discontinued Operations: Loss from
discontinued operations was $751,000 in 2006 compared to
$49,566,000 for the year ended December 31, 2005. The loss
in 2006 primarily related to our Infergen operations. In 2006,
the loss related to the Infergen operations was offset in part
by the reduction in an environmental reserve for the
discontinued biomedical facility. The losses in 2005 primarily
relate to the charge for acquired in-process research and
development related to the Infergen acquisition of $47,200,000.
Liquidity
and Capital Resources
Cash and marketable securities totaled $361,487,000 at
December 31, 2007 compared to $335,746,000 at
December 31, 2006. Working capital (excluding assets held
for sale and discontinued operations) was $522,764,000 at
December 31, 2007 compared to $464,909,000 at
December 31, 2006. The increase in working capital of
$57,855,000 was primarily attributable to cash generated from
operations and the reduction in income tax liabilities and
accrued liabilities, offset in part by the reductions in
accounts receivable and inventories.
Cash provided by operating activities in continuing operations
is expected to be our primary source of funds for operations in
2008. During the year ended December 31, 2007, cash
provided by operating activities in continuing operations
totaled $121,870,000, compared with $127,053,000 in 2006. The
cash provided by operating activities in continuing operations
for 2007 included receipt of $19,200,000 related to the
pradefovir licensing payment from Schering-Plough and $6,000,000
from the Republic of Serbia. The cash provided by operating
activities in continuing operations for 2006 included receipt of
$28,000,000 from the Republic of Serbia. The sale of $13,818,000
of inventory in the Basel, Switzerland and Puerto Rico
manufacturing plant sales reduced cash provided by operating
activities in 2007, as the cash received for this inventory has
been reported in cash flows from investing activities.
46
Cash used in investing activities in continuing operations was
$34,207,000 for the year ended December 31, 2007, compared
with cash used in investing activities in continuing operations
of $34,101,000 in 2006. In 2007, cash used in investing
activities consisted primarily of the purchase of investments of
$72,518,000, the purchase of product rights for $36,184,000 and
capital expenditures of $32,222,000, offset in part by proceeds
from the sale of assets of $38,633,000 proceeds from investments
of $36,633,000 and proceeds from sale of businesses of
$31,451,000. In 2006 cash used in investing activities in
continuing operations consisted of $40,968,000 for capital
expenditures and $4,568,000 for the acquisition of product
rights, offset in part by proceeds from sale of businesses of
$10,022,000.
Cash flows used in financing activities in continuing operations
was $93,147,000 in the year ended December 31, 2007,
compared with $7,885,000 in 2006 and primarily consisted of the
repurchase of our common stock for $99,557,000 and payments on
long-term debt and notes payable of $10,884,000, offset in part
by proceeds from stock option exercises and employee stock
purchases of $15,288,000. In 2006, cash flows used in financing
activities in continuing operations was $7,885,000 and consisted
primarily of $21,552,000 in dividends paid on common stock and
$6,563,000 of payments on long-term debt, offset in part by
$17,389,000 in proceeds from stock option exercises and employee
stock purchases.
In January 2004, 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 six-month 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 rate will float and correlate
to the variable interest earned on our cash held. At
December 31, 2007 the effective rate on the $150,000,000 of
debt under the swap agreement was 7.01%. 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 contracts. As of December 31, 2007, we have
collateral of $5,050,000 included in marketable securities and
other assets related to this instrument.
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 December 31, 2008,
and to provide cash needed to fund capital expenditures and our
clinical development program. We may seek additional debt
financing or issue additional equity securities to finance
future acquisitions or for other purposes. We fund our cash
requirements primarily from cash provided by our operating
activities. Our sources of liquidity are our cash and cash
equivalent balances and our cash flow from operations.
We did not declare and did not pay dividends in 2007. We
declared and paid cash dividends of $0.0775 per share for the
first and second quarters of 2006. We also paid cash dividends
of $0.0775 per share in the first quarter of 2006 for the
dividend declared in the fourth quarter of 2005. There are
significant contractual limitations on our ability to pay future
dividends under the terms of the indenture governing our
7% senior notes due 2011.
Contractual
Obligations
The following table summarizes our contractual obligations as of
December 31, 2007, and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Amounts in thousands)
|
|
|
Long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0% Senior Notes due 2011
|
|
$
|
300,716
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300,716
|
|
|
$
|
|
|
3.0% Convertible Subordinated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes due 2010
|
|
|
240,000
|
|
|
|
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
4.0% Convertible Subordinated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes due 2013
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
Interest payments
|
|
|
163,200
|
|
|
|
37,800
|
|
|
|
75,600
|
|
|
|
40,200
|
|
|
|
9,600
|
|
Lease obligations
|
|
|
57,758
|
|
|
|
9,164
|
|
|
|
16,561
|
|
|
|
11,577
|
|
|
|
20,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations
|
|
$
|
1,001,674
|
|
|
$
|
46,964
|
|
|
$
|
332,161
|
|
|
$
|
352,493
|
|
|
$
|
270,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
We have no material commitments for purchases of property, plant
and equipment.
Due to the uncertainty with respect to the timing of future cash
flows associated with our unrecognized tax benefits at
December 31, 2007, we are unable to make reasonably
reliable estimates of the period of cash settlement with the
respective taxing authorities. Therefore, $69,365,000 of
unrecognized tax benefits have been excluded from the
contractual obligations table above. See Note 6 of the
consolidated financial statements for a discussion on income
taxes.
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 table contained in the Contractual
Obligations section above. Our 3% and 4% Notes
include conversion features that are considered as 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. The first patient in the RESTORE 1 trial was
enrolled in September 2005. We completed the enrollment of
patients in RESTORE 1 and RESTORE 2 in July 2007 and November
2007, respectively.
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 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 ≥ 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.
48
RETIGABINE:
SUMMARY RESTORE 1 EFFICACY DATA
|
|
|
|
|
|
|
|
|
|
|
RTG 1200 mg
|
|
Placebo
|
|
Median reduction in
28-day total
partial seizure frequency* (ITT)
|
|
|
44.3
|
%
|
|
|
17.5
|
%
|
|
|
|
n=151
|
|
|
|
n=150
|
|
Median reduction in
28-day total
partial seizure frequency during Maintenance Phase
|
|
|
54.5
|
%
|
|
|
18.9
|
%
|
|
|
|
n=119
|
|
|
|
n=137
|
|
Responder Rate (ITT)
|
|
|
45.0
|
%
|
|
|
18.0
|
%
|
|
|
|
n=151
|
|
|
|
n=150
|
|
Responder Rate during Maintenance Phase**
|
|
|
55.5
|
%
|
|
|
22.6
|
%
|
|
|
|
n=119
|
|
|
|
n=137
|
|
|
|
|
|
|
ITT population defined as all subjects taking at least 1 dose of
study medication and having at least 1 efficacy assessment |
|
* |
|
FDA endpoint |
|
** |
|
Endpoint per EU Committee for Human Medicinal Products (CHMP) |
|
|
|
p <0.0001 compared to placebo |
|
|
|
Responder Rate defined as ≥ 50% reduction in
28-day total
partial seizure frequency |
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 (a speech disorder), ataxia (loss of muscle
coordination), blurred vision, tremor, and nausea. We plan to
present comprehensive efficacy and safety results from RESTORE 1
at upcoming scientific meetings in the United States and the
European Union.
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 may seek a partner to share the
investment and risk in the development of retigabine. External
research and development expenses for retigabine were
$43,650,000 and $27,391,000 in 2007 and 2006, respectively. 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 April 2007 we filed an IND for
the treatment of post herpetic neuralgia, a common form of
neuropathic pain. Following review, the FDA has allowed Valeant
to proceed with this Phase IIa clinical trial and we began
enrolling patients in November 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.
49
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 leads us to believe that the dosage of taribavirin, like
ribavirin, likely needs to be based on a patients weight
to achieve efficacy equal or superior to that of ribavirin.
Additionally we think that higher doses of taribavirin than
those studied in the VISER program may be necessary to achieve
our efficacy objectives.
Based on our analysis, we initiated a Phase 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).
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study. The Phase IIb study
is a U.S. multi-center, randomized, parallel, open-label
study in 278 treatment naïve, genotype 1 patients
evaluating taribavirin at 20 mg/kg, 25 mg/kg, and
30 mg/kg per day in combination with pegylated interferon
alfa-2b. The control group is being administered weight-based
dosed ribavirin (800/1,000/1,200/1,400 mg daily) and
pegylated interferon alfa-2b. Overall treatment duration will be
48-weeks with a post-treatment
follow-up
period of 24-weeks. The primary endpoints for this study are
viral load reduction at treatment week 12 and anemia rates
throughout the study. 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.
Key
Efficacy and Safety Data Table at Treatment Week 12 (ITT
Population)
|
|
|
|
|
|
|
|
|
|
|
TBV 20mg/kg
|
|
TBV 25 mg/kg
|
|
TBV 30 mg/kg
|
|
RBV 800-1400mg
|
|
|
n = 67
|
|
n = 70
|
|
n = 68
|
|
n = 70
|
Responders*
|
|
43 (64.2)%
|
|
40 (57.1)%
|
|
37 (54.4)%
|
|
36 (51.4)%
|
Undetectable**
|
|
28 (41.8)%
|
|
29 (41.4)%
|
|
17 (25.0)%
|
|
22 (31.4)%
|
Anemia rate***
|
|
6 (9.0)%
|
|
5 (7.1)%
|
|
10 (14.7)%
|
|
17 (24.3)%
|
|
|
|
* |
|
HCV RNA undetectable (less than 100 copies per mL) or
≥ 2-log decrease in viral load using the NGI SuperQuant
Assay |
|
** |
|
HCV RNA less than 100 copies per mL |
|
*** |
|
Anemia rate defined as percentage of patients with Hgb level
< 10 g/dL. p=0.022 for 20mg/kg and p=0.009 for 25mg/kg. |
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.
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. Our external research and development expenses
for taribavirin were $8,115,000 and $16,133,000 for 2007 and
2006, respectively
Other
Development Activities
Diastat Intranasal: Our product Diastat
AcuDial is a gel formulation of diazepam administered rectally
in the management of selected, refractory patients with
epilepsy, who require intermittent use of diazepam to control
bouts of increased seizure activity. In order to improve the
convenience of this product, we have initiated the development
of an intranasal delivery of diazepam. Our external research and
development expenses for Diastat Intranasal were $1,425,000 and
$70,000 for 2007 and 2006, respectively.
50
Foreign
Operations
Approximately 74% of our revenues from continuing operations,
which includes royalties, for the years ended December 31,
2007 and 2006 were generated from operations or otherwise earned
outside the United States. All of our foreign operations are
subject to risks inherent in conducting business abroad. See
Item 1A. Risk Factors.
Inflation
and Changing Prices
We experience the effects of inflation through increases in the
costs of labor, services and raw materials. We are subject to
price control restriction on our pharmaceutical products in the
majority of countries in which we operate. While we attempt to
raise selling prices in anticipation of inflation, we operate in
some markets which have price controls that may limit our
ability to raise prices in a timely fashion.
Recent
Accounting Pronouncements
FIN 48. In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109 (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in
accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 applies to all income tax
positions taken on previously filed tax returns or expected to
be taken on a future tax return. FIN 48 prescribes a
benefit recognition model with a two-step approach, a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being ultimately
realized upon final settlement. If it is not more likely than
not that the benefit will be sustained on its technical merits,
no benefit will be recorded. Uncertain tax positions that relate
only to timing of when an item is included on a tax return are
considered to have met the recognition threshold for purposes of
applying FIN 48. Therefore, if it can be established that
the only uncertainty is when an item is taken on a tax return,
such positions have satisfied the recognition step for purposes
of FIN 48 and uncertainty related to timing should be
assessed as part of measurement. FIN 48 also requires that
the amount of interest expense and income to be recognized
related to uncertain tax positions be computed by applying the
applicable statutory rate of interest to the difference between
the tax position recognized in accordance with FIN 48 and
the amount previously taken or expected to be taken in a tax
return.
FIN 48 became effective for Valeant as of January 1,
2007. The change in net assets as a result of applying this
pronouncement was recorded as a change in accounting principle
with the cumulative effect of the change required to be treated
as an adjustment to the opening balance of retained earnings. As
a result of the adoption of FIN 48, we recognized an
increase of $1,560,000 to the beginning balance of accumulated
deficit on the balance sheet.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements but does not change the requirements to
apply fair value in existing accounting standards. Under
SFAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. The
standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. SFAS No. 157 will be effective for
Valeant as of January 1, 2008 and we are currently
assessing the impact that SFAS No. 157 may have on our
financial statements.
SFAS No. 158. In September 2006, the
FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R), which became effective for Valeant as of
December 31, 2006. SFAS No. 158 requires
companies to recognize the over-funded or under-funded status of
defined benefit postretirement plans as an asset or liability on
the balance sheet. Valeant does not have defined benefit
postretirement plans for its U.S. operations but does
maintain such plans for certain of its foreign operations.
SFAS No. 158 also prescribes that, by
December 31, 2008, the measurement date of a plan to be the
date of its year-end balance sheet, which is the measurement
date Valeant already uses for most its plans. The impact of
adopting FAS 158 resulted in an increase in pension related
assets and an increase in other comprehensive income of
approximately $643,000. In addition, we have disclosed
additional information about certain effects on net periodic
benefit cost for 2008.
51
SFAS 159. In February 2007 the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS 159) which provides companies with an option to
report selected financial assets and liabilities at fair value.
The objective of SFAS 159 is to reduce both complexity in
accounting for financial instruments 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 is effective for fiscal years
beginning after November 15, 2007. We do not expect the
adoption of SFAS 159 to have a material impact on our
consolidated financial statements.
SAB No. 108. In September 2006, the
SEC issued Staff Accounting Bulletin No. 108
(SAB No. 108) regarding the quantification of
financial statement misstatements. SAB No. 108
requires a dual approach for quantifications of
errors using both a method that focuses on the income statement
impact, including the cumulative effect of prior years
misstatements, and a method that focuses on the period-end
balance sheet. SAB No. 108 became effective for
Valeant as of January 1, 2007. The adoption of this
standard did not have a material impact on Valeant.
In June 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires that nonrefundable advance payments for goods and
services that will be used in future research and development
activities be deferred and capitalized until the related service
is performed or the goods are delivered.
EITF 07-3
is effective for fiscal years beginning after December 15,
2007. We do not expect the adoption of
EITF 07-3
to have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141(R) also
provides guidance for recognizing and measuring goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. Among other requirements, SFAS 141(R)
expands the definition of a business combination, requires
acquisitions to be accounted for at fair value, 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.
52
Critical
Accounting Estimates
The consolidated financial statements appearing elsewhere in
this document have been prepared in conformity with accounting
principles generally recognized 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
ongoing basis, we evaluate our estimates, including those
related to product returns, rebates, collectibility of
receivables, inventories, intangible assets, income taxes and
contingencies and litigation. The actual results could differ
materially from those estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.
Revenue
Recognition
We recognize revenues from product sales when title and risk of
ownership transfers to the customer. Revenues are recorded net
of provisions for rebates, discounts and returns, which are
estimated and recorded at the time of sale. Allowances for
future returns of products sold to our direct and indirect
customers, who include wholesalers, retail pharmacies and
hospitals, are calculated as a percent of sales based on
historical return percentages taking into account additional
available information on competitive products and contract
changes. Sales revenue in certain countries is recognized on a
consignment or cash basis.
Our product sales are subject to a variety of deductions,
primarily representing rebates and discounts to government
agencies, wholesalers and managed care organizations. These
deductions represent estimates of the related obligations and,
as such, judgment is required when estimating the impact of
these sales deductions on revenues for a reporting period.
In the United States we record provisions for Medicaid, Medicare
and contract rebates based upon our actual experience ratio of
rebates paid and actual prescriptions written during prior
quarters. We apply the experience ratio to the respective
periods sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
adjusted if necessary to ensure that the historical trends are
as current as practicable. We adjust the ratio to better match
our current experience or our expected future experience, as
appropriate. In developing this ratio, we consider current
contract terms, such as changes in formulary status and discount
rates. If our ratio is not indicative of future experience, our
results could be materially affected.
Outside of the United States, the majority of our rebates are
contractual or legislatively mandated and our estimates are
based on actual invoiced sales within each period; both of these
elements help to reduce the risk of variations in the estimation
process. Some European countries base their rebates on the
governments unbudgeted pharmaceutical spending and we use
an estimated allocation factor against our actual invoiced sales
to project the expected level of reimbursement. We obtain third
party information that helps us to monitor the adequacy of these
accruals. If our estimates are not indicative of actual
unbudgeted spending, our results could be materially affected.
Historically, our adjustments to actual have not been material;
on a quarterly basis, they generally have been less than 5% of
product sales. Sales revenue in certain countries is recognized
on a consignment or cash basis. The sensitivity of our estimates
can vary by program, type of customer and geographic location.
However, estimates associated with U.S. Medicaid and
contract rebates are most at-risk for material adjustment
because of the extensive time delay between the recording of the
accrual and its ultimate settlement. This interval can range up
to one year. Because of this time lag, in any given quarter, our
adjustments to actual can incorporate revisions of several prior
quarters.
We record sales incentives as a reduction of revenues at the
time the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
We use third-party data to estimate the level of product
inventories, expiration dating, and product demand at our major
wholesalers. Actual results could be materially different from
our estimates, resulting in future adjustments to revenue. For
the years ended December 31, 2007 and 2006, the provision
for sales returns was
53
less than 3% of product sales. We conduct a review of the
current methodology and assess the adequacy of the allowance for
returns on a quarterly basis, adjusting for changes in
assumptions, historical results and business practices, as
necessary.
We earn ribavirin royalties as a result of sales of products by
Schering-Plough. Ribavirin royalties are earned at the time the
products subject to the royalty are sold by the third party and
are reduced by an estimate for discounts and rebates that will
be paid in subsequent periods for those products sold during the
current period. We rely on a limited amount of financial
information provided by Schering-Plough to estimate the amounts
due to us under the royalty agreements.
Sales
Incentives
In the U.S. market, our current practice is to offer sales
incentives primarily in connection with launches of new products
or changes of existing products where demand has not yet been
established. We monitor and restrict sales in the
U.S. market in order to limit wholesaler purchases in
excess of their ordinary-course-of-business inventory levels. We
operate Inventory Management Agreements (IMAs) with major
wholesalers in the United States. However, specific events such
as the case of sales incentives described above or seasonal
demand (e.g. antivirals during an outbreak) may justify larger
purchases by wholesalers. We may offer sales incentives
primarily in international markets, where typically no right of
return exists except for goods damaged in transit, product
recalls or replacement of existing products due to packaging or
labeling changes. Our revenue recognition policy on these types
of purchases and on incentives in international markets is
consistent with the policies described above.
Impairment
of Property, Plant and Equipment
We evaluate the carrying value of property, plant and equipment
when conditions indicate a potential impairment. We determine
whether there has been impairment by comparing the anticipated
undiscounted future cash flows expected to be generated by the
property, plant and equipment with its carrying value. If the
undiscounted cash flows are less than the carrying value, the
amount of the asset impairment, if any, is then determined by
comparing the carrying value of the property, plant and
equipment with its fair value. Fair value is generally based on
a discounted cash flows analysis, independent appraisals or
preliminary offers from prospective buyers.
Valuation
of Intangible Assets
We periodically review intangible assets for impairment using an
undiscounted net cash flows approach. We determine whether there
has been impairment by comparing the anticipated undiscounted
future operating cash flows of the products associated with the
intangible asset with its carrying value. If the undiscounted
operating cash flows are less than the carrying value, the
amount of the asset impairment, if any, will be determined by
comparing the value of each intangible asset with its fair
value. Fair value is generally based on a discounted cash flows
analysis.
We use a discounted cash flow model to value intangible assets
acquired and for the assessment of impairment. The discounted
cash flow model requires assumptions about the timing and amount
of future cash inflows and outflows, risk, the cost of capital,
and terminal values. Each of these factors can significantly
affect the value of the intangible asset.
The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require
managements judgment. Any changes in key assumptions about
our businesses and their prospects, or changes in market
conditions, could result in an impairment charge. Some of the
more significant estimates and assumptions inherent in the
intangible asset impairment estimation process include: the
timing and amount of projected future cash flows; the discount
rate selected to measure the risks inherent in the future cash
flows; and the assessment of the assets life cycle and the
competitive trends impacting the asset, including consideration
of any technical, legal or regulatory factors.
In 2007, we capitalized purchased software from a third party
vendor and software development costs incurred under the
provisions of
SOP 98-1,
Accounting for the Cost of Computer Software Developed or
Obtained for
54
Internal Use. Capitalized costs include only
(1) external direct costs of materials and services
incurred in developing or obtaining internal use software,
(2) payroll and payroll-related costs for employees who are
directly associated with and who devote substantial time to the
internal-use software project, and (3) interest costs
incurred, while developing internal-use software. Amortization
began in certain countries when portions of the project were
completed, were ready for their intended purpose and were placed
in service. Training and computer software maintenance costs are
expensed as incurred. Software development costs are being
amortized using the straight-line method over the expected life
of the product which is estimated to be five to seven years
depending on when it is placed in service.
Purchase
Price Allocation Including Acquired In-Process Research and
Development
The purchase prices for the Xcel, Amarin and Ribapharm
acquisitions were allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed based on
their estimated fair values at the acquisition date. Such a
valuation requires significant estimates and assumptions,
including but not limited to: determining the timing and
expected costs to complete the in-process projects; projecting
regulatory approvals; estimating future cash flows from product
sales resulting from completed products and in-process projects;
and developing appropriate discount rates and probability rates
by project. We believe the fair values assigned to the assets
acquired and liabilities assumed are based on reasonable
assumptions, however, these assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur.
We value IPR&D acquired in a business combination based on
an approach consistent with the AICPA Practice Aid, Assets
Acquired in Business Combinations to be Used in Research and
Development Activities: A Focus in Software, Electronic Devices
and Pharmaceutical Industries. The amounts expensed as
acquired IPR&D represents an estimate of the fair value of
purchased in-process technology for projects that, as of the
acquisition date, had not yet reached technological feasibility
and had no alternative future use. The data used to determine
fair value requires significant judgment. The estimated fair
values were based on our use of a discounted cash flow model.
For each project, the estimated after-tax cash flows were
probability weighted to take account of the stage of completion
and the risks surrounding the successful development and
commercialization. The assumed tax rates are our estimate of the
effective tax rates that will apply to the expected cash flows.
These cash flows were then discounted to a present value using
discount rates between 15% and 20%. The discount rates represent
our weighted average cost of capital for each of the
acquisitions. In addition, solely for the purposes of estimating
the fair value of IPR&D projects acquired, we estimated
that future clinical development costs would be incurred in the
amount of $50,000,000 for retigabine (acquired from Xcel). See
Note 4 of notes to consolidated financial statements for a
discussion of acquisitions.
The major risks and uncertainties associated with the timely and
successful completion of these projects include the uncertainty
of our ability to confirm the safety and efficacy of product
candidates based on the data from clinical trials and of
obtaining necessary regulatory approvals. In addition, no
assurance can be given that the underlying assumptions we used
to forecast the cash flows or the timely and successful
completion of these projects will materialize as estimated. For
these reasons, among others, actual results may vary
significantly from the estimated results.
Contingencies
We are exposed to contingencies in the ordinary course of
business, such as legal proceedings and business-related claims,
which range from product and environmental liabilities to tax
matters. In accordance with SFAS No. 5, Accounting
for Contingencies, we record accruals for such contingencies
when it is probable that a liability will be incurred and the
amount of loss can be reasonably estimated. The estimates are
refined each accounting period, as additional information is
known. See Note 16 of notes to consolidated financial
statements for a discussion of contingencies.
Income
Taxes
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved favorably for us and
could have a material adverse effect on our
55
reported effective tax rate and after-tax cash flows. We record
liabilities based on the recognition and measurement criteria of
FIN 48, which involves significant management judgment. New
laws and new interpretations of laws and rulings by tax
authorities may affect the liability for uncertain tax
positions. Due to the subjectivity and complex nature of the
underlying issues, actual payments or assessments may differ
from our estimates. To the extent that our estimates differ from
amounts eventually assessed and paid our income and cash flows
can be materially and adversely affected.
The Internal Revenue Service has completed an examination of our
U.S. income tax returns for the years 2002 through 2004 and
has proposed adjustments to our tax liabilities for those years,
plus penalties. While we have written a formal protest in
response to the proposed adjustments, additional unrecognized
tax benefits of $69,897,000 ($41,751,000 of which are temporary
differences) were identified related to issues arising during
this examination. Of these amounts, $19,005,000 was recorded as
an addition to non-current liability for uncertain tax
positions. Deferred tax assets were increased by $16,403,000,
and $2,602,000 was recorded as income tax expense. All other
unrecognized tax benefit amounts arose in years in which we
generated a tax loss and are offset by the valuation allowance.
We assess whether it is more likely than not that we will
realize the tax benefits associated with our deferred tax assets
and establish a valuation allowance for assets that are not
expected to result in a realized tax benefit. A significant
amount of judgment is used in this process, including
preparation of forecasts of future taxable income and evaluation
of tax planning initiatives. If we revise these forecasts or
determine that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made. We have
increased the valuation allowance significantly since 2004 to
recognize the uncertainty of realizing the benefits of the
U.S. net operating losses and research credits.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Polish Zloty, the Mexican Peso, the Swiss Franc and the Canadian
Dollar. During 2007, we entered into various forward currency
contracts to a) reduce our exposure to forecasted 2008 Euro
and Japanese Yen denominated royalty revenue, b) hedge our
net investment in our Polish and Brazilian subsidiaries,
c) reduce our exposure to various currencies as a result of
repetitive short-term intercompany investments and obligations
and d) reduce our Canadian subsidiarys exposure to
its investment in U.S. Dollar denominated securities. In
sum, as a result of these activities, an unrealized gain of
$1,206,000 was recorded in the financial statements at
December 31, 2007. In the normal course of business, we
also face risks that are either non-financial or
non-quantifiable. Such risks principally include country risk,
credit risk and legal risk and are not discussed or quantified
in the following analysis. At December 31, 2007, the fair
value of our financial instruments was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and Hedging Activity
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
Gain/(Loss)
|
|
|
|
Gain/(Loss)
|
|
|
|
|
Amount Held in
|
|
|
|
Amount Held in
|
|
|
Notional
|
|
OCI or
|
|
Notional
|
|
OCI or
|
Description
|
|
Amount
|
|
Recognized
|
|
Amount
|
|
Recognized
|
|
Undesignated Hedges
|
|
$
|
78,595
|
|
|
$
|
834
|
|
|
$
|
14,605
|
|
|
$
|
(71
|
)
|
Net Investment Hedges
|
|
$
|
35,000
|
|
|
$
|
(441
|
)
|
|
$
|
74,205
|
|
|
$
|
963
|
|
Cash Flow Hedges
|
|
$
|
17,788
|
|
|
$
|
323
|
|
|
$
|
10,479
|
|
|
$
|
(106
|
)
|
Fair Value Hedges
|
|
$
|
26,000
|
|
|
$
|
490
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest Rate Swap
|
|
$
|
150,000
|
|
|
$
|
715
|
|
|
$
|
150,000
|
|
|
$
|
(4,318
|
)
|
We currently do not hold financial instruments for trading or
speculative purposes. Our financial assets are not subject to
significant interest rate risk due to their short duration. At
December 31, 2007 we had $181,000 of foreign denominated
variable rate debt that would subject us to both interest rate
and currency risks. In 2004 we entered into
56
an interest rate swap agreement with respect to $150,000,000
principal amount of our 7.0% Senior Notes. A 100
basis-point increase in interest rates affecting our financial
instruments would not have had a material effect on our 2006
pretax earnings. In addition, we had $780,000,000 of fixed rate
debt as of December 31, 2007 that requires U.S. Dollar
repayment. To the extent that we require, as a source of debt
repayment, earnings and cash flow from some of our units located
in foreign countries, we are subject to risk of changes in the
value of certain currencies relative to the U.S. Dollar.
57
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Financial Data
Following is a summary of quarterly financial data for the years
ended December 31, 2007 and 2006 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(a)
|
|
$
|
204,403
|
|
|
$
|
220,542
|
|
|
$
|
207,054
|
|
|
$
|
240,223
|
|
Gross profit on product sales (excluding amortization)
|
|
|
121,032
|
|
|
|
143,973
|
|
|
|
135,112
|
|
|
|
152,559
|
|
Income (loss) from continuing operations(b)
|
|
|
13,523
|
|
|
|
21,880
|
|
|
|
(2,277
|
)
|
|
|
(7,072
|
)
|
Loss from discontinued operations, net(c)
|
|
|
(4,200
|
)
|
|
|
(4,966
|
)
|
|
|
(9,813
|
)
|
|
|
(13,261
|
)
|
Net income (loss)
|
|
|
9,323
|
|
|
|
16,914
|
|
|
|
(12,090
|
)
|
|
|
(20,333
|
)
|
Basic earnings (loss) per share from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.23
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
Discontinued operations, net of tax
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
|
|
(0.14
|
)
|
Basic earnings (loss) per share net income (loss)
|
|
$
|
0.10
|
|
|
$
|
0.18
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.22
|
)
|
Diluted earnings (loss) per share from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.23
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
Discontinued operations, net of tax
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
|
|
(0.14
|
)
|
Diluted earnings (loss) per share net income (loss)
|
|
$
|
0.10
|
|
|
$
|
0.18
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Unaudited)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
185,545
|
|
|
$
|
218,820
|
|
|
$
|
210,230
|
|
|
$
|
248,209
|
|
Gross profit on product sales (excluding amortization)
|
|
|
113,041
|
|
|
|
135,120
|
|
|
|
131,936
|
|
|
|
163,324
|
|
Income (loss) from continuing operations(d)(e)
|
|
|
(7,415
|
)
|
|
|
(40,949
|
)
|
|
|
7,533
|
|
|
|
(15,986
|
)
|
Income (loss) from discontinued operations, net(c)
|
|
|
1,269
|
|
|
|
(1,176
|
)
|
|
|
6,004
|
|
|
|
(6,848
|
)
|
Net Income (loss)
|
|
|
(6,146
|
)
|
|
|
(42,125
|
)
|
|
|
13,537
|
|
|
|
(22,834
|
)
|
Basic earnings (loss) per share from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.17
|
)
|
Discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
|
|
(0.07
|
)
|
Basic earnings (loss) per share net income (loss)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.24
|
)
|
Diluted earnings (loss) per share from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.17
|
)
|
Discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.07
|
)
|
Diluted earnings (loss) per share net income (loss)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.24
|
)
|
|
|
|
(a) |
|
In the first quarter of 2007, we recorded alliance revenue of
$36,470,000, of which $19,200,000 related to the licensing of
pradefovir to Schering-Plough. |
|
(b) |
|
In the first and second quarters of 2007, we incurred expenses
of $7,238,000 and $6,337,000, respectively, relating to our
restructuring program. These restructuring charges included
employee severance costs (493 employees), professional
service fees, contract cancellation costs, accumulated foreign
currency translation adjustments, and asset impairment charges.
We did not incur a restructuring expense in the third quarter of
2007. In the fourth quarter of 2007 we incurred expenses related
to the 2008 Strategic Review, comprising |
58
|
|
|
|
|
$957,000 for executive severances, $4,676,000 for professional
service expenses for management consultants assisting with the
Strategic Review, and the $3,968,000 contract termination and
transaction costs associated with the sale of our Asia
businesses. |
|
(c) |
|
Discontinued operations in 2007 and 2006 related primarily to
our Infergen operations. In the third quarter of 2006, income
from discontinued operations benefited from the release of
$5,648,000 of a reserve for environmental remediation |
|
(d) |
|
In the first quarter of 2006, we recorded a gain on litigation
settlement from litigation with the Republic of Serbia of
$34,000,000 relating to the ownership and operations of a joint
venture we formerly participated in known as Galenika. In the
third quarter of 2006, we recorded a gain on litigation
settlement from litigation with a former Chief Executive
Officer, Milan Panic of $17,550,000 relating to Ribapharm
bonuses. |
|
(e) |
|
In the first, second, third and fourth quarters of 2006, we
incurred expenses of $26,466,000, $53,083,000, $17,138,000 and
$41,494,000 respectively relating to a restructuring program
undertaken to reduce costs and accelerate earnings growth,
focused on our research and development and manufacturing
operations, but also reducing selling, general and
administrative expenses. The expense included employee severance
costs (259 employees), abandoned software and other capital
assets, asset impairment charges relating to writing down fixed
assets at two manufacturing facilities and our former
headquarters facility to fair value and contract cancellation
and other cash charges. |
59
Below is a summary of the summarized quarterly financial data as
reported and as affected by the restatement for our fiscal
quarters ended March 31, June 30, September 30,
2007 and 2006, and December 31, 2006 (in thousands, except
for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
204,392
|
|
|
$
|
221,654
|
|
|
$
|
208,623
|
|
As restated
|
|
|
204,403
|
|
|
|
220,542
|
|
|
|
207,054
|
|
Gross profit on product sales (excluding amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
119,094
|
|
|
|
143,471
|
|
|
|
135,512
|
|
As restated
|
|
|
121,032
|
|
|
|
143,973
|
|
|
|
135,112
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
12,768
|
|
|
|
21,416
|
|
|
|
(2,206
|
)
|
As restated
|
|
|
13,523
|
|
|
|
21,880
|
|
|
|
(2,277
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
8,568
|
|
|
|
16,450
|
|
|
|
(12,019
|
)
|
As restated
|
|
|
9,323
|
|
|
|
16,914
|
|
|
|
(12,090
|
)
|
Basic earnings (loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
0.13
|
|
|
|
0.23
|
|
|
|
(0.02
|
)
|
As restated
|
|
|
0.14
|
|
|
|
0.23
|
|
|
|
(0.02
|
)
|
Basic loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(0.04
|
)
|
|
|
(0.06
|
)
|
|
|
(0.11
|
)
|
As restated
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
Basic earnings (loss) per share net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
0.09
|
|
|
|
0.17
|
|
|
|
(0.13
|
)
|
As restated
|
|
|
0.10
|
|
|
|
0.18
|
|
|
|
(0.13
|
)
|
Diluted earnings (loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
0.13
|
|
|
|
0.22
|
|
|
|
(0.02
|
)
|
As restated
|
|
|
0.14
|
|
|
|
0.23
|
|
|
|
(0.02
|
)
|
Diluted loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
As restated
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
Diluted earnings (loss) per share net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
0.09
|
|
|
|
0.17
|
|
|
|
(0.13
|
)
|
As restated
|
|
|
0.10
|
|
|
|
0.18
|
|
|
|
(0.13
|
)
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
185,786
|
|
|
$
|
219,083
|
|
|
$
|
210,840
|
|
|
$
|
248,812
|
|
As restated
|
|
|
185,545
|
|
|
|
218,820
|
|
|
|
210,230
|
|
|
|
248,209
|
|
Gross profit on product sales (excluding amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
113,282
|
|
|
|
135,383
|
|
|
|
132,546
|
|
|
|
163,927
|
|
As restated
|
|
|
113,041
|
|
|
|
135,120
|
|
|
|
131,936
|
|
|
|
163,324
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(7,240
|
)
|
|
|
(41,343
|
)
|
|
|
7,704
|
|
|
|
(14,935
|
)
|
As restated
|
|
|
(7,415
|
)
|
|
|
(40,949
|
)
|
|
|
7,533
|
|
|
|
(15,986
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(5,971
|
)
|
|
|
(42,519
|
)
|
|
|
13,708
|
|
|
|
(21,783
|
)
|
As restated
|
|
|
(6,146
|
)
|
|
|
(42,125
|
)
|
|
|
13,537
|
|
|
|
(22,834
|
)
|
Basic earnings (loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(0.08
|
)
|
|
|
(0.45
|
)
|
|
|
0.08
|
|
|
|
(0.16
|
)
|
As restated
|
|
|
(0.08
|
)
|
|
|
(0.44
|
)
|
|
|
0.08
|
|
|
|
(0.17
|
)
|
Basic earnings (loss) per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
0.02
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
|
|
(0.07
|
)
|
As restated
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
|
|
(0.07
|
)
|
Basic earnings (loss) per share net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(0.06
|
)
|
|
|
(0.46
|
)
|
|
|
0.15
|
|
|
|
(0.23
|
)
|
As restated
|
|
|
(0.07
|
)
|
|
|
(0.45
|
)
|
|
|
0.15
|
|
|
|
(0.24
|
)
|
Diluted earnings (loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(0.08
|
)
|
|
|
(0.45
|
)
|
|
|
0.08
|
|
|
|
(0.16
|
)
|
As restated
|
|
|
(0.08
|
)
|
|
|
(0.44
|
)
|
|
|
0.08
|
|
|
|
(0.17
|
)
|
Diluted earnings (loss) per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
0.02
|
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.07
|
)
|
As restated
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.07
|
)
|
Diluted earnings (loss) per share net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
|
(0.06
|
)
|
|
|
(0.46
|
)
|
|
|
0.14
|
|
|
|
(0.23
|
)
|
As restated
|
|
|
(0.07
|
)
|
|
|
(0.45
|
)
|
|
|
0.14
|
|
|
|
(0.24
|
)
|
61
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 31,
2007
|
|
|
|
|
|
|
Page
|
|
|
|
|
63
|
|
Financial statements:
|
|
|
|
|
|
|
|
65
|
|
For the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
69
|
|
Financial statement schedule for the years ended
December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
116
|
|
The other schedules have not been submitted because they are not
applicable.
62
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Valeant Pharmaceuticals International:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Valeant Pharmaceuticals International
and its subsidiaries at December 31, 2007 and 2006 and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company did not maintain, in all material respects, effective
internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) because a material weakness in internal
control over financial reporting related to the complement of
personnel in the Companys foreign locations existed as of
that date. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis. The material
weakness referred to above is described in the Managements
Report on Internal Control over Financial Reporting appearing
under Item 9A. We considered this material weakness in
determining the nature, timing, and extent of audit tests
applied in our audit of the December 31, 2007 consolidated
financial statements and our opinion regarding the effectiveness
of the Companys internal control over financial reporting
does not affect our opinion on those consolidated financial
statements. The Companys management is responsible for
these financial statements and the financial statement
schedules, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in
managements report referred to above. Our responsibility
is to express opinions on these financial statements, on the
financial statement schedule, and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007 and the manner in which it
accounts for stock-based compensation in 2006.
As disclosed in Note 2 to the consolidated financial
statements, the Company has restated its 2006 and 2005
consolidated financial statements.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable
63
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Orange County, California
March 17, 2008
64
VALEANT
PHARMACEUTICALS INTERNATIONAL
December 31,
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)(1)
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
309,365
|
|
|
$
|
325,376
|
|
Marketable securities
|
|
|
52,122
|
|
|
|
10,370
|
|
Accounts receivable, net
|
|
|
191,796
|
|
|
|
227,151
|
|
Inventories, net
|
|
|
115,177
|
|
|
|
130,747
|
|
Assets held for sale and assets of discontinued operations
|
|
|
66,247
|
|
|
|
124,821
|
|
Prepaid expenses and other current assets
|
|
|
21,713
|
|
|
|
16,398
|
|
Current deferred tax assets, net
|
|
|
11,819
|
|
|
|
8,550
|
|
Income taxes
|
|
|
26,433
|
|
|
|
2,526
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
794,672
|
|
|
|
845,939
|
|
Property, plant and equipment, net
|
|
|
116,376
|
|
|
|
94,121
|
|
Deferred tax assets, net
|
|
|
65,950
|
|
|
|
21,218
|
|
Goodwill
|
|
|
80,346
|
|
|
|
75,346
|
|
Intangible assets, net
|
|
|
401,575
|
|
|
|
414,915
|
|
Other assets
|
|
|
35,343
|
|
|
|
53,927
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
699,590
|
|
|
|
659,753
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,494,262
|
|
|
$
|
1,505,692
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
49,203
|
|
|
$
|
60,621
|
|
Accrued liabilities
|
|
|
139,754
|
|
|
|
146,705
|
|
Notes payable and current portion of long-term debt
|
|
|
1,655
|
|
|
|
9,237
|
|
Income taxes
|
|
|
10,239
|
|
|
|
39,646
|
|
Liabilities held for sale and liabilities of discontinued
operations
|
|
|
4,194
|
|
|
|
|
|
Current liabilities for uncertain tax positions
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
205,661
|
|
|
|
256,209
|
|
Long-term debt, less current portion
|
|
|
782,552
|
|
|
|
778,196
|
|
Deferred tax liabilities, net
|
|
|
5,337
|
|
|
|
3,705
|
|
Liabilities for uncertain tax positions
|
|
|
68,749
|
|
|
|
|
|
Other liabilities
|
|
|
17,860
|
|
|
|
24,506
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
12,686
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
874,498
|
|
|
|
819,093
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,080,159
|
|
|
|
1,075,302
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000 shares
authorized; 89,286 (December 31, 2007) and 94,416
(December 31, 2006) shares outstanding (after
deducting shares in treasury of 7,585 as of December 31,
2007 and 1,094 as of December 31, 2006)
|
|
|
893
|
|
|
|
944
|
|
Additional capital
|
|
|
1,192,559
|
|
|
|
1,263,318
|
|
Accumulated deficit
|
|
|
(859,559
|
)
|
|
|
(851,812
|
)
|
Accumulated other comprehensive income
|
|
|
80,210
|
|
|
|
17,940
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
414,103
|
|
|
|
430,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,494,262
|
|
|
$
|
1,505,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated financial statements.
65
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
STATEMENTS OF OPERATIONS
For the
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)(1)
|
|
|
(Restated)(1)
|
|
|
|
(In thousands except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
785,770
|
|
|
$
|
781,562
|
|
|
$
|
731,869
|
|
Alliance revenue (including ribavirin royalties)
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
91,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
872,222
|
|
|
|
862,804
|
|
|
|
823,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
233,094
|
|
|
|
238,141
|
|
|
|
222,358
|
|
Selling expenses
|
|
|
259,324
|
|
|
|
244,757
|
|
|
|
232,316
|
|
General and administrative expenses
|
|
|
111,721
|
|
|
|
114,583
|
|
|
|
108,508
|
|
Research and development costs
|
|
|
98,025
|
|
|
|
105,442
|
|
|
|
114,100
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
(51,550
|
)
|
|
|
|
|
Restructuring charges and asset impairment
|
|
|
23,176
|
|
|
|
138,181
|
|
|
|
1,253
|
|
Amortization expense
|
|
|
71,567
|
|
|
|
65,276
|
|
|
|
68,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
796,907
|
|
|
|
854,830
|
|
|
|
873,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
75,315
|
|
|
|
7,974
|
|
|
|
(50,251
|
)
|
Other income (loss), net including translation and exchange
|
|
|
1,060
|
|
|
|
1,152
|
|
|
|
(6,358
|
)
|
Interest income
|
|
|
17,792
|
|
|
|
12,610
|
|
|
|
13,169
|
|
Interest expense
|
|
|
(42,878
|
)
|
|
|
(43,726
|
)
|
|
|
(40,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
51,289
|
|
|
|
(21,990
|
)
|
|
|
(83,766
|
)
|
Provision for income taxes
|
|
|
25,233
|
|
|
|
34,824
|
|
|
|
55,073
|
|
Minority interest, net
|
|
|
2
|
|
|
|
3
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
26,054
|
|
|
|
(56,817
|
)
|
|
|
(139,126
|
)
|
Loss from discontinued operations
|
|
|
(32,240
|
)
|
|
|
(751
|
)
|
|
|
(49,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
Loss from discontinued operations
|
|
|
(0.35
|
)
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
Loss from discontinued operations
|
|
|
(0.35
|
)
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share:
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computations basic
|
|
|
93,029
|
|
|
|
93,387
|
|
|
|
91,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation diluted
|
|
|
93,976
|
|
|
|
93,387
|
|
|
|
91,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share of common stock
|
|
$
|
|
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
|
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated financial statements.
66
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
For the
Years Ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(As restated)(1)
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2004, as previously reported
|
|
|
84,219
|
|
|
$
|
842
|
|
|
$
|
1,024,776
|
|
|
$
|
(560,722
|
)
|
|
$
|
4,711
|
|
|
$
|
469,607
|
|
Effect of restatement (See Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,793
|
)
|
|
|
3,724
|
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
84,219
|
|
|
|
842
|
|
|
|
1,024,776
|
|
|
|
(562,515
|
)
|
|
|
8,435
|
|
|
|
471,538
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188,692
|
)
|
|
|
|
|
|
|
(188,692
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,383
|
)
|
|
|
(30,383
|
)
|
Unrealized gain on marketable equity
securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,363
|
|
|
|
4,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214,712
|
)
|
Exercise of stock options
|
|
|
161
|
|
|
|
2
|
|
|
|
2,146
|
|
|
|
|
|
|
|
|
|
|
|
2,148
|
|
Employee stock purchase plan
|
|
|
100
|
|
|
|
1
|
|
|
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
1,644
|
|
Common stock offering
|
|
|
8,280
|
|
|
|
83
|
|
|
|
188,947
|
|
|
|
|
|
|
|
|
|
|
|
189,030
|
|
Stock option compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
1,192
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
2,139
|
|
Tax effect on stock options exercised, net
|
|
|
|
|
|
|
|
|
|
|
4,064
|
|
|
|
|
|
|
|
|
|
|
|
4,064
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,485
|
)
|
|
|
|
|
|
|
(21,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
92,760
|
|
|
|
928
|
|
|
|
1,224,907
|
|
|
|
(772,692
|
)
|
|
|
(17,585
|
)
|
|
|
435,558
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,568
|
)
|
|
|
|
|
|
|
(57,568
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,692
|
|
|
|
39,692
|
|
Unrealized loss on marketable equity
securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,810
|
)
|
|
|
(4,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,686
|
)
|
Net effect of adopting new accounting standard for pensions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643
|
|
|
|
643
|
|
Exercise of stock options
|
|
|
1,592
|
|
|
|
16
|
|
|
|
16,435
|
|
|
|
|
|
|
|
|
|
|
|
16,451
|
|
Employee stock purchase plan
|
|
|
64
|
|
|
|
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
20,848
|
|
|
|
|
|
|
|
|
|
|
|
20,848
|
|
Stock compensation in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
94,416
|
|
|
|
944
|
|
|
|
1,263,318
|
|
|
|
(851,812
|
)
|
|
|
17,940
|
|
|
|
430,390
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,186
|
)
|
|
|
|
|
|
|
(6,186
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,117
|
|
|
|
60,117
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,471
|
)
|
|
|
(4,471
|
)
|
Unrealized gain on marketable equity securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,624
|
|
|
|
6,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,084
|
|
Exercise of stock options
|
|
|
1,283
|
|
|
|
12
|
|
|
|
14,417
|
|
|
|
|
|
|
|
|
|
|
|
14,429
|
|
Employee stock purchase plan
|
|
|
78
|
|
|
|
2
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
859
|
|
Share repurchase
|
|
|
(6,491
|
)
|
|
|
(65
|
)
|
|
|
(99,492
|
)
|
|
|
|
|
|
|
|
|
|
|
(99,557
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
13,220
|
|
|
|
|
|
|
|
|
|
|
|
13,220
|
|
Stock compensation in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
Net effect of adopting new accounting standard for uncertain tax
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
89,286
|
|
|
$
|
893
|
|
|
$
|
1,192,559
|
|
|
$
|
(859,559
|
)
|
|
$
|
80,210
|
|
|
$
|
414,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated financial statements.
67
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)(1)
|
|
|
(Restated)(1)
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
Loss from discontinued operations
|
|
|
(32,240
|
)
|
|
|
(751
|
)
|
|
|
(49,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
26,054
|
|
|
|
(56,817
|
)
|
|
|
(139,126
|
)
|
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities in
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
87,968
|
|
|
|
85,593
|
|
|
|
97,351
|
|
Provision for losses on accounts receivable and inventory
|
|
|
18,274
|
|
|
|
14,071
|
|
|
|
10,744
|
|
Stock compensation expense
|
|
|
13,220
|
|
|
|
20,848
|
|
|
|
3,331
|
|
Translation and exchange (gains) losses, net
|
|
|
(1,060
|
)
|
|
|
(1,152
|
)
|
|
|
6,358
|
|
Impairment charges and other non-cash items
|
|
|
6,744
|
|
|
|
122,171
|
|
|
|
2,969
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
Deferred income taxes
|
|
|
21,404
|
|
|
|
3,356
|
|
|
|
(33,913
|
)
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
31,801
|
|
|
|
(27,778
|
)
|
|
|
(14,774
|
)
|
Inventories
|
|
|
(732
|
)
|
|
|
(5,598
|
)
|
|
|
(30,141
|
)
|
Prepaid expenses and other assets
|
|
|
(8,517
|
)
|
|
|
(2,232
|
)
|
|
|
(3,762
|
)
|
Trade payables and accrued liabilities
|
|
|
(17,996
|
)
|
|
|
(13,051
|
)
|
|
|
8,132
|
|
Income taxes
|
|
|
(50,769
|
)
|
|
|
(11,991
|
)
|
|
|
27,559
|
|
Other liabilities
|
|
|
(4,521
|
)
|
|
|
(367
|
)
|
|
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities in continuing operations
|
|
|
121,870
|
|
|
|
127,053
|
|
|
|
65,045
|
|
Cash flow from operating activities in discontinued operations
|
|
|
(29,349
|
)
|
|
|
(1,992
|
)
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
92,521
|
|
|
|
125,061
|
|
|
|
64,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(32,222
|
)
|
|
|
(40,968
|
)
|
|
|
(45,525
|
)
|
Proceeds from sale of assets
|
|
|
38,633
|
|
|
|
10,022
|
|
|
|
7,252
|
|
Proceeds from sale of businesses
|
|
|
31,451
|
|
|
|
|
|
|
|
|
|
Proceeds from investments
|
|
|
36,633
|
|
|
|
27,913
|
|
|
|
533,307
|
|
Purchase of investments
|
|
|
(72,518
|
)
|
|
|
(26,500
|
)
|
|
|
(305,300
|
)
|
Acquisition of businesses, license rights and product lines
|
|
|
(36,184
|
)
|
|
|
(4,568
|
)
|
|
|
(293,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities in continuing operations
|
|
|
(34,207
|
)
|
|
|
(34,101
|
)
|
|
|
(103,356
|
)
|
Cash flow from investing activities in discontinued operations
|
|
|
(5,135
|
)
|
|
|
1,948
|
|
|
|
(114,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(39,342
|
)
|
|
|
(32,153
|
)
|
|
|
(218,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(10,884
|
)
|
|
|
(6,563
|
)
|
|
|
(1,114
|
)
|
Proceeds capitalized lease financing, long-term debt, and notes
payable
|
|
|
2,006
|
|
|
|
2,841
|
|
|
|
802
|
|
Stock option exercises and employee stock purchases
|
|
|
15,288
|
|
|
|
17,389
|
|
|
|
3,792
|
|
Proceeds from sales of stock (purchase of treasury stock)
|
|
|
(99,557
|
)
|
|
|
|
|
|
|
189,030
|
|
Dividends paid
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
(27,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
(93,147
|
)
|
|
|
(7,885
|
)
|
|
|
164,544
|
|
Cash flow from financing activities in discontinued operations
|
|
|
(170
|
)
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(93,317
|
)
|
|
|
(6,810
|
)
|
|
|
164,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
23,924
|
|
|
|
15,140
|
|
|
|
(8,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(16,214
|
)
|
|
|
101,238
|
|
|
|
2,269
|
|
Cash and cash equivalents at beginning of period
|
|
|
325,579
|
|
|
|
224,341
|
|
|
|
222,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
309,365
|
|
|
|
325,579
|
|
|
|
224,341
|
|
Cash and cash equivalents classified as part of discontinued
operations
|
|
|
|
|
|
|
(203
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
309,365
|
|
|
$
|
325,376
|
|
|
$
|
224,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated financial statements.
68
VALEANT
PHARMACEUTICALS INTERNATIONAL
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
In these financial statements and this annual report,
we, us and our refers to
Valeant Pharmaceuticals International (Valeant) and
its subsidiaries.
Organization: We are an international
specialty 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 financial statements include the accounts of
Valeant, its wholly owned subsidiaries and its majority-owned
subsidiary in Poland. Minority interest in results of operations
of consolidated subsidiaries represents the minority
stockholders share of the income or loss of these
consolidated subsidiaries. All significant intercompany account
balances and transactions have been eliminated.
Cash and Cash Equivalents: Cash equivalents
include short-term commercial paper, time deposits and money
market funds which, at the time of purchase, have maturities of
three months or less. For purposes of the consolidated
statements of cash flows, we consider highly liquid investments
with a maturity of three months or less at the time of purchase
to be cash equivalents. The carrying amount of these assets
approximates fair value due to the short-term maturity of these
investments.
Marketable Securities: Investments in
marketable securities are categorized as either being expected
to be held-to-maturity or available-for-sale. 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.
Investments categorized as available-for-sale are marked to
market based on quoted market values of the securities, with the
resulting adjustments, net of deferred taxes, reported as a
component of other comprehensive income (loss) in
stockholders equity until realized. As of
December 31, 2007 and 2006, the fair value of our
marketable securities approximated cost.
Allowance for Doubtful Accounts: We evaluate
the collectibility of accounts receivable on a regular basis.
The allowance is based upon various factors including the
financial condition and payment history of major customers, an
overall review of collections experience on other accounts and
economic factors or events expected to affect our future
collections experience.
Inventories: Inventories, which include
material, direct labor and factory overhead, are stated at the
lower of cost or market. Cost is determined on a
first-in,
first-out (FIFO) basis. We evaluate the carrying
value of inventories on a regular basis, taking into account
such factors as historical and anticipated future sales compared
with quantities on hand, the price we expect to obtain for
products in their respective markets compared with historical
cost and the remaining shelf life of goods on hand.
Property, Plant and Equipment: Property, plant
and equipment are stated at cost. We primarily use the
straight-line method for depreciating property, plant and
equipment over their estimated useful lives. Buildings are
depreciated up to 40 years, machinery and equipment are
depreciated from 3-11 years, furniture and fixtures from
5-10 years
and leasehold improvements and capital leases are amortized over
their useful lives, limited to the life of the related lease. We
follow the policy of capitalizing expenditures that materially
increase the lives of the related assets and charge maintenance
and repairs to expense. Upon sale or retirement, the costs and
related accumulated depreciation or amortization are eliminated
from the respective accounts and the resulting gain or loss is
included in income. From time to time, if there is an indication
of possible asset impairment, we evaluate the carrying value of
property, plant and equipment. We determine if there has been
asset impairment by comparing the anticipated undiscounted
future cash flows expected to be generated by the property,
plant and equipment with its carrying value. If the undiscounted
cash flows are less than the carrying value, the amount of the
asset impairment, if any, is determined by comparing the
carrying value of the property, plant and equipment with its
fair value. Fair value is generally based on a discounted cash
flows analysis, appraisals or preliminary offers from
prospective buyers. In the
69
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years ended December 31, 2007, 2006 and 2005, we recorded
asset impairment charges of $2,439,000, $97,344,000 and
$2,322,000 respectively, on certain of our fixed assets. See
Note 3.
Capitalized Software Costs: In 2007, we
capitalized purchased software from a third party vendor and
software development costs incurred under the provisions of
SOP 98-1,
Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use. Capitalized costs include only
(1) external direct costs of materials and services
incurred in developing or obtaining internal use software,
(2) payroll and payroll-related costs for employees who are
directly associated with and who devote substantial time to the
internal-use software project, and (3) interest costs
incurred, while developing internal-use software. Amortization
began in certain countries when portions of the project were
completed, were ready for their intended purpose and were placed
in service. Training and computer software maintenance costs are
expensed as incurred. Software development costs are being
amortized using the straight-line method over the expected life
of the product which is estimated to be five to seven years
depending on when it is placed in service.
Acquired In-Process Research and
Development: We charge the costs associated with
acquired in-process research and development
(IPR&D) to expense. These amounts represent an
estimate of the fair value of purchased in-process technology
for projects that, as of the acquisition date, had not yet
reached technological feasibility and had no alternative future
use. The estimation of fair value requires significant judgment.
Differences in those judgments would have the impact of changing
our allocation of purchase price to goodwill, which is an
intangible asset that is not amortized. We incurred an
IPR&D expense of $126,399,000 related to the acquisition of
Xcel in 2005.
The major risks and uncertainties associated with the timely and
successful completion of IPR&D projects consist of the
ability to confirm the safety and efficacy of the technology
based on the data from clinical trials and obtaining necessary
regulatory approvals. In addition, no assurance can be given
that the underlying assumptions used to forecast the cash flows
or the timely and successful completion of such projects will
materialize as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.
Goodwill and Intangible Assets: Our intangible
assets comprise product marketing rights, related patents and
trademarks for pharmaceutical products, and rights under the
ribavirin license agreements. The product rights primarily
relate to either 1) mature pharmaceutical products without
patent protection, or 2) patented products. The mature
products display a stable and consistent revenue stream over a
relatively long period of time. The patented products generally
have steady growth rates up until the point of patent expiration
when revenues decline due to the introduction of generic
competition. We amortize the mature products using the
straight-line method over the estimated remaining life of the
product (ranging from 5-19 years for current products)
where the pattern of revenues is generally flat over the
remaining life. We amortize patented products using the
straight-line method over the remaining life of the patent
because the revenues are generally growing until patent
expiration.
We amortize the license rights for ribavirin on an accelerated
basis because of the significant decline in royalties which
started in 2003 upon the expiration of a U.S. patent;
amortization is scheduled to be completed in June 2008.
Intangible assets are tested for impairment when possible
indicators of impairment are identified. We recorded asset
impairment charges for intangible assets of $310,000,
$1,075,000, and $7,417,000 in 2007, 2006, and 2005 respectively.
The charges in 2007 and 2006 related to two products in Spain.
The charge in 2005 primarily related to products sold in the
United Kingdom, Germany and Spain which experienced revenue
declines in recent years. We evaluate intangible assets by
comparing the carrying value of each intangible asset to the
related undiscounted future cash flows. If the carrying value
exceeds the undiscounted cash flows, the amount of the asset
impairment is determined by comparing the carrying value to its
fair value, as determined using discounted cash flows analysis.
Revenue Recognition: We recognize revenues
from product sales when title and risk of ownership transfers to
the customer and all required elements as described in SEC Staff
Accounting Bulletin No. 104 have been addressed. We
record revenues net of provisions for rebates, discounts and
returns, which are established at the time
70
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of sale. We calculate allowances for future returns of products
sold to our direct and indirect customers, who include
wholesalers, retail pharmacies and hospitals, as a percent of
sales based on our historical return percentages and taking into
account additional available information on competitive products
and contract changes. Where we do not have data sharing
agreements, we use third-party data to estimate the level of
product inventories, expiration dating, and product demand at
our major wholesalers and in retail pharmacies. We have data
sharing agreements with the three largest wholesalers in the US.
Based upon this information, adjustments are made to the
allowance accrual if deemed necessary. Actual results could be
materially different from our estimates, resulting in future
adjustments to revenue. We review our current methodology and
assess the adequacy of the allowance for returns on a quarterly
basis, adjusting for changes in assumptions, historical results
and business practices, as necessary.
In the United States, we record provisions for Medicaid,
Medicare and contract rebates based upon our actual experience
ratio of rebates paid and actual prescriptions during prior
quarters. We apply the experience ratio to the respective
periods sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
compared to industry data and claims made by states and other
contract organizations to ensure that the historical trends are
representative of current experience and that our accruals are
adequate.
Our reserve for rebates, product returns and allowances is
included in accrued liabilities and was $54,846,000 and
$51,324,000 at December 31, 2007 and 2006, respectively.
We earn ribavirin royalties as a result of our license of
product rights and technologies to Schering-Plough. Ribavirin
royalties are earned at the time the products subject to the
royalty are sold by Schering-Plough. We rely on a limited amount
of financial information provided by Schering-Plough to estimate
the amounts due to us under the royalty agreements.
Foreign Currency Translation: The assets and
liabilities of our foreign operations are translated at end of
period exchange rates. Revenues and expenses are translated at
the weighted average exchange rates prevailing during the
period. The effects of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into United
States Dollars are accumulated as a separate component of
stockholders equity.
Income Taxes: Income taxes are calculated in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(SFAS No. 109). SFAS No. 109
requires that we recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have
been recognized in our financial statements or tax returns. A
valuation allowance is established, when necessary, to reduce
our deferred tax assets. In estimating the future tax
consequences of any transaction, we consider all expected future
events under presently existing tax laws and rates.
Derivative Financial Instruments: We account
for derivative financial instruments based on whether they meet
our criteria for designation as hedging transactions, either as
cash flow 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 a hedged item
are either offset against the change in the fair value of the
hedged item through earnings or recognized in other
comprehensive income until the hedged item is recognized in
earnings.
Comprehensive Income: We have adopted the
provisions of SFAS No. 130, Reporting Comprehensive
Income. Accumulated other comprehensive income as of
December 31, 2007 consisted of accumulated foreign currency
adjustments of $85,772,000, unrealized loss on marketable equity
securities and other of ($1,735,000) and net pension liabilities
of ($3,827,000).
Per Share Information: We compute basic
earnings per share by dividing income or loss available to
common stockholders by the weighted-average number of common
shares outstanding. We compute diluted earnings per share by
adjusting the weighted-average number of common shares
outstanding to reflect the effect of potentially dilutive
securities including options, warrants, and convertible debt or
preferred stock. We adjust income
71
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
available to common stockholders in these computations to
reflect any changes in income or loss that would result from the
issuance of the dilutive common shares.
Stock-Based Compensation: We adopted
SFAS No. 123(R), Share Based Payment
(SFAS 123(R)) on January 1, 2006.
SFAS 123(R) is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123) and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). SFAS 123(R) requires
companies to recognize compensation expense for the fair value
of all share based incentive programs including employee stock
options and our employee stock purchase plan. We adopted
SFAS 123(R) on the modified prospective basis prescribed
therein and have not restated prior period financial statements
for this new accounting method.
Prior to the adoption of SFAS 123(R) in 2006, we followed
APB 25 to account for employee stock options. Under APB 25,
compensation expense was recognized in the amount of the
intrinsic value of the option on the date of grant over the
vesting period of the option. Intrinsic value is the amount that
the exercise price of a stock option is less than the market
price of the underlying stock. Prior to the adoption of
SFAS 123(R) we also applied the disclosure provisions of
SFAS 123 which illustrate, on a pro forma basis, the effect
on our reported earnings as if we recorded stock compensation
expense based on the fair value of stock options.
In order to estimate the fair value of stock options under the
provisions of SFAS 123 and SFAS 123(R) we use the
Black-Scholes option valuation model, which was developed for
use in estimating the fair value of publicly traded options
which, unlike employee stock options, have no vesting
restrictions and are fully transferable. Option valuation models
such as Black-Scholes require the input of subjective
assumptions which can vary over time. Additional information
about our stock incentive programs and the assumptions used in
determining the fair value of stock options are contained in
Note 15.
Stock compensation expense was $13,220,000, $20,848,000 and
$3,331,000 in 2007, 2006 and 2005, respectively.
The following pro forma net loss and loss per share was
determined as if we had accounted for employee stock options and
stock issued under our employee stock plans under the fair value
method prescribed by SFAS 123(R) in 2005. Since we have
recorded valuation allowances for U.S. tax benefits, no tax
benefits have been attributed to the additional compensation
expense (in thousands, except per share amounts).
|
|
|
|
|
|
|
2005
|
|
|
Net loss as reported (restated)
|
|
$
|
(188,692
|
)
|
Stock compensation expense recorded at intrinsic value for stock
incentive plans
|
|
|
3,331
|
|
Stock compensation expense determined under fair value based
method for stock incentive plans
|
|
|
(19,642
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(205,003
|
)
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(2.06
|
)
|
|
|
|
|
|
Basic and diluted pro forma
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from those
estimates.
72
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
FIN 48. In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109 (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in
accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 applies to all income tax
positions taken on previously filed tax returns or expected to
be taken on a future tax return. FIN 48 prescribes a
benefit recognition model with a two-step approach, a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being ultimately
realized upon final settlement. If it is not more likely than
not that the benefit will be sustained on its technical merits,
no benefit will be recorded. Uncertain tax positions that relate
only to timing of when an item is included on a tax return are
considered to have met the recognition threshold for purposes of
applying FIN 48. Therefore, if it can be established that
the only uncertainty is when an item is taken on a tax return,
such positions have satisfied the recognition step for purposes
of FIN 48 and uncertainty related to timing should be
assessed as part of measurement. FIN 48 also requires that
the amount of interest expense and income to be recognized
related to uncertain tax positions be computed by applying the
applicable statutory rate of interest to the difference between
the tax position recognized in accordance with FIN 48 and
the amount previously taken or expected to be taken in a tax
return.
FIN 48 became effective for Valeant as of January 1,
2007. The change in net assets as a result of applying this
pronouncement was recorded as a change in accounting principle
with the cumulative effect of the change required to be treated
as an adjustment to the opening balance of retained earnings. As
a result of the adoption of FIN 48, we recognized an
increase of $1,561,000 to the beginning balance of accumulated
deficit on the balance sheet.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements but does not change the requirements to
apply fair value in existing accounting standards. Under
SFAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. The
standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. SFAS No. 157 will be effective for
Valeant as of January 1, 2008 and we are currently
assessing the impact that SFAS No. 157 may have on our
financial statements.
SFAS No. 158. In September 2006, the
FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R), which became effective for Valeant as of
December 31, 2006. SFAS No. 158 requires
companies to recognize the over-funded or under-funded status of
defined benefit postretirement plans as an asset or liability on
the balance sheet. Valeant does not have defined benefit
postretirement plans for its U.S. operations but does
maintain such plans for certain of its foreign operations.
SFAS No. 158 also prescribes that, by
December 31, 2008, the measurement date of a plan to be the
date of its year-end balance sheet, which is the measurement
date Valeant already uses for most its plans. The impact of
adopting FAS 158 resulted in an increase in pension related
assets and an increase in other comprehensive income of
approximately $643,000. In addition, we have disclosed
additional information about certain effects on net periodic
benefit cost for 2008.
SFAS 159. In February 2007 the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS 159) which provides companies with an option to
report selected financial assets and liabilities at fair value.
The objective of SFAS 159 is to reduce both complexity in
accounting for financial instruments 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 is effective for fiscal years
beginning after November 15, 2007. We do not expect the adoption
of SFAS 159 to have a material impact on our consolidated
financial statements.
73
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SAB No. 108. In September 2006, the
SEC issued Staff Accounting Bulletin No. 108
(SAB No. 108) regarding the quantification of
financial statement misstatements. SAB No. 108
requires a dual approach for quantifications of
errors using both a method that focuses on the income statement
impact, including the cumulative effect of prior years
misstatements, and a method that focuses on the period-end
balance sheet. SAB No. 108 became effective for
Valeant as of January 1, 2007. The adoption of this
standard did not have a material impact on Valeant.
In June 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires that nonrefundable advance payments for goods and
services that will be used in future research and development
activities be deferred and capitalized until the related service
is performed or the goods are delivered.
EITF 07-3
is effective for fiscal years beginning after December 15,
2007. We do not expect the adoption of
EITF 07-3
to have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141(R) also
provides guidance for recognizing and measuring goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. Among other requirements, SFAS 141(R)
expands the definition of a business combination, requires
acquisitions to be accounted for at fair value, 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.
|
|
2.
|
Restatement
of Consolidated Financial Statements
|
During the preparation process for this annual report on
Form 10-K, we concluded that certain errors identified
subsequent to the filing of our annual report on Form 10-K
for the year ended December 31, 2006 were material to
certain prior periods, including the year ended
December 31, 2006.
74
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The errors and the cumulative effect of the corrections as of
December 31, 2006 are identified as follows and summarized
in the table below:
i. Increase in reserves for anticipated product returns
based on historical trends in Latin America, the cumulative
effect of which as of December 31, 2006 is a reduction in
revenue of $3,953,000 and certain other adjustments of $127,000;
ii. Decrease in revenues associated with sales to certain
customers in Italy where preexisting rights of return became
known in the fourth quarter of 2007, the cumulative effect of
which as of December 31, 2006 is a reduction of revenues of
$290,000;
iii. Changes in pension expense in UK, Netherlands,
Switzerland and Germany resulting from incorrect application of
Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions and Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, the cumulative effect of which as of
December 31, 2006 is a decrease in general and
administrative expenses of $519,000; and
iv. Reduction in cumulative income tax expense as of
December 31, 2006 of $1,331,000 resulting from the income
tax effects of the pre-tax adjustments described above.
Additionally, income tax expense increased by $825,000 due to
corrections of deferred taxes in certain foreign locations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Year Ended
|
|
|
|
|
|
Additional
|
|
|
|
December 31,
|
|
|
|
|
|
Income
|
|
Income (Expense)
|
|
2006
|
|
|
2005
|
|
|
Prior Periods
|
|
|
(Expense)
|
|
|
|
(In thousands)
|
|
|
Returns reserve in Latin America
|
|
$
|
(1,554
|
)
|
|
$
|
(371
|
)
|
|
$
|
(2,155
|
)
|
|
$
|
(4,080
|
)
|
Reversal of revenue in Italy
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
(290
|
)
|
European pension accounting
|
|
|
1,401
|
|
|
|
(256
|
)
|
|
|
(626
|
)
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact before taxes
|
|
|
(443
|
)
|
|
|
(627
|
)
|
|
|
(2,781
|
)
|
|
$
|
(3,851
|
)
|
Tax effect on above
|
|
|
204
|
|
|
|
139
|
|
|
|
988
|
|
|
$
|
1,331
|
|
Other deferred tax items
|
|
|
(764
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
|
|
$
|
(1,003
|
)
|
|
$
|
(549
|
)
|
|
$
|
(1,793
|
)
|
|
$
|
(3,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Below is a summary of the specific income statement accounts as
previously reported and as affected by the restatement for the
two years ended December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Product sales
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
783,279
|
|
|
$
|
732,240
|
|
Adjustment
|
|
|
(1,717
|
)
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
781,562
|
|
|
$
|
731,869
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
115,857
|
|
|
$
|
108,252
|
|
Adjustment
|
|
|
(1,274
|
)
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
114,583
|
|
|
$
|
108,508
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations, before interest, taxes and other
items
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
8,417
|
|
|
$
|
(49,624
|
)
|
Adjustment
|
|
|
(443
|
)
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
7,974
|
|
|
$
|
(50,251
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes and minority
interest
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(21,547
|
)
|
|
$
|
(83,139
|
)
|
Adjustment
|
|
|
(443
|
)
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(21,990
|
)
|
|
$
|
(83,766
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
34,264
|
|
|
$
|
55,151
|
|
Adjustment
|
|
|
560
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
34,824
|
|
|
$
|
55,073
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(55,814
|
)
|
|
$
|
(138,577
|
)
|
Adjustment
|
|
|
(1,003
|
)
|
|
|
(549
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(56,817
|
)
|
|
$
|
(139,126
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
(56,565
|
)
|
|
$
|
(188,143
|
)
|
Adjustment
|
|
|
(1,003
|
)
|
|
|
(549
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
|
|
|
|
|
|
|
|
|
76
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Below is a summary of the earnings per share information as
reported and as affected by the restatement for the years ended
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Basic loss per share as previously reported
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.60
|
)
|
|
$
|
(1.51
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.61
|
)
|
|
$
|
(2.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share adjustments
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
From discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share as restated
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share as previously reported
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.60
|
)
|
|
$
|
(1.51
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.61
|
)
|
|
$
|
(2.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share adjustments
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
From discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share as restated
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
77
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Below is a summary of the specific balance sheet accounts as
reported and as affected by the restatement and certain
adjustments for changes in balance sheet classification as of
December 31, 2006:
|
|
|
|
|
|
|
2006
|
|
|
Cash and cash equivalents
|
|
|
|
|
As previously reported
|
|
$
|
326,002
|
|
Adjustment
|
|
|
(626
|
)
|
|
|
|
|
|
As restated
|
|
$
|
325,376
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
As previously reported
|
|
$
|
9,743
|
|
Adjustment
|
|
|
627
|
|
|
|
|
|
|
As restated
|
|
$
|
10,370
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
As previously reported
|
|
$
|
227,452
|
|
Adjustment
|
|
|
(301
|
)
|
|
|
|
|
|
As restated
|
|
$
|
227,151
|
|
|
|
|
|
|
Current deferred tax assets, net
|
|
|
|
|
As previously reported
|
|
$
|
8,071
|
|
Adjustment
|
|
|
479
|
|
|
|
|
|
|
As restated
|
|
$
|
8,550
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
|
|
As previously reported
|
|
$
|
21,514
|
|
Adjustment
|
|
|
(296
|
)
|
|
|
|
|
|
As restated
|
|
$
|
21,218
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
As previously reported
|
|
$
|
53,555
|
|
Adjustment
|
|
|
372
|
|
|
|
|
|
|
As restated
|
|
$
|
53,927
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
As previously reported
|
|
$
|
142,532
|
|
Adjustment
|
|
|
4,173
|
|
|
|
|
|
|
As restated
|
|
$
|
146,705
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
As previously reported
|
|
$
|
39,818
|
|
Adjustment
|
|
|
(172
|
)
|
|
|
|
|
|
As restated
|
|
$
|
39,646
|
|
|
|
|
|
|
78
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
2006
|
|
|
Deferred tax liabilities, net
|
|
|
|
|
As previously reported
|
|
$
|
3,255
|
|
Adjustment
|
|
|
450
|
|
|
|
|
|
|
As restated
|
|
$
|
3,705
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
As previously reported
|
|
$
|
18,182
|
|
Adjustment
|
|
|
6,324
|
|
|
|
|
|
|
As restated
|
|
$
|
24,506
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
As previously reported
|
|
$
|
18,343
|
|
Adjustment
|
|
|
(5,657
|
)
|
|
|
|
|
|
As restated
|
|
$
|
12,686
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
As previously reported
|
|
$
|
(848,467
|
)
|
Adjustment
|
|
|
(3,345
|
)
|
|
|
|
|
|
As restated
|
|
$
|
(851,812
|
)
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
As previously reported
|
|
$
|
19,458
|
|
Adjustment
|
|
|
(1,518
|
)
|
|
|
|
|
|
As restated
|
|
$
|
17,940
|
|
|
|
|
|
|
79
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information on cash flow as set forth in our Consolidated
Statement of Cash Flows for the years ended December 31,
2006 and 2005 (in thousands), presenting the impact of the
restatement and certain adjustments for changes in balance sheet
classification is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
2006
|
|
|
2006
|
|
|
Previously
|
|
|
2005
|
|
|
2005
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(56,565
|
)
|
|
$
|
(1,003
|
)
|
|
$
|
(57,568
|
)
|
|
$
|
(188,143
|
)
|
|
$
|
(549
|
)
|
|
$
|
(188,692
|
)
|
Loss from discontinued operations
|
|
|
(751
|
)
|
|
|
|
|
|
|
(751
|
)
|
|
|
(49,566
|
)
|
|
|
|
|
|
|
(49,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(55,814
|
)
|
|
|
(1,003
|
)
|
|
|
(56,817
|
)
|
|
|
(138,577
|
)
|
|
|
(549
|
)
|
|
|
(139,126
|
)
|
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities in
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
85,593
|
|
|
|
|
|
|
|
85,593
|
|
|
|
97,351
|
|
|
|
|
|
|
|
97,351
|
|
Provision for losses on accounts receivable and inventory
|
|
|
14,071
|
|
|
|
|
|
|
|
14,071
|
|
|
|
10,744
|
|
|
|
|
|
|
|
10,744
|
|
Stock compensation expense
|
|
|
20,848
|
|
|
|
|
|
|
|
20,848
|
|
|
|
3,331
|
|
|
|
|
|
|
|
3,331
|
|
Translation and exchange (gains) losses, net
|
|
|
(1,152
|
)
|
|
|
|
|
|
|
(1,152
|
)
|
|
|
6,358
|
|
|
|
|
|
|
|
6,358
|
|
Impairment charges and other non-cash items
|
|
|
122,171
|
|
|
|
|
|
|
|
122,171
|
|
|
|
2,969
|
|
|
|
|
|
|
|
2,969
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
|
|
|
|
|
|
126,399
|
|
Deferred income taxes
|
|
|
2,625
|
|
|
|
731
|
|
|
|
3,356
|
|
|
|
(34,204
|
)
|
|
|
291
|
|
|
|
(33,913
|
)
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(28,068
|
)
|
|
|
290
|
|
|
|
(27,778
|
)
|
|
|
(14,774
|
)
|
|
|
|
|
|
|
(14,774
|
)
|
Inventories
|
|
|
(5,598
|
)
|
|
|
|
|
|
|
(5,598
|
)
|
|
|
(30,141
|
)
|
|
|
|
|
|
|
(30,141
|
)
|
Prepaid expenses and other assets
|
|
|
(858
|
)
|
|
|
(1,374
|
)
|
|
|
(2,232
|
)
|
|
|
(3,545
|
)
|
|
|
(217
|
)
|
|
|
(3,762
|
)
|
Trade payables and accrued liabilities
|
|
|
(14,733
|
)
|
|
|
1,682
|
|
|
|
(13,051
|
)
|
|
|
7,838
|
|
|
|
294
|
|
|
|
8,132
|
|
Income taxes
|
|
|
(11,820
|
)
|
|
|
(171
|
)
|
|
|
(11,991
|
)
|
|
|
27,559
|
|
|
|
|
|
|
|
27,559
|
|
Other liabilities
|
|
|
(117
|
)
|
|
|
(250
|
)
|
|
|
(367
|
)
|
|
|
3,807
|
|
|
|
111
|
|
|
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities in continuing operations
|
|
|
127,148
|
|
|
|
(95
|
)
|
|
|
127,053
|
|
|
|
65,115
|
|
|
|
(70
|
)
|
|
|
65,045
|
|
Cash flow from operating activities in discontinued operations
|
|
|
(2,087
|
)
|
|
|
95
|
|
|
|
(1,992
|
)
|
|
|
(657
|
)
|
|
|
70
|
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
125,061
|
|
|
|
|
|
|
|
125,061
|
|
|
|
64,458
|
|
|
|
|
|
|
|
64,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(40,968
|
)
|
|
|
|
|
|
|
(40,968
|
)
|
|
|
(45,525
|
)
|
|
|
|
|
|
|
(45,525
|
)
|
Proceeds from sale of assets
|
|
|
10,022
|
|
|
|
|
|
|
|
10,022
|
|
|
|
7,252
|
|
|
|
|
|
|
|
7,252
|
|
Proceeds from sale of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments
|
|
|
27,913
|
|
|
|
|
|
|
|
27,913
|
|
|
|
533,307
|
|
|
|
|
|
|
|
533,307
|
|
Purchase of investments
|
|
|
(26,500
|
)
|
|
|
|
|
|
|
(26,500
|
)
|
|
|
(305,300
|
)
|
|
|
|
|
|
|
(305,300
|
)
|
Acquisition of businesses, license rights and product lines
|
|
|
(4,568
|
)
|
|
|
|
|
|
|
(4,568
|
)
|
|
|
(293,090
|
)
|
|
|
|
|
|
|
(293,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities in continuing operations
|
|
|
(34,101
|
)
|
|
|
|
|
|
|
(34,101
|
)
|
|
|
(103,356
|
)
|
|
|
|
|
|
|
(103,356
|
)
|
Cash flow from investing activities in discontinued operations
|
|
|
1,948
|
|
|
|
|
|
|
|
1,948
|
|
|
|
(114,994
|
)
|
|
|
|
|
|
|
(114,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,153
|
)
|
|
|
|
|
|
|
(32,153
|
)
|
|
|
(218,350
|
)
|
|
|
|
|
|
|
(218,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
2006
|
|
|
2006
|
|
|
Previously
|
|
|
2005
|
|
|
2005
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(6,563
|
)
|
|
|
|
|
|
|
(6,563
|
)
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
(1,114
|
)
|
Proceeds capitalized lease financing, long-term debt, and notes
payable
|
|
|
2,841
|
|
|
|
|
|
|
|
2,841
|
|
|
|
802
|
|
|
|
|
|
|
|
802
|
|
Stock option exercises and employee stock purchases
|
|
|
17,389
|
|
|
|
|
|
|
|
17,389
|
|
|
|
192,822
|
|
|
|
|
|
|
|
192,822
|
|
Proceeds from sales of stock (purchase of treasury stock)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(21,552
|
)
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
(27,966
|
)
|
|
|
|
|
|
|
(27,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
(7,885
|
)
|
|
|
|
|
|
|
(7,885
|
)
|
|
|
164,544
|
|
|
|
|
|
|
|
164,544
|
|
Cash flow from financing activities in discontinued operations
|
|
|
1,075
|
|
|
|
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(6,810
|
)
|
|
|
|
|
|
|
(6,810
|
)
|
|
|
164,544
|
|
|
|
|
|
|
|
164,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
15,204
|
|
|
|
(64
|
)
|
|
|
15,140
|
|
|
|
(8,468
|
)
|
|
|
85
|
|
|
|
(8,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
101,302
|
|
|
|
(64
|
)
|
|
|
101,238
|
|
|
|
2,184
|
|
|
|
85
|
|
|
|
2,269
|
|
Cash and cash equivalents at beginning of period
|
|
|
224,903
|
|
|
|
(562
|
)
|
|
|
224,341
|
|
|
|
222,719
|
|
|
|
(647
|
)
|
|
|
222,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
326,205
|
|
|
|
(626
|
)
|
|
|
325,579
|
|
|
|
224,903
|
|
|
|
(562
|
)
|
|
|
224,341
|
|
Cash and cash equivalents classified as part of discontinued
operations
|
|
|
(203
|
)
|
|
|
|
|
|
|
(203
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
326,002
|
|
|
$
|
(626
|
)
|
|
$
|
325,376
|
|
|
$
|
224,856
|
|
|
$
|
(562
|
)
|
|
$
|
224,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restatement of our consolidated financial statements also
included certain corrections in our accounting for pensions, as
described in Note. 11.
2007
Restructuring Charges
In 2007 we recorded a restructuring charge of $23,176,000 that
consisted of $13,575,000 for the 2006 Restructuring and
$9,601,000 for the restructuring program that will be announced
in connection with the 2008 Strategic Review.
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 includes 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 includes
certain product rights in Japan. We closed this transaction on
March 3, 2008. The assets sold to Invida have been
classified as held for sale in accordance with
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, as of December 2007.
2008 Strategic Review and 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.
81
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This strategic review, which we refer to as the 2008
Strategic Review, is still underway as of date of this
filing and we expect to describe it in an announcement in late
March 2008. We expect the 2008 Strategic Review to lead to
significant changes in our business and will include a
restructuring program. The charges taken in 2007 for this 2008
restructuring include $957,000 for executive severances,
$4,676,000 for professional service expenses, and the $3,968,000
contract termination and transaction costs associated with the
sale of our Asia businesses to Invida.
March
2006 June 2007 Restructuring Charges
On April 3, 2006, we announced a restructuring program to
reduce costs and accelerate earnings growth. The 2006
Restructuring was primarily focused on our research and
development and manufacturing operations. The objective of this
restructuring program as it related to research and development
activities was to focus our efforts and expenditures on two late
stage projects currently in development. In December 2006 we
sold our HIV and cancer development programs and certain
discovery and pre-clinical assets to Ardea Biosciences, Inc.
(Ardea), with an option for us to reacquire rights
outside of the United States and Canada to commercialize the
compound being developed in the HIV program upon Ardeas
completion of Phase IIb trials. In March 2007, we sold our
former headquarters building in Costa Mesa, California, where
our former research laboratories were located, for net proceeds
of $36,758,000.
The objective of the 2006 Restructuring as it related to
manufacturing was to further rationalize our manufacturing
operations to reflect the regional nature of our existing
products and further reduce our excess capacity after
considering the delay in the development of taribavirin. In
December 2006, we transferred our former factories in Basel,
Switzerland and Puerto Rico to a held for sale
classification in accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. In June
2007, we sold these manufacturing facilities and the related
inventories to Legacy Pharmaceuticals International for
aggregate proceeds of $29,500,000, of which $12,000,000 was
received as consideration for inventories sold to Legacy
Pharmaceuticals International and $17,500,000 was received as
consideration for the manufacturing facilities. The transaction
also included transition payment obligations of $6,000,000 to be
paid by Valeant to Legacy Pharmaceuticals International over a
24-month
period as well as capital expenditure obligations of $650,000 to
be incurred by us. The sale of these manufacturing facilities to
Legacy Pharmaceuticals International in June 2007 completed the
2006 Restructuring.
The charges in the 2006 Restructuring included impairment
charges resulting from the sale of our former headquarters
facility, discovery and pre-clinical operations equipment, and
our former manufacturing facilities in Puerto Rico and Basel,
Switzerland. The restructuring included the reduction of
approximately 850 employees, the majority of whom work in
the two manufacturing facilities sold to Legacy Pharmaceuticals
International. As of December 31, 2007, employee severance
costs in this restructuring program have been recorded for
approximately 490 employees and no severance payments have
been recorded for the remaining employees who transferred to
Legacy Pharmaceuticals International.
The 2006 Restructuring also rationalized selling, general and
administrative expenses primarily through consolidation of the
management functions in fewer administrative groups to achieve
greater economies of scale. Management and administrative
responsibilities for our regional operations in Australia,
Africa and Asia, which had previously been managed as a separate
business unit, were combined in 2006 with those of other regions.
We recorded a restructuring provision for the 2006 Restructuring
of $13,575,000 in 2007, compared with $138,181,000 for 2006.
Severance charges recorded as part of this restructuring program
were $22,127,000.
Abandoned software and other capital assets included an expense
of $20,453,000 in 2006 relating to an Enterprise Resource
Planning (ERP) project, which was discontinued in March 2006. It
also included $632,000 of cash-related charges.
82
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring
Charge Details
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Cumulative
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Incurred
|
|
|
|
(In thousands)
|
|
|
2006 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances
|
|
$
|
5,130
|
|
|
$
|
16,997
|
|
|
$
|
22,127
|
|
Contract cancellation and other cash costs
|
|
|
3,115
|
|
|
|
1,662
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
8,245
|
|
|
|
18,659
|
|
|
|
26,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
22,178
|
|
|
|
22,178
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
2,891
|
|
|
|
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
2,439
|
|
|
|
97,344
|
|
|
|
99,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
5,330
|
|
|
|
119,522
|
|
|
|
124,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
13,575
|
|
|
$
|
138,181
|
|
|
$
|
151,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008 Restructuring Program
|
|
|
|
|
Employee severances
|
|
$
|
957
|
|
Contract cancellation and other cash costs
|
|
|
8,644
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
9,601
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
9,601
|
|
|
|
|
|
|
83
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED 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 $3,979,000 restructuring accrual for the
2006 Restructuring, accrued as of December 31, 2007,
relates to ongoing contractual contractual payments to Legacy
Pharmaceuticals International relating to the sale of our former
manufacturing 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
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
19,291
|
|
Cash paid
|
|
|
(14,075
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2006
|
|
|
5,216
|
|
|
|
|
|
|
Charges to earnings
|
|
|
8,245
|
|
Transition and capital expenditure payment obligations
|
|
|
6,813
|
|
Cash paid
|
|
|
(16,295
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
3,979
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
9,601
|
|
Cash paid
|
|
|
(1,080
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
$
|
8,521
|
|
|
|
|
|
|
Pre-
2006 Activities
During 2003, we approved restructuring plans to establish a
global manufacturing and supply chain network of five
manufacturing sites, and dispose of or close ten of our
manufacturing sites (the Manufacturing Restructuring
Plan). In 2005 we modified the Manufacturing Restructuring
Plan to include the disposition of the manufacturing site in
China and recorded an asset impairment reserve of $3,602,000 for
this facility and one in Poland. Also, in 2005 we sold a plant
in the United States, two plants in Argentina and one plant in
Mexico and recorded a net gain of $2,349,000 on these sales. In
2006 we completed the sale of a manufacturing facility in Poland
and recorded a loss of $635,000 on the sale which was recorded
as a restructuring charge in 2006.
2007
Transactions
In 2007, we acquired product rights in the United States,
Europe, and Argentina for aggregate consideration of
$40,803,000, of which $36,184,000 was cash consideration. In the
United States, we acquired a
paid-up
license to Kinetin and Zeatin, the active ingredients in the
Kinerase product line, for cash consideration of $21,000,000 and
other consideration of $4,170,000. In Europe we acquired the
rights to Nabilone, the product we currently market as Cesamet
in Canada and the United States, for $13,582,000. We acquired
the rights to certain products in Poland, Argentina and Spain
for $1,602,000 in cash consideration and $449,000 in other
consideration.
2006
Transactions
In 2006 we acquired rights to new product lines in Poland and
the UK. In Poland we acquired the rights to a number of branded
generic products for nominal cash consideration. In the UK we
acquired exclusive rights to distribute certain dermatological
skin care products from Intendis AG, including Finacea,
Skinoren, Scheriproct,
84
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and Ultrabase. We also purchased additional rights to Melleril
in Latin America and additional rights to Zelapar in Canada and
Mexico. Aggregate consideration for these transactions was
$4,568,000 in 2006.
2005
Transactions
Melleril and Acurenal: During the third
quarter of 2005, we acquired product rights to Melleril in
Brazil from Novartis for consideration of approximately
$5,900,000. Additionally, we paid approximately $2,000,000 for
product rights to Acurenal in Poland. Sales of these products
recorded during 2005 were $3,800,000. Costs of both of these
acquisitions were capitalized as intangible product costs.
Xcel Pharmaceuticals, Inc.: On March 1,
2005, we acquired Xcel Pharmaceuticals, Inc. (Xcel),
a specialty pharmaceutical company focused on the treatment of
disorders of the central nervous system, for $280,000,000 in
cash, plus expenses of $5,435,000. Under the terms of the
purchase agreement, we paid an additional $7,470,000 as a
post-closing working capital adjustment. The Xcel acquisition
expanded our existing neurology product portfolio with four
products that are sold within the United States, and retigabine,
a late-stage clinical product candidate that is an adjunctive
treatment for partial-onset seizures in patients with epilepsy.
In connection with the Xcel acquisition, we completed an
offering of 8,280,000 shares of our common stock in
February 2005. We received net proceeds, after underwriting
discounts and commissions, of $189,030,000 which were used to
partially fund the Xcel acquisition. The remaining funds for the
Xcel acquisition were obtained from existing cash and our
marketable securities investments.
Xcels results of operations have been included in our
consolidated statement of operations since the date of
acquisition. We allocated the purchase price based on estimates
of the fair value of the assets acquired and liabilities assumed
at the date of acquisition. A portion of the purchase price was
placed in an escrow account to cover potential claims under the
purchase agreement that would arise within one year of the
acquisition date. We filed a claim for indemnification from the
former Xcel stockholders with respect to certain breaches of
representation and warranties made by Xcel under the Xcel
purchase agreement relating to Medicaid rebates on
preacquisition sales and certain third-party claims. On
June 13, 2007, we settled an arbitration relating to this
claim. Under the settlement, we received $700,000 from the
escrow fund of $5,000,000 that was set up to provide for
indemnification claims by Valeant. The remaining escrow funds
were released to the former Xcel shareholders and their
representatives.
The components of the purchase price allocation for the Xcel
acquisition are as follows (in thousands):
|
|
|
|
|
Purchase price:
|
|
|
|
|
Cash paid
|
|
$
|
280,000
|
|
Working capital adjustment
|
|
|
7,470
|
|
Transaction costs
|
|
|
5,435
|
|
|
|
|
|
|
|
|
$
|
292,905
|
|
|
|
|
|
|
Allocation:
|
|
|
|
|
Xcel tangible assets acquired
|
|
$
|
8,875
|
|
In-process research and development
|
|
|
126,399
|
|
Intangible product rights
|
|
|
103,500
|
|
Goodwill
|
|
|
54,131
|
|
|
|
|
|
|
|
|
$
|
292,905
|
|
|
|
|
|
|
The allocation of the purchase price includes $103,500,000 of
intangible product rights, which is being amortized over a
period of 10 years, $126,399,000 of IPR&D, which was
expensed in 2005, and goodwill of $56,026,000 which was
capitalized. Since the Xcel transaction was a stock purchase,
neither the IPR&D nor the
85
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
goodwill is deductible for tax purposes. We have allocated the
goodwill to our North American pharmaceutical reporting unit.
We estimated the fair value of the IPR&D based on the use
of a discounted cash flow model (including an estimate of future
sales at an average gross margin of 80%). For each project, the
estimated after-tax cash flows (using a tax rate of 35%) were
probability weighted to take account of the stage of completion
and risks surrounding the successful development and
commercialization. The assumed tax rate is our estimate of the
effective statutory tax rate for an acquisition of similar types
of assets. The cash flows were discounted to a present value
using a discount rate of 18%, which represents our risk adjusted
after tax weighted average cost of capital for each product. We
estimated we would incur future research and development costs
of approximately $50,000,000 to complete the retigabine
IPR&D project.
The following unaudited pro forma financial information presents
the combined results of operations of Valeant and Xcel as if the
acquisition had occurred as of the beginning of the period
presented (in thousands except per share information). The
unaudited pro forma financial information is not intended to
represent or be indicative of our consolidated results of
operations or financial condition that would have been reported
had the acquisition been completed as of the dates presented,
and should not be taken as representative of our future
consolidated results of operations or financial condition.
|
|
|
|
|
|
|
2005
|
|
|
Net revenue
|
|
$
|
835,469
|
|
Loss from continuing operations
|
|
|
(144,335
|
)
|
Net loss
|
|
|
(193,901
|
)
|
Basic and diluted loss per share:
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(1.57
|
)
|
Net loss
|
|
$
|
(2.11
|
)
|
The pro forma data above includes the charge for the write off
of the IPR&D associated with the Xcel in 2005.
With respect to each of the business acquisitions discussed
above, our allocations of the purchase prices are largely
dependent on discounted cash flow analyses of projects and
products of the acquired companies. The major risks and
uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm
the safety and efficacy of the compound based on the data from
clinical trials and obtaining necessary regulatory approvals. In
addition, we cannot provide assurance that the underlying
assumptions used to forecast the cash flows or the timely and
successful completion of such projects will materialize as we
estimated. For these reasons, among others, our actual results
may vary significantly from the estimated results.
|
|
5.
|
Discontinued
Operations
|
In 2007, we made a strategic decision 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.
In the twelve months ended December 31, 2007, the loss from
discontinued operations primarily related to Infergen. The loss
on disposal of discontinued operations in 2007 was primarily
related to a legal judgment with respect to the discontinued
biomedical business. In 2006, loss from discontinued operations
was primarily related to our Infergen operations, offset in part
by the partial release of an environmental reserve for the
discontinued biomedical facility. The cost of goods sold of
discontinued operations in 2007 includes a technology transfer
payment of $5,259,000 made to the future manufacturer of
Infergen.
86
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the twelve months ended December 31, 2005, the loss from
discontinued operations primarily related to the $47,200,000
charge for acquired in-process research and development related
to the Infergen acquisition. We closed this acquisition on
December 30, 2005 and did not recognize any revenue or
operating expenses for Infergen in 2005 other than this charge.
In August 2005, we disposed of a raw materials and manufacturing
facility in Hungary for cash proceeds of $7,000,000. We recorded
a net gain from discontinued operations of $1,725,000 on this
disposal.
Summarized selected financial information for discontinued
operations for the years ended December 31, 2007, 2006, and
2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Infergen:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
32,085
|
|
|
$
|
42,716
|
|
|
$
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
24,897
|
|
|
|
18,838
|
|
|
|
|
|
Selling expenses
|
|
|
25,602
|
|
|
|
20,077
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,693
|
|
|
|
1,315
|
|
|
|
|
|
Research and development costs
|
|
|
6,476
|
|
|
|
4,176
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
47,200
|
|
Amortization expense
|
|
|
4,950
|
|
|
|
6,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
63,618
|
|
|
|
51,006
|
|
|
|
47,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, Infergen
|
|
|
(31,533
|
)
|
|
|
(8,290
|
)
|
|
|
(47,200
|
)
|
Other discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
|
|
|
|
5,089
|
|
|
|
(3,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(31,533
|
)
|
|
|
(3,201
|
)
|
|
|
(51,089
|
)
|
Benefit for income taxes
|
|
|
(2
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(31,531
|
)
|
|
|
(3,156
|
)
|
|
|
(51,089
|
)
|
Disposal of discontinued operations, net
|
|
|
(709
|
)
|
|
|
2,405
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
|
|
$
|
(32,240
|
)
|
|
$
|
(751
|
)
|
|
$
|
(49,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities of discontinued operations are stated
separately as of December 31, 2007 and December 31,
2006 on the accompanying consolidated balance sheet. All of the
assets of discontinued operations as of December 31, 2007
relate to the Infergen business. We have allocated $4,816,000 of
goodwill to discontinued operations based on the relative fair
value of Infergen in comparison with the North America segment.
The major assets and liabilities categories of discontinued
operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash
|
|
$
|
|
|
|
$
|
203
|
|
Accounts receivable, net
|
|
|
|
|
|
|
21
|
|
Inventories, net
|
|
|
1,051
|
|
|
|
11,932
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
2
|
|
Property, plant and equipment, net
|
|
|
132
|
|
|
|
158
|
|
Goodwill
|
|
|
4,816
|
|
|
|
4,816
|
|
Intangible assets, net
|
|
|
54,450
|
|
|
|
59,400
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
60,449
|
|
|
$
|
76,532
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accrued liabilities
|
|
|
1,897
|
|
|
|
12,686
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
1,897
|
|
|
$
|
12,686
|
|
|
|
|
|
|
|
|
|
|
The assets held for sale and assets of discontinued operations
as of December 31, 2006 had a total value of $125,047,000,
which included the assets of discontinued operations of
$76,532,000 detailed above and other assets held for sale, which
primarily consisted of our former research and headquarters
building in Costa Mesa, California and our manufacturing
facilities in Basel, Switzerland and Puerto Rico.
Environmental contamination had previously been identified in
the soil under a facility which housed operations of the
discontinued biomedicals segment and is currently vacant.
Remediation of the site involved excavation and disposal of the
waste at appropriately licensed sites. Environmental reserves
have been provided for remediation and related costs.
Remediation costs have been applied against these environmental
reserves as they have been incurred. As assessments and
remediation have progressed, these liabilities have been
reviewed and adjusted to reflect additional information. The
environmental reserves were reduced in the third quarter of 2006
by $5,648,000 based upon contractual agreements for remediation
work which totaled less than the amounts previously accrued for
projects. We have substantially completed this environmental
remediation work. In December 2007, we received formal license
termination from the State of California following its
inspection of the site. Total environmental reserves for this
site were $1,897,000 and $12,660,000 as of December 31,
2007 and December 31, 2006, respectively, and are included
in the current liabilities of discontinued operations. Although
we believe that the reserves are adequate, there can be no
assurance that the amount of expenditures and other expenses,
which will be required relating to environmental remediation
actions and compliance with applicable environmental laws will
not exceed the amounts reflected in reserves or will not have a
material adverse effect on our consolidated financial condition,
results of operations or cash flows. Any possible loss that may
be incurred in excess of amounts provided for as of
December 31, 2007 cannot be reasonably estimated.
88
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of income (loss) from continuing operations
before income taxes and minority interest for each of the years
ended December 31, 2007, 2006 and 2005 consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Domestic
|
|
$
|
(66,032
|
)
|
|
$
|
(79,426
|
)
|
|
$
|
(196,686
|
)
|
Foreign
|
|
|
117,321
|
|
|
|
57,436
|
|
|
|
112,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,289
|
|
|
$
|
(21,990
|
)
|
|
$
|
(83,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision for each of the years ended
December 31, 2007, 2006 and 2005 consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(18,112
|
)
|
|
$
|
1,379
|
|
|
$
|
28,760
|
|
Effect of foreign earnings repatriation
|
|
|
|
|
|
|
|
|
|
|
4,526
|
|
State
|
|
|
397
|
|
|
|
1,589
|
|
|
|
1,377
|
|
Foreign
|
|
|
36,521
|
|
|
|
36,999
|
|
|
|
40,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,806
|
|
|
|
39,967
|
|
|
|
74,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
168
|
|
|
|
254
|
|
|
|
257
|
|
State
|
|
|
27
|
|
|
|
42
|
|
|
|
|
|
Foreign
|
|
|
6,232
|
|
|
|
(5,439
|
)
|
|
|
(20,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,427
|
|
|
|
(5,143
|
)
|
|
|
(19,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,233
|
|
|
$
|
34,824
|
|
|
$
|
55,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rate from continuing operations differs from
the applicable United States statutory federal income tax rate
due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Foreign source income taxed at other effective rates
|
|
|
(12
|
)%
|
|
|
(69
|
)%
|
|
|
5
|
%
|
Change in valuation allowance
|
|
|
60
|
%
|
|
|
(65
|
)%
|
|
|
(35
|
)%
|
Net operating loss & examination adjustments
|
|
|
(31
|
)%
|
|
|
(47
|
)%
|
|
|
(31
|
)%
|
State tax and other, net
|
|
|
(3
|
)%
|
|
|
(12
|
)%
|
|
|
(6
|
)%
|
Effect of IPR&D, not deductible for tax
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
(34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
49
|
%
|
|
|
(158
|
)%
|
|
|
(66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rates for the years ended December 31,
2007, 2006 and 2005 were significantly affected by recording
valuation allowances to recognize the uncertainty of realizing
the benefits of net operating losses and credits. The valuation
allowances were recorded because there is insufficient objective
evidence at this time to recognize those assets for financial
reporting purposes. Ultimate realization of the benefit of these
tax benefits is dependent upon generating sufficient taxable
income in the United States and other locations prior to their
expiration.
89
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2007 a valuation allowance of $151,715,000
had been recorded to offset U.S. deferred tax assets. The
U.S. valuation allowance was increased by $53,106,000
during 2007, offset by reclassifications of uncertain tax
positions of $60,095,000. Additionally, valuation allowances of
$7,995,000 for foreign deferred tax assets had been recorded as
of December 31, 2007.
In 2007 and 2006, the effective tax rate was also affected by
pre-tax losses resulting from restructuring, and asset
impairment charges in Asia and Puerto Rico of $15,430,000 and
$37,223,000 respectively, for which no tax benefit was recorded.
During 2005, the Internal Revenue Service completed an
examination of our tax returns for the years 1997 through 2001
and proposed adjustments to the tax liabilities for those years
plus associated interest and penalties. Although a formal
protest was filed in response to the proposed adjustments, in
2005 we recorded a related tax provision of $27,368,000. The
provision consisted of $62,317,000 for the estimated additional
taxes, interest and penalties associated with the period 1997 to
2001 which was reduced by utilization of $34,949,000 of net
operating losses and other carryforwards. While substantial net
operating loss and other carryforwards were available to offset
our U.S. tax liabilities, the additional tax provision
resulted from annual utilization limitations on those
carryforwards that would result if the Internal Revenue Service
adjustments were upheld.
During 2007, the IRS examination of the U.S. income tax
returns for the years ended December 31, 1997 through 2001
was resolved. As a result, the 2007 provision for income taxes
was reduced by $21,521,000, primarily related to resolution of a
gain recognition issue which arose for the year ended
December 31, 1999. In addition to the reduction in the
provision for income taxes, the following accounts were
affected: income taxes payable increased $6,314,000, income tax
liability for uncertain tax positions decreased $73,814,000,
deferred income taxes decreased $28,229,000, and the valuation
allowance on deferred tax assets increased $17,749,000.
In 2005, the effective tax rate was also affected by pre-tax
losses resulting from restructuring, asset impairment and work
force reduction charges of $11,868,000 for which a minimal tax
benefit of $1,087,000 (9%) was recorded. This minimal tax
benefit reflects uncertainty of the realization of tax benefits
in some of the jurisdictions in which these charges were
incurred. Additionally, in 2005, we reversed valuation
allowances of $10,527,000 on net operating losses for certain
foreign operations and recorded a corresponding tax benefit due
to the existence of additional evidence supporting the
probability of realizing the benefit of these net operating
losses. We also recorded net tax benefits associated with
resolution of foreign examinations and tax law changes of
$3,391,000.
Additionally, our tax rate was impacted in 2005 by IPR&D
expenses associated with acquisitions which were structured as
stock purchase transactions. IPR&D costs resulting from
acquisitions structured as stock purchases are not deductible
for U.S. tax purposes.
In 2005 and 2007 gains were realized by certain of our
subsidiaries related to intercompany transfers of intangible
property rights. These gains were recorded in the books of the
subsidiaries and are subject to tax in the subsidiaries
jurisdictions, but they were eliminated in consolidation for
financial reporting purposes. The purchasing subsidiaries have
recorded corresponding tax basis increases, which in most cases
can be amortized and deducted for tax purposes. In 2005 and
2007, tax liabilities of $16,127,000 and $2,116,000 created by
these transactions were recorded. However, because these are
intercompany transactions, the associated expense was deferred
and recorded as prepaid tax. The 2005 amount has been partially
offset by carrying back $7,690,000 of net operating losses.
Amortization of the prepaid tax balances of $538,000, $235,000
and $574,000 was recorded as tax expense during 2005, 2006 and
2007, respectively.
In years prior to 2005, no U.S. income or foreign
withholding taxes were provided on the undistributed earnings of
our foreign subsidiaries with the exception of Subpart F income,
since management intended to reinvest those undistributed
earnings in the foreign operations. However, during 2005,
legislation provided for a special one-time tax deduction of
85 percent of certain foreign earnings that were
repatriated to the United States (The American Jobs Creation Act
of 2004). To take advantage of this opportunity during 2005, we
repatriated $205,000,000 of earnings from certain foreign
subsidiaries. Income tax expense of $4,526,000 associated with
90
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
such repatriation was recorded in 2005, and an additional cost
of $5,337,000 was been recorded as a reduction of the
U.S. net operating losses (net of valuation allowance this
has no current effect on tax expense).
During 2006, we reinstated our intention to reinvest
undistributed earnings in the foreign operations. No
U.S. income or foreign withholding taxes were provided on
the 2006 or 2007 undistributed earnings. Included in the
consolidated accumulated deficit at December 31, 2007 is
approximately $435,549,000 of accumulated earnings of foreign
operations that would be subject to United States income or
foreign withholdings taxes, if and when repatriated. Management,
however, does not intend to repatriate these amounts. We intend
to reinvest the remaining undistributed earnings in foreign
operations for an indefinite period of time.
The primary components of our net deferred tax asset at
December 31, 2007 and 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL and capital loss carryforwards
|
|
$
|
115,632
|
|
|
$
|
90,460
|
|
Inventory and other reserves
|
|
|
35,102
|
|
|
|
29,454
|
|
Tax credit carryforwards
|
|
|
24,240
|
|
|
|
13,007
|
|
Intangibles
|
|
|
31,826
|
|
|
|
30,873
|
|
Prepaid tax on intercompany transaction
|
|
|
9,202
|
|
|
|
7,663
|
|
Other
|
|
|
20,093
|
|
|
|
21,026
|
|
Valuation allowance
|
|
|
(159,710
|
)
|
|
|
(161,713
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
76,385
|
|
|
|
30,770
|
|
|
|
|
|
|
|
|
|
|
Fixed assets and other
|
|
|
(3,789
|
)
|
|
|
(2,576
|
)
|
Intangibles
|
|
|
(2,416
|
)
|
|
|
(6,927
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
(6,205
|
)
|
|
|
(9,503
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liability) asset
|
|
$
|
70,180
|
|
|
$
|
21,267
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recorded in the
following captions in the consolidated balance sheets as of
December 31, 2007 and 2006, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Current deferred tax assets, net
|
|
$
|
11,819
|
|
|
$
|
8,550
|
|
Deferred tax asset, net
|
|
|
65,950
|
|
|
|
21,218
|
|
Income taxes
|
|
|
2,252
|
|
|
|
4,796
|
|
Deferred tax liabilities, net
|
|
|
5,337
|
|
|
|
3,705
|
|
In 2007 and 2006 the valuation allowance primarily relates to
U.S. and foreign net operating losses.
At December 31, 2007, we had U.S. federal, state and
foreign net operating losses of approximately $271,383,000,
$180,300,000 and $7,640,000, respectively. In 2008, $19,289,000
of our U.S. federal net operating losses will expire. The
remainder will begin to expire in 2019. The state net operating
losses will begin to expire in 2014 and the foreign net
operating losses will begin to expire in 2009. We also had a
state capital loss of $48,640,000 that will begin to expire in
2008. We also had U.S. federal and state credits of
$22,846,000 and $1,393,000 that will begin to expire in 2015.
Tax benefits associated with certain hedging activities, the
exercise of employee stock options and with the convertible note
hedge (see note 10) were not recognized during 2007 and
2006 due to the application of FAS 123(R)
91
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and the valuation allowance. As of December 31, 2007
approximately $4,009,000 of the valuation allowance related to
hedges, $10,166,000 of the valuation allowance related to the
tax benefits of stock option deductions and $12,085,000 related
to the tax benefits of the convertible note hedge. These amounts
are included in our net operating losses for tax reporting
purposes. At such time as the valuation allowance is released,
the tax benefit associated with these amounts will be credited
to additional paid in capital. Additionally, approximately
$16,800,000 of deferred tax assets was included in our
acquisition of Xcel with a valuation allowance. Future releases
of the valuation allowance related to these assets will be
accounted for as a reduction of goodwill rather than a reduction
of income tax expense if the valuation allowance decrease occurs
prior to the effective date of SFAS No. 141 (revised
2007), Business Combinations, or
SFAS No. 141(R). Effective January 1, 2009,
SFAS 141(R) provides that any reduction to the valuation
allowance established in purchase accounting is to be accounted
for as a reduction to income tax expense.
We adopted the provision of Financial Standards Accounting Board
Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (FIN 48) an interpretation of FASB
Statement No. 109 on January 1, 2007. A reconciliation
of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Deferred Federal,
|
|
|
Income Tax
|
|
|
|
Federal,
|
|
|
Accrued
|
|
|
Unrecognized
|
|
|
State and Foreign
|
|
|
Benefits, Net of
|
|
|
|
State and
|
|
|
Interest and
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
Deferred Federal and
|
|
|
|
Foreign Tax
|
|
|
Penalties
|
|
|
Benefits
|
|
|
Benefits
|
|
|
State Benefits
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
122,697
|
|
|
$
|
18,529
|
|
|
$
|
141,226
|
|
|
$
|
19,800
|
|
|
$
|
121,426
|
|
Additions for tax positions related to the current year
|
|
|
1,214
|
|
|
|
88
|
|
|
|
1,302
|
|
|
|
840
|
|
|
|
462
|
|
Additions for tax positions related to prior years
|
|
|
8,337
|
|
|
|
2,449
|
|
|
|
10,786
|
|
|
|
(8,909
|
)
|
|
|
19,695
|
|
Settlements
|
|
|
(10,754
|
)
|
|
|
(10,767
|
)
|
|
|
(21,521
|
)
|
|
|
45,979
|
|
|
|
(67,500
|
)
|
Lapse of statute of limitations
|
|
|
(235
|
)
|
|
|
|
|
|
|
(235
|
)
|
|
|
|
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
121,259
|
|
|
|
10,299
|
|
|
|
131,558
|
|
|
|
57,710
|
|
|
|
73,848
|
|
Less: tax attributable to timing items included above
|
|
|
(115,132
|
)
|
|
|
(887
|
)
|
|
|
(116,019
|
)
|
|
|
(57,710
|
)
|
|
|
(58,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total UTBs that, if recognized, would impact the effective
income tax rate as of December 31, 2007
|
|
$
|
6,127
|
|
|
$
|
9,412
|
|
|
$
|
15,539
|
|
|
$
|
|
|
|
$
|
15,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, based on discussions with the IRS
related to its exam of tax years 2003 and 2004, we believed it
was reasonably possible that certain amounts would be reversed
within the next twelve months. However, based on subsequent
discussions, we no longer believe these amounts will reverse in
the next twelve months, except for approximately $616,000 of
federal, state and foreign uncertain tax benefits.
We recognize interest and penalties related to uncertain tax
positions in income tax expense. As of January 1, 2007 and
December 31, 2007, we had approximately $18,529,000 and
$9,412,000 of accrued interest and penalties related to
uncertain tax positions, respectively.
For the U.S., all years prior to 1997 are closed under the
statute of limitations. Years subsequent to 1996 are open, with
2002 to 2004 in appeals, and 2005 and 2006 under examination.
Our significant foreign subsidiaries are open to tax
examinations for years ending in 2001 and later.
92
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and dilutive earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
26,054
|
|
|
$
|
(56,817
|
)
|
|
$
|
(139,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(32,240
|
)
|
|
$
|
(751
|
)
|
|
$
|
(49,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding
|
|
|
92,841
|
|
|
|
93,251
|
|
|
|
91,696
|
|
Vested stock equivalents (not issued)
|
|
|
188
|
|
|
|
136
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
93,029
|
|
|
|
93,387
|
|
|
|
91,797
|
|
Denominator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
894
|
|
|
|
|
|
|
|
|
|
Other dilutive securities
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for dilutive earnings per share
|
|
|
93,976
|
|
|
|
93,387
|
|
|
|
91,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
Loss from discontinued operations
|
|
|
(0.35
|
)
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.61
|
)
|
|
$
|
(1.52
|
)
|
Loss from discontinued operations
|
|
|
(0.35
|
)
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $240,000,000 3.0% Convertible Subordinated Notes due
2010 and the $240,000,000 4.0% Convertible Subordinated
Notes due 2013, discussed in Note 10, allow us to settle
any conversion by remitting to the note holder the principal
amount of the note in cash, while settling the conversion spread
(the excess conversion value over the accreted value) in shares
of our common stock. The accounting for convertible debt with
such settlement features is addressed in EITF Issue
No. 90-19,
Convertible Bonds with Issuer Option to Settle for Cash
upon Conversion. It is our intent to settle the
notes conversion obligations consistent with Instrument C
of
EITF 90-19.
Only the conversion spread, which will be settled in stock,
results in potential dilution in our
earnings-per-share
computations as the accreted value of the notes will be settled
for cash upon the conversion. The calculation of diluted
earnings per share was not affected by the conversion spread in
the years ended December 31, 2007, 2006, and 2005.
For the years ended December 31, 2006 and 2005, options to
purchase 1,863,000 and 2,908,000 weighted-average shares of
common stock, respectively, were not included in the computation
of earnings per share because we incurred a loss from continuing
operations and the effect would have been anti-dilutive.
For the years ended December 31, 2007, 2006 and 2005,
options to purchase 8,990,000, 9,118,000 and 4,441,000
weighted-average shares of common stock, respectively, were also
not included in the computation of
93
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings per share because the options exercise prices were
greater than the average market price of our common stock and,
therefore, the effect would have been anti-dilutive.
|
|
8.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
162,591
|
|
|
$
|
180,466
|
|
Royalties receivable
|
|
|
18,620
|
|
|
|
22,212
|
|
Other receivables
|
|
|
23,513
|
|
|
|
31,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,724
|
|
|
|
234,165
|
|
Allowance for doubtful accounts
|
|
|
(12,928
|
)
|
|
|
(7,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
191,796
|
|
|
$
|
227,151
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
30,935
|
|
|
$
|
37,045
|
|
Work-in-process
|
|
|
13,707
|
|
|
|
21,477
|
|
Finished goods
|
|
|
89,363
|
|
|
|
86,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,005
|
|
|
|
145,044
|
|
Allowance for inventory obsolescence
|
|
|
(18,828
|
)
|
|
|
(14,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,177
|
|
|
$
|
130,747
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,778
|
|
|
$
|
1,593
|
|
Buildings
|
|
|
59,029
|
|
|
|
45,545
|
|
Machinery and equipment
|
|
|
104,275
|
|
|
|
98,935
|
|
Furniture and fixtures
|
|
|
27,898
|
|
|
|
20,842
|
|
Leasehold improvements
|
|
|
8,060
|
|
|
|
6,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,040
|
|
|
|
173,117
|
|
Accumulated depreciation and amortization
|
|
|
(98,796
|
)
|
|
|
(89,476
|
)
|
Construction in progress
|
|
|
14,132
|
|
|
|
10,480
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,376
|
|
|
$
|
94,121
|
|
|
|
|
|
|
|
|
|
|
94
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
|
Payroll and related items
|
|
$
|
31,302
|
|
|
$
|
37,092
|
|
Accrued returns, rebates and allowances
|
|
|
54,846
|
|
|
|
51,324
|
|
Legal and professional fees
|
|
|
9,417
|
|
|
|
7,584
|
|
Accrued research and development costs
|
|
|
18,586
|
|
|
|
10,490
|
|
Environmental accrual
|
|
|
1,354
|
|
|
|
1,638
|
|
Interest
|
|
|
4,860
|
|
|
|
4,860
|
|
Accrued royalties payable
|
|
|
2,446
|
|
|
|
4,409
|
|
Other
|
|
|
16,943
|
|
|
|
29,308
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
139,754
|
|
|
$
|
146,705
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, construction in progress primarily
includes costs incurred in plant expansion projects and costs
associated with the installation of an enterprise resource
planning information system. At December 31, 2006,
construction in progress primarily includes costs incurred in
plant expansion projects.
|
|
9.
|
Intangible
Assets and Goodwill
|
The components of intangible assets at December 31, 2007
and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
13
|
|
|
$
|
306,398
|
|
|
$
|
(128,267
|
)
|
|
$
|
178,131
|
|
|
$
|
291,388
|
|
|
$
|
(99,090
|
)
|
|
$
|
192,298
|
|
Infectious diseases
|
|
|
11
|
|
|
|
21,992
|
|
|
|
(14,054
|
)
|
|
|
7,938
|
|
|
|
20,500
|
|
|
|
(11,771
|
)
|
|
|
8,729
|
|
Dermatology
|
|
|
19
|
|
|
|
111,934
|
|
|
|
(54,178
|
)
|
|
|
57,756
|
|
|
|
87,105
|
|
|
|
(44,029
|
)
|
|
|
43,076
|
|
Other products
|
|
|
11
|
|
|
|
343,831
|
|
|
|
(192,253
|
)
|
|
|
151,578
|
|
|
|
310,633
|
|
|
|
(157,331
|
)
|
|
|
153,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
784,155
|
|
|
|
(388,752
|
)
|
|
|
395,403
|
|
|
|
709,626
|
|
|
|
(312,221
|
)
|
|
|
397,405
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(61,204
|
)
|
|
|
6,172
|
|
|
|
67,376
|
|
|
|
(49,866
|
)
|
|
|
17,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
851,531
|
|
|
$
|
(449,956
|
)
|
|
$
|
401,575
|
|
|
$
|
777,002
|
|
|
$
|
(362,087
|
)
|
|
$
|
414,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future amortization of intangible assets at December 31,
2007 is scheduled as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
29,438
|
|
|
$
|
29,438
|
|
|
$
|
29,269
|
|
|
$
|
22,699
|
|
|
$
|
21,065
|
|
|
$
|
46,223
|
|
Infectious diseases
|
|
|
1,331
|
|
|
|
1,326
|
|
|
|
780
|
|
|
|
780
|
|
|
|
780
|
|
|
|
2,941
|
|
Dermatology
|
|
|
10,296
|
|
|
|
10,198
|
|
|
|
9,861
|
|
|
|
9,671
|
|
|
|
4,637
|
|
|
|
13,093
|
|
Other products
|
|
|
19,077
|
|
|
|
18,340
|
|
|
|
18,276
|
|
|
|
17,743
|
|
|
|
17,555
|
|
|
|
60,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
60,142
|
|
|
|
59,302
|
|
|
|
58,186
|
|
|
|
50,893
|
|
|
|
44,037
|
|
|
|
122,843
|
|
License agreement
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,314
|
|
|
$
|
59,302
|
|
|
$
|
58,186
|
|
|
$
|
50,893
|
|
|
$
|
44,037
|
|
|
$
|
122,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill balances relate primarily to the Xcel acquisition and
totaled $80,346,000 and $75,346,000 at December 31, 2007
and 2006, respectively. In 2007, we made a $5,000,000 contingent
milestone payment to InterMune related to Infergen which we
recorded as goodwill. We subsequently reclassified $4,816,000 of
goodwill to discontinued operations based on the relative fair
value of Infergen in comparison with the North America segment.
|
|
10.
|
Debt and
lease obligations
|
As of December 31, 2007 and 2006, long-term debt consists
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
3% Convertible Subordinated Notes due 2010
|
|
$
|
240,000
|
|
|
$
|
240,000
|
|
4% Convertible Subordinated Notes due 2013
|
|
|
240,000
|
|
|
|
240,000
|
|
7% Senior Notes due 2011
|
|
|
300,716
|
|
|
|
295,682
|
|
Mortgages in Swiss francs with an interest rate of LIBOR + 1.5%;
interest and principal payable semi-annually through 2030
|
|
|
|
|
|
|
7,177
|
|
Other
|
|
|
3,310
|
|
|
|
3,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784,026
|
|
|
|
786,778
|
|
Less: current portion
|
|
|
(1,474
|
)
|
|
|
(8,582
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
782,552
|
|
|
$
|
778,196
|
|
|
|
|
|
|
|
|
|
|
In December 2003, we issued $300,000,000 aggregate principal
amount of 7.0% Senior Notes due 2011 (the
7.0% Senior Notes). Interest on the
7% Senior Notes is payable semi-annually on June 15 and
December 15 of each year. We may, at our option, redeem some or
all of the 7.0% Senior Notes at any time on or after
December 15, 2007, at a redemption price of 103.50%,
101.75% and 100.00% of the principal amount during the
twelve-month period beginning December 15, 2007, 2008 and
2009 and thereafter, respectively. The 7.0% Senior Notes
are senior unsecured obligations. They rank senior in right of
payment to any of our existing and future subordinated
indebtedness. The indenture governing the 7.0% Senior Notes
includes certain covenants which restricts the incurrence of
additional indebtedness, the payment of dividends and other
restricted payments, the creation of certain liens, the sale of
assets or the ability to consolidate or merge with another
entity, subject to qualifications and exceptions. In January
2004, we entered into an interest rate swap agreement with
respect to $150,000,000 in principal amount of the Senior Notes.
See Note 13 for a description of the interest rate swap
arrangement.
In November 2003, we issued $240,000,000 aggregate principal
amount of 3.0% Convertible Subordinated Notes due 2010 (the
3.0% Notes) and $240,000,000 aggregate
principal amount of 4.0% Convertible Subordinated Notes due
2013 (the 4.0% Notes), which were issued as two
series of notes under a single indenture. Interest on the
3.0% Notes is payable semi-annually on February 16 and
August 16 of each year. Interest on the 4.0% Notes is
payable semi-annually on May 15 and November 15 of each year. We
have the right to redeem the 4.0% Notes, in whole or in
part, at their principal amount on or after May 20, 2011.
The 3.0% Notes and 4.0% Notes are convertible into our
common stock at a conversion rate of 31.6336 shares per
each $1,000 principal amount of notes, subject to adjustment.
Upon conversion, we will have the right to satisfy the
conversion obligations by delivery, at our option in shares of
our common stock, in cash or in a combination thereof. It is our
intent to settle the principal amount of the 3.0% Notes and
4.0% Notes in cash. The 3.0% Notes and 4.0% Notes
are subordinated unsecured obligations, ranking in right of
payment behind our senior debt, including the 7.0% Senior
Notes.
In connection with the offering of the 3.0% Notes and the
4.0% Notes, we entered into convertible note hedge and
written call option transactions with respect to our common
stock (the Convertible Note Hedge). The Convertible
Note Hedge consisted of purchasing a call option on
12,653,440 shares of our common stock at a strike price of
$31.61 and selling a written call option on the identical number
of shares at $39.52. The number of shares covered by the
Convertible Note Hedge is the same number of shares underlying
the conversion of $200,000,000
96
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
principal amount of the 3.0% Notes and $200,000,000
principal amount of the 4.0% Notes. The Convertible Note
Hedge is expected to reduce the potential dilution from
conversion of the notes. The written call option sold offset, to
some extent, the cost of the written call option purchased. The
net cost of the Convertible Note Hedge of $42,880,000 was
recorded as the sale of a permanent equity instrument pursuant
to guidance in
EITF 00-19.
Subsequently, as a result of the cessation of Valeants
common dividend, the strike price on the Convertible Note Hedge
was adjusted during 2007, with the new strike prices becoming
$34.61 and $35.36 for the 3.0% Notes and the
4.0% Notes, respectively.
The total number of shares applicable to the Convertible Note
Hedge remains the same at 12,653,440, with 6,326,720 shares
still allocated to each set of purchased call options in
connection with the 3.0% and the 4.0% Notes, respectively.
Aggregate annual maturities of long-term debt are as follows (in
thousands):
|
|
|
|
|
2008
|
|
|
1,474
|
|
2009
|
|
|
1,301
|
|
2010
|
|
|
240,466
|
|
2011
|
|
|
300,785
|
|
2012
|
|
|
|
|
Thereafter
|
|
|
240,000
|
|
|
|
|
|
|
Total
|
|
$
|
784,026
|
|
|
|
|
|
|
The estimated fair value of our public debt, based on quoted
market prices or on current interest rates for similar
obligations with like maturities, was approximately $714,766,000
and $735,637,000 compared to its carrying value of $780,716,000
and $775,682,000 at December 31, 2007 and 2006,
respectively.
We maintain no lines of credit in the U.S. and have a
short-term line of credit of $700,000 in the aggregate outside
the U.S., under which $181,000 was outstanding at
December 31, 2007. The line of credit provides for
short-term borrowings and bears interest at a variable rate
based upon LIBOR or an equivalent index.
We lease certain administrative and laboratory facilities under
non-cancelable operating lease agreements that expire through
2017. Additionally, we lease certain automobiles and computer
software under lease agreements that qualify as capital leases.
The following table summarizes our lease commitments at
December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2008
|
|
$
|
7,548
|
|
|
$
|
1,616
|
|
2009
|
|
|
7,561
|
|
|
|
1,327
|
|
2010
|
|
|
7,185
|
|
|
|
488
|
|
2011
|
|
|
6,068
|
|
|
|
96
|
|
2012
|
|
|
5,413
|
|
|
|
|
|
Thereafter
|
|
|
20,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,231
|
|
|
$
|
3,527
|
|
|
|
|
|
|
|
|
|
|
Amounts representing interest
|
|
|
|
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
Amounts of lease obligations recorded as debt
|
|
|
|
|
|
$
|
3,310
|
|
|
|
|
|
|
|
|
|
|
97
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Pension
and Postretirement Employee Benefit Plans
|
We operate 401(k) and similar defined contribution retirement
plans for our employees in the United States. Under these plans
employees are allowed to contribute up to 15% of their income
and Valeant matches such contributions with 50% of the amount
contributed up to 3% of salary.
Outside the United States certain groups of our employees are
covered by defined benefit retirement plans. In 2006 the FASB
issued SFAS No. 158 (SFAS 158) which was
effective for Valeant on December 31, 2006 and required
that we recognize the net over-funded or under-funded financial
position of our defined benefit retirement plans in our balance
sheet. The difference between the overall funded status of each
plan and the amounts of assets and liabilities recorded in our
financial statements is charged to accumulated other
comprehensive income and represents pension costs and benefits
that will be recorded in the income statement in future years
under currently effective pension accounting rules.
Certain amounts of our pension accounts have been restated for
the year ended December 31, 2006, including the net pension
benefit obligation, which was $2,169,000 as originally reported
and $2,786,000 as restated and the net pension benefit cost,
which was $2,818,000 as originally reported and $1,575,000 as
restated.
Below is a summary of the activity in our defined benefit
pension plans which have projected pension obligations in excess
of plan assets for the years ended December 31, 2007 and
2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Changes in benefit obligation:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
30,896
|
|
|
$
|
25,269
|
|
Service cost
|
|
|
1,198
|
|
|
|
1,099
|
|
Interest cost
|
|
|
1,561
|
|
|
|
1,310
|
|
Employee contributions
|
|
|
|
|
|
|
10
|
|
Actuarial (gains) losses
|
|
|
(1,229
|
)
|
|
|
1,068
|
|
Total benefits paid
|
|
|
(2,888
|
)
|
|
|
(1,866
|
)
|
Acquisitions
|
|
|
|
|
|
|
1,014
|
|
Currency exchange and other
|
|
|
979
|
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
30,516
|
|
|
$
|
30,896
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
18,314
|
|
|
$
|
15,807
|
|
Actual return on plan assets
|
|
|
136
|
|
|
|
902
|
|
Employer contributions
|
|
|
4,994
|
|
|
|
356
|
|
Employee contributions
|
|
|
27
|
|
|
|
56
|
|
Benefits paid from plan assets
|
|
|
(925
|
)
|
|
|
(820
|
)
|
Currency exchange and other
|
|
|
410
|
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
22,956
|
|
|
$
|
18,314
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations in excess of plan assets
|
|
$
|
7,560
|
|
|
$
|
12,582
|
|
|
|
|
|
|
|
|
|
|
Below is a summary of the activity in our defined benefit
pension plans which have plan assets in excess of projected
pension obligations for the years ended December 31, 2007
and 2006 (amounts in thousands). Included below are the assets
and obligations of the plan covering our current and former
employees in Switzerland.
98
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Changes in benefit obligation:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
52,466
|
|
|
$
|
56,743
|
|
Service cost
|
|
|
1,377
|
|
|
|
1,836
|
|
Interest cost
|
|
|
1,669
|
|
|
|
1,865
|
|
Employee contributions
|
|
|
824
|
|
|
|
900
|
|
Actuarial (gains) losses
|
|
|
(1,633
|
)
|
|
|
(1,281
|
)
|
Total benefits paid
|
|
|
(4,394
|
)
|
|
|
(3,267
|
)
|
Plan settlements and curtailments
|
|
|
(43,984
|
)
|
|
|
(8,203
|
)
|
Currency exchange and other
|
|
|
1,835
|
|
|
|
3,871
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
8,161
|
|
|
$
|
52,466
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
62,262
|
|
|
$
|
60,653
|
|
Actual return on plan assets
|
|
|
2,678
|
|
|
|
4,920
|
|
Employer contributions
|
|
|
1,094
|
|
|
|
1,600
|
|
Employee contributions
|
|
|
824
|
|
|
|
900
|
|
Benefits paid from plan assets
|
|
|
(4,394
|
)
|
|
|
(3,267
|
)
|
Plan settlements and curtailments
|
|
|
(54,238
|
)
|
|
|
(6,886
|
)
|
Currency exchange and other
|
|
|
2,154
|
|
|
|
4,341
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
10,381
|
|
|
$
|
62,262
|
|
|
|
|
|
|
|
|
|
|
Plan assets in excess of projected benefit obligations
|
|
$
|
2,219
|
|
|
$
|
9,796
|
|
|
|
|
|
|
|
|
|
|
The funded status of the defined benefit pension plans at
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Surplus on plans with assets in excess of obligations
|
|
|
2,219
|
|
|
|
9,796
|
|
Deficit on plans with obligations in excess of assets
|
|
|
(7,560
|
)
|
|
|
(12,582
|
)
|
|
|
|
|
|
|
|
|
|
Net surplus/(deficit)
|
|
$
|
(5,340
|
)
|
|
$
|
(2,786
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 the accumulated benefit obligations of
our defined benefit pension plans totaled $34,734,000 of which
$26,678,000 relates to plans with total assets are less than the
total pension obligations and $8,056,000 relates to plans with
assets in excess of pension obligations.
99
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pension expense related to these plans in 2007 and 2006 was
composed of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Service cost
|
|
$
|
2,575
|
|
|
$
|
3,022
|
|
Interest cost
|
|
|
3,230
|
|
|
|
3,204
|
|
Expected return on plan assets
|
|
|
(3,809
|
)
|
|
|
(3,698
|
)
|
Amortization of past service cost
|
|
|
18
|
|
|
|
12
|
|
Amortization of net transition obligation
|
|
|
24
|
|
|
|
24
|
|
Recognized actuarial net loss
|
|
|
29
|
|
|
|
332
|
|
Net settlement and curtailment costs
|
|
|
1,164
|
|
|
|
(1,320
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,231
|
|
|
$
|
1,575
|
|
|
|
|
|
|
|
|
|
|
The weighted average actuarial assumptions related to the
determination of pension liabilities and expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Expected return on plan assets
|
|
|
5.96
|
%
|
|
|
4.61
|
%
|
Discount rate for determining pension benefit obligations
|
|
|
5.75
|
%
|
|
|
4.04
|
%
|
Salary increase rate
|
|
|
2.56
|
%
|
|
|
1.83
|
%
|
Amounts recorded in our consolidated balance sheet as
December 31, 2007 and 2006 that are related to defined
benefit pension plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Current liabilities
|
|
$
|
(89
|
)
|
|
$
|
(89
|
)
|
Non-current liabilities
|
|
|
(7,479
|
)
|
|
|
(12,758
|
)
|
Other assets
|
|
|
2,224
|
|
|
|
9,797
|
|
Accumulated other comprehensive income
|
|
|
4,817
|
|
|
|
(1,021
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized in income
|
|
$
|
(527
|
)
|
|
$
|
(4,071
|
)
|
|
|
|
|
|
|
|
|
|
The amounts of pension costs included in accumulated other
comprehensive income at December 31, 2007 and 2006 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Unrecognized net actuarial (gains)/losses
|
|
$
|
4,443
|
|
|
$
|
(1,424
|
)
|
Unrecognized prior service cost
|
|
|
313
|
|
|
|
336
|
|
Unrecognized net transition obligation
|
|
|
60
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,817
|
|
|
$
|
(1,021
|
)
|
|
|
|
|
|
|
|
|
|
100
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts recognized in accumulated other comprehensive income
during 2007 are as follows:
|
|
|
|
|
Balance as at December 31, 2006
|
|
$
|
(1,021
|
)
|
Actuarial loss/(gain)
|
|
|
(3,285
|
)
|
Settlement loss/(gain)
|
|
|
10,254
|
|
Portion of net loss/(gain) recognized due to settlement
|
|
|
(1,164
|
)
|
Exchange rate and other
|
|
|
33
|
|
|
|
|
|
|
Balance as at December 31, 2007
|
|
$
|
4,817
|
|
|
|
|
|
|
The amounts of pension costs included in accumulated other
comprehensive income in which are expected to be recorded in
income in 2008 are as follows (amounts in thousands):
|
|
|
|
|
Unrecognized net actuarial gains
|
|
$
|
444
|
|
Unrecognized prior service cost
|
|
|
31
|
|
Unrecognized net transition obligation
|
|
|
6
|
|
|
|
|
|
|
Total
|
|
$
|
482
|
|
|
|
|
|
|
The amounts of employers contributions which are expected
to be recorded in 2008 are as follows:
|
|
|
|
|
Estimated employers contributions in 2008
|
|
$
|
779
|
|
|
|
|
|
|
|
|
12.
|
Supplemental
Cash Flow Disclosures
|
The following table sets forth the amounts of interest and
income taxes paid during 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest paid
|
|
$
|
37,800
|
|
|
$
|
38,054
|
|
|
$
|
38,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
58,768
|
|
|
$
|
42,052
|
|
|
$
|
63,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Derivatives
and Hedging Activities
|
We use derivative financial instruments to hedge foreign
currency and interest rate exposures. We do not speculate in
derivative instruments in order to profit from foreign currency
exchange or interest rate fluctuations; nor do we enter into
trades for which there is no underlying exposure.
Interest Rate Swap Agreement: In January 2004,
we entered into an interest rate swap agreement with respect to
the $150,000,000 principal amount of the 7.0% Senior Notes
due 2011 (the Interest Rate Swap), with the
objective of initially lowering our effective interest rate by
exchanging fixed rate payments for floating rate payments. The
agreement provides that we will exchange our 7.0% fixed-rate
payment obligation for variable-rate payments of six-month LIBOR
plus 2.409% (7.01% as of December 31, 2007). The Interest
Rate Swap is designated as a fair value hedge and is deemed
perfectly effective. The counterparty to the swap may, at its
option, terminate the swap, in whole or in part, on or after
December 15, 2007, at a premium of 3.50%, 1.75% and 0.00%
of the notional amount during the twelve-month period beginning
December 15, 2007, 2008, and 2009 and thereafter,
respectively. At December 31, 2007, the fair value of the
Interest Rate Swap was an asset of $715,000 and this amount has
been offset against long-term debt as a fair value adjustment.
The underlying portion of the hedged debt is also marked to
market through the profit and loss account. In support of our
obligation under the Interest Rate Swap, we are required to
maintain a minimum level of cash and investment collateral
depending on the fair market value of the Interest Rate Swap. As
of December 31, 2007, $5,050,000 is recorded on the balance
sheet in other assets related to collateral on the Interest Rate
Swap.
101
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign Currency Hedge Transactions: During
2007, we entered into various forward currency contracts to
a) reduce our exposure to forecasted 2008 Euro and Japanese
Yen denominated royalty revenue and b) hedge our net
investment in our Polish and Brazilian subsidiaries and
c) utilize fair value hedges to reduce our exposure to
various currencies as a result of repetitive short-term
intercompany investments and obligations and d) reduce our
Canadian subsidiarys exposure to its investment in
U.S. Dollar denominated securities. In the aggregate, as a
result of all of these activities, an unrealized gain of
$1,206,000 was recorded in the financial statements at
December 31, 2007. A more detailed description of the
accounting treatment of these activities follows:
Beginning in March 2004, we entered into a series of forward
contracts to reduce exposure to variability in the Euro compared
to the U.S. Dollar (the Cash Flow Hedges). The
Cash Flow Hedges cover the Euro and Japanese Yen denominated
royalty payments on forecasted Euro and Japanese Yen royalty
revenue. The Cash Flow Hedges were designated as cash flow
hedges. The Cash Flow Hedges have been consistent with our risk
management policy, which allows for the hedging of risk
associated with fluctuations in foreign currency for anticipated
future transactions. The Cash Flow Hedges have been determined
to be fully effective as a hedge in reducing the risk of the
underlying transactions.
At December 31, 2007, the notional amount of the Euro and
Yen contracts utilized to hedge currency exposure was
$17,788,000 (the Cash Flow Hedges). The Cash Flow
Hedges have been determined to be fully effective in reducing
the risk of currency rate fluctuations with the Euro and the
Yen. We have recorded gains of $323,000 related to the Cash Flow
Hedges in other comprehensive income for the year ended
December 31, 2007.
At December 31, 2007, the notional amount of the Polish
Zloty contracts utilized to hedge currency exposure was
$35,000,000 (The Net Investment Hedges). The Net
Investment Hedges have been determined to be fully effective in
reducing the risk of currency rate fluctuations with the Zloty.
We have recorded total losses of $441,000 related to the Net
Investment Hedges in other comprehensive income for the year
ended December 31, 2007.
At December 31, 2007, the notional amount of various
currency contracts utilized to hedge currency exposure in our
Treasury Center was $72,070,000 (the Treasury Center
Hedges). We have chosen not to seek hedge accounting
treatment for the Treasury Center Hedges as these contracts are
short term (less than 30 days in duration) and offset
matching intercompany exposures in selected Valeant
subsidiaries. We have recorded a total gain of $944,000 related
to the Treasury Center Hedges in earnings for the year ended
December 31, 2007.
At December 31, 2007, the notional amount of the Brazilian
Real contracts utilized to hedge currency exposure in our
Brazilian subsidiary was $6,525,000 (The Brazil
Hedges). We have chosen not to seek hedge accounting
treatment for the Brazil Hedges as any gain or loss on these
contracts offset closely any gain or loss on matching
intercompany exposures in our Brazil subsidiary. We have
recorded total loss of $110,000 related to the Brazil Hedges in
earnings for the year ended December 31, 2007.
102
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2007, the notional amount of the Canadian
Dollar contracts utilized to hedge currency exposure for our
Canadian subsidiary relating to an investment denominated in
U.S. Dollars was $26,000,000 (The Fair Value
Hedge). The Fair Value Hedges have been determined to be
fully effective in reducing the risk of currency rate
fluctuations with the Canadian Dollar. We have recorded a total
gain of $490,000 related to the Fair Value Hedge in earnings for
the year ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and Hedging Activity
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Gain/(Loss)
|
|
|
|
|
|
Gain/(Loss)
|
|
|
|
|
|
|
Amount Held in
|
|
|
|
|
|
Amount Held in
|
|
|
|
Notional
|
|
|
OCI or
|
|
|
Notional
|
|
|
OCI or
|
|
Description
|
|
Amount
|
|
|
Recognized
|
|
|
Amount
|
|
|
Recognized
|
|
|
Undesignated Hedges
|
|
$
|
78,595
|
|
|
$
|
834
|
|
|
$
|
14,605
|
|
|
$
|
(71
|
)
|
Net Investment Hedges
|
|
$
|
35,000
|
|
|
$
|
(441
|
)
|
|
$
|
74,205
|
|
|
$
|
963
|
|
Cash Flow Hedges
|
|
$
|
17,788
|
|
|
$
|
323
|
|
|
$
|
10,479
|
|
|
$
|
(106
|
)
|
Fair Value Hedges
|
|
$
|
26,000
|
|
|
$
|
490
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest Rate Swap
|
|
$
|
150,000
|
|
|
$
|
715
|
|
|
$
|
150,000
|
|
|
$
|
(4,318
|
)
|
Beginning in March 2004, we entered into a series of forward
contracts to reduce exposure to variability in the Euro compared
to the U.S. Dollar (the Cash Flow Hedges). The
Cash Flow Hedges cover the Euro and Japanese Yen denominated
royalty payments on forecasted Euro and Japanese Yen royalty
revenue. The Cash Flow Hedges were designated as cash flow
hedges. The Cash Flow Hedges have been consistent with our risk
management policy, which allows for the hedging of risk
associated with fluctuations in foreign currency for anticipated
future transactions. The Cash Flow Hedges have been determined
to be fully effective as a hedge in reducing the risk of the
underlying transactions.
|
|
14.
|
Concentrations
of Credit Risk
|
We are exposed to concentrations of credit risk related to our
cash deposits and marketable securities. We place our cash and
cash equivalents with respected financial institutions. Our cash
and cash equivalents and marketable securities totaled
$361,487,000 and $335,746,000 at December 31, 2007 and
2006, respectively, and consisted of time deposits, commercial
paper and money market funds through approximately ten major
financial institutions. We are also exposed to credit risk
related to our royalties receivable from Schering-Plough, which
totaled $18,205,000 and $18,692,000 at December 31, 2007
and 2006, respectively.
During the year ended December 31, 2007, one customer,
McKesson Corporation, accounted for more than 10% of
consolidated product sales. Sales to McKesson Corporation and
its affiliates in the United States, Canada, and Mexico were
$132,035,000 in the year ended December 31, 2007,
representing 17% of our product sales. At December 31, 2007
and December 31, 2006 accounts receivables balances with
McKesson Corporation and its affiliates in the United States,
Canada, and Mexico were $25,988,000 and $34,851,000,
respectively.
|
|
15.
|
Stock and
Stock Incentive Programs
|
In June 2007, our Board of Directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200,000,000 of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts as we see appropriate. The number of shares to be
purchased and the timing of such purchases are subject to
various factors, which may include the price of our common
stock, general market conditions, corporate requirements,
including restrictions in our debt covenants, and alternate
investment opportunities. For the year ended December 31,
2007, we had purchased 6,490,690 shares, for a total amount
of $99,557,000.
103
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2006, our stockholders approved our 2006 Equity Incentive
Plan (the Incentive Plan), which is an amendment and
restatement of our 2003 Equity Incentive Plan. The number of
shares of common stock authorized for issuance under the
Incentive Plan was 22,304,000 in the aggregate, with 5,004,000
remaining available for grant at December 31, 2007. The
Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights,
restricted stock awards, restricted stock unit awards and stock
bonuses to our key employees, officers, directors, consultants
and advisors. Options granted under the Incentive Plan must have
an exercise price that is not less than 100% of the fair market
value of the common stock on the date of grant and a term not
exceeding 10 years. Under the Incentive Plan, other than
with respect to options and stock appreciation rights awards,
shares may be issued as awards for which a participant pays less
than the fair market value of the common stock on the date of
grant. Generally, options vest ratably over a four-year period
from the date of grant.
The following table sets forth information relating to the
Incentive Plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares under option, December 31, 2004
|
|
|
13,336
|
|
|
$
|
17.93
|
|
Granted
|
|
|
2,192
|
|
|
$
|
18.16
|
|
Exercised
|
|
|
(160
|
)
|
|
$
|
13.36
|
|
Canceled
|
|
|
(736
|
)
|
|
$
|
22.28
|
|
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2005
|
|
|
14,632
|
|
|
$
|
17.80
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,014
|
|
|
$
|
18.54
|
|
Exercised
|
|
|
(1,592
|
)
|
|
$
|
10.34
|
|
Canceled
|
|
|
(1,703
|
)
|
|
$
|
21.81
|
|
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2006
|
|
|
13,351
|
|
|
$
|
18.28
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,094
|
|
|
$
|
15.12
|
|
Exercised
|
|
|
(1,241
|
)
|
|
$
|
11.63
|
|
Canceled
|
|
|
(2,312
|
)
|
|
$
|
21.11
|
|
Shares under option, December 31, 2007
|
|
|
10,892
|
|
|
$
|
18.13
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005
|
|
|
7,197
|
|
|
$
|
17.82
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
|
8,374
|
|
|
$
|
18.00
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
7,846
|
|
|
$
|
18.26
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2005
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2006
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2007
|
|
|
5,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth information relating to our
restricted stock unit awards during the years ended
December 31, 2007, 2006, and 2005 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Nonvested awards at December 31, 2004
|
|
|
51
|
|
|
$
|
17.70
|
|
Granted
|
|
|
142
|
|
|
$
|
18.83
|
|
Vested
|
|
|
(56
|
)
|
|
$
|
17.90
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at December 31, 2005
|
|
|
137
|
|
|
$
|
18.76
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
70
|
|
|
$
|
16.88
|
|
Vested
|
|
|
(47
|
)
|
|
$
|
20.14
|
|
Forfeited
|
|
|
(47
|
)
|
|
$
|
17.99
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at Decemvaber 31, 2006
|
|
|
113
|
|
|
$
|
17.34
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
679
|
|
|
$
|
14.01
|
|
Vested
|
|
|
(55
|
)
|
|
$
|
16.37
|
|
Forfeited
|
|
|
(59
|
)
|
|
$
|
14.71
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at December 31, 2007
|
|
|
678
|
|
|
$
|
14.31
|
|
|
|
|
|
|
|
|
|
|
The schedule below reflects the number of outstanding and
exercisable options as of December 31, 2007 segregated by
price range (in thousands, except per share and life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
$ 8.10 - $17.72
|
|
|
4,768
|
|
|
$
|
13.75
|
|
|
|
3,107
|
|
|
$
|
12.50
|
|
|
|
6.51
|
|
$18.55 - $23.78
|
|
|
3,666
|
|
|
$
|
18.92
|
|
|
|
2,547
|
|
|
$
|
18.94
|
|
|
|
5.73
|
|
$23.92 - $46.25
|
|
|
2,458
|
|
|
$
|
25.46
|
|
|
|
2,192
|
|
|
$
|
25.64
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,892
|
|
|
|
|
|
|
|
7,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123(R) Assumptions and Fair
Value: The fair value of options granted in 2007
and 2006 was estimated at the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Average life of option (years)
|
|
5.7
|
|
4.1 - 5.7
|
|
4.1 - 4.2
|
Stock price volatility
|
|
35% - 37%
|
|
37% - 39%
|
|
39% - 61%
|
Expected dividend per share
|
|
$0.00
|
|
$0.00 - $0.31
|
|
$0.31
|
Risk-free interest rate
|
|
4.15 - 4.76%
|
|
4.54 - 4.80%
|
|
3.77 - 4.40%
|
Weighted-average fair value of options
|
|
$6.21
|
|
$7.83
|
|
$5.87
|
Estimated forfeiture rate
|
|
35%
|
|
5%
|
|
NA
|
NA Not applicable
105
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate intrinsic value of the stock options outstanding
at December 31, 2007 was $4,442,000. The aggregate
intrinsic value of the stock options that are both outstanding
and exercisable at December 31, 2007 was $4,442,000. During
the year ended December 31, 2007 stock options with an
aggregate intrinsic value of $7,151,000 were exercised.
Intrinsic value is the in the money valuation of the
options or the difference between market and exercise prices.
The fair value of options that vested in the year ended
December 31, 2007, as determined using the Black-Scholes
valuation model, was $14,372,000.
2003 Employee Stock Purchase Plan: In May
2003, our stockholders approved the Valeant Pharmaceuticals
International 2003 Employee Stock Purchase Plan (the
ESPP). The ESPP provides employees with an
opportunity to purchase common stock at a 15% discount. There
are 7,000,000 shares of common stock reserved for issuance
under the ESPP, plus an annual increase on the first day of our
fiscal year for a period of ten years, commencing on
January 1, 2005 and ending on January 1, 2015, equal
to the lower of (i) 1.5% of the shares of common stock
outstanding on each calculation date,
(ii) 1,500,000 shares of common stock, or (iii) a
number of shares that may be determined by the Compensation
Committee. In 2006, we issued 64,000 shares of common stock
for proceeds of $938,000 under the ESPP. In the year ended
December 31, 2007, 78,000 shares were issued for
proceeds of $858,000.
Restricted Stock Units: Non-employee members
of our board of directors receive compensation in the form of
restricted stock units, cash retainers and meeting fees for each
meeting they attend during the year. During 2007 and 2006, we
granted our non-employee directors 63,132 and 72,194 restricted
stock units, respectively. The restricted stock units issued to
non-employee directors in these periods had a fair value of
$998,000 and $1,220,000, respectively. Each restricted stock
unit granted to non-employee directors vests over one year or
less, is entitled to dividend equivalent shares and is exchanged
for a share of our common stock one year after the director
ceases to serve as a member of our Board.
During 2005 we granted certain officers of the company
restricted stock units. Each restricted stock unit vests
50 percent three years after grant with the balance vesting
equally in years four and five after grant, is entitled to
dividend equivalent shares and is exchanged for a share of our
common stock upon vesting.
During 2007, we granted certain officers of the company
additional restricted stock units under a market performance
award. Shares of this restricted stock unit award may vest based
upon three years of service and certain stock price appreciation
conditions. In addition, during 2007, we granted certain
officers and employees of the company restricted stock units.
Each share of these restricted stock awards includes a service
requirement of three years. As of December 31, 2007 and
December 31, 2006, there were 858,076 and 268,524
restricted stock units outstanding, respectively.
A summary of stock compensation expense for our stock incentive
plans is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Employee stock options
|
|
$
|
11,012
|
|
|
$
|
18,532
|
|
|
$
|
1,192
|
|
Employee stock purchase plan
|
|
|
224
|
|
|
|
309
|
|
|
|
|
|
Phantom and restricted stock units
|
|
|
1,984
|
|
|
|
2,007
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
13,220
|
|
|
$
|
20,848
|
|
|
$
|
3,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock compensation expense was charged to the following accounts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of goods sold
|
|
$
|
596
|
|
|
$
|
1,256
|
|
|
$
|
252
|
|
Selling expenses
|
|
|
3,097
|
|
|
|
3,390
|
|
|
|
140
|
|
General and administrative expenses
|
|
|
8,708
|
|
|
|
13,697
|
|
|
|
2,031
|
|
Research and development costs
|
|
|
819
|
|
|
|
2,505
|
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
13,220
|
|
|
$
|
20,848
|
|
|
$
|
3,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future stock compensation expense for restricted stock units and
stock option incentive awards outstanding at December 31,
2007 is as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
7,817
|
|
2009
|
|
|
4,838
|
|
2010 and thereafter
|
|
|
3,035
|
|
|
|
|
|
|
|
|
$
|
15,690
|
|
|
|
|
|
|
This calculation of future stock compensation expense is reduced
for estimated stock option forfeitures, using an estimated
forfeiture rate of 35%.
Dividends: We did not declare and did not pay
dividends in 2007. We declared and paid cash dividends of
$0.0775 per share for the first and second quarters of 2006. We
also paid cash dividends of $0.0775 per share in the first
quarter of 2006 for the dividend declared in the fourth quarter
of 2005.
|
|
16.
|
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:
Derivative Actions Related to Ribapharm
Bonuses: We were a nominal defendant in a
shareholder derivative lawsuit pending in state court in Orange
County, California, styled James Herrig, IRA v. Milan Panic
et al. This lawsuit, which was filed on June 6, 2002,
purported to assert derivative claims on our behalf against
certain of our current
and/or
former officers and directors. The lawsuit asserted claims for
breach of fiduciary duties, abuse of control, gross
mismanagement and waste of corporate assets. The plaintiff
sought, among other things, damages and a constructive trust
over cash bonuses paid to the officer and director defendants in
connection with the Ribapharm offering. In March 2007, the
complaint was dismissed, with prejudice. On January 8,
2008, the Court awarded Plaintiffs counsel $58,633 in fees.
On October 1, 2002, several of our former and current
directors, as individuals, as well as Valeant, as a nominal
defendant, were named as defendants in a second
shareholders derivative complaint filed in the Delaware
Court of Chancery, styled Paul Gerstley v. Norman
Barker, Jr. et al. The original complaint in the
Delaware action purported to state causes of action for
violation of Delaware General Corporation Law Section 144,
breach of fiduciary duties and waste of corporate assets in
connection with the defendants management of our company.
We settled the litigation with respect to ten of the defendants
prior to trial. The claims with respect to defendants Milan
Panic and Adam Jerney, who received Ribapharm Bonuses of
$33,050,000 and $3,000,000, respectively, were tried in Delaware
Chancery Court in a one-week trial beginning February 27,
2006. We entered into a settlement agreement with
Mr. Panic. Pursuant to which, Mr. Panic paid us
$20,000,000. We recorded a
107
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$17,550,000 gain resulting from this settlement in the third
quarter of 2006. The amount reflects the settlement proceeds net
of related costs associated with the litigation and settlement
arrangement.
On March 1, 2007, the Delaware Court of Chancery issued an
opinion finding Mr. Jerney liable for breach of fiduciary
duty and on March 14, 2007, entered an order requiring
Mr. Jerney to pay us a total of $6,983,085. We are pursuing
collection of the award.
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, and statements made in connection with
the public release of data and matters regarding our stock
option grants since January 1, 2000. In September 2006, our
board of directors established a Special Committee to review our
historical stock option practices and related accounting, and
informed the SEC of these efforts. We have cooperated fully and
will continue to cooperate with the SEC in its investigation. We
cannot predict the outcome of the investigation.
Derivative Actions Related to Stock
Options: We are a nominal defendant in two
shareholder derivative lawsuits pending in state court in Orange
County, California, styled (i) Michael Pronko v.
Timothy C. Tyson et al., and (ii) Kenneth Lawson v.
Timothy C. Tyson et al. These lawsuits, which were filed on
October 27, 2006 and November 16, 2006, respectively,
purport to assert derivative claims on our behalf against
certain of our current
and/or
former officers and directors. The lawsuits assert claims for
breach of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment, and
violations of the California Corporations Code related to the
purported backdating of employee stock options. The plaintiffs
seek, among other things, damages, an accounting, the rescission
of stock options, and a constructive trust over amounts acquired
by the defendants who have exercised Valeant stock options. On
January 16, 2007, the court issued an order consolidating
the two cases before Judge Ronald L. Bauer. On February 6,
2007, the court issued a further order abating the Lawson action
due to a procedural defect while the Pronko action proceeds to
conclusion. The plaintiff in the Pronko action filed an amended
complaint on February 6, 2008, which dismissed claims
against eighteen defendants. The remaining defendants must
respond to the amended complaint by March 17, 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,
108
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
emotional distress and mental anguish. Eli Lilly, holder of the
right granted by the FDA to market and sell Permax in the United
States, which right was licensed to Amarin and the source of the
manufactured product, has also been named in the suit. Under an
agreement between Valeant and Eli Lilly, Eli Lilly will bear a
portion of the liability, if any, associated with this claim.
Product liability insurance exists with respect to this claim.
Although it is expected that the insurance proceeds will be
sufficient to cover any material liability which might arise
from this claim, there can be no assurance that defending
against any future similar claims and any resulting settlements
or judgments will not, individually or in the aggregate, have a
material adverse affect on our consolidated financial position,
results of operation or liquidity.
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 submitted this
matter to binding arbitration. On December 28, 2007, the
arbitrator ruled in favor of Valeant on key threshold legal
issues. Plaintiffs have declined to file a motion for
reconsideration and Valeant has requested that the arbitrator
issue a final order.
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
a decision is expected in March or April 2008.
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.
We have three reportable specialty pharmaceutical segments
comprising our pharmaceutical operations in North America,
International and Europe, Middle East and Africa (EMEA). In
addition, we have a research and development division. The
segment reporting has been reclassified to conform to
discontinued operations presentation for all periods presented.
See Note 5 for discussion of discontinued operations.
109
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth the amounts of segment revenues,
operating income, non-cash charges and capital expenditures for
the years ended December 31, 2007, 2006 and 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
276,671
|
|
|
$
|
264,393
|
|
|
$
|
232,342
|
|
International
|
|
|
201,310
|
|
|
|
239,597
|
|
|
|
219,319
|
|
EMEA
|
|
|
307,789
|
|
|
|
277,572
|
|
|
|
280,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
785,770
|
|
|
|
781,562
|
|
|
|
731,869
|
|
Alliance revenues (including ribavirin royalties)
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
91,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
872,222
|
|
|
$
|
862,804
|
|
|
$
|
823,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
100,855
|
|
|
|
90,359
|
|
|
|
69,286
|
|
International
|
|
|
34,189
|
|
|
|
71,697
|
|
|
|
65,407
|
|
EMEA
|
|
|
55,700
|
|
|
|
45,822
|
|
|
|
35,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,744
|
|
|
|
207,878
|
|
|
|
170,630
|
|
Corporate expenses
|
|
|
(75,525
|
)
|
|
|
(75,382
|
)
|
|
|
(54,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
115,219
|
|
|
|
132,496
|
|
|
|
115,892
|
|
Restructuring charges and asset impairment
|
|
|
(23,176
|
)
|
|
|
(138,181
|
)
|
|
|
(1,253
|
)
|
Gain on litigation settlement
|
|
|
|
|
|
|
51,550
|
|
|
|
|
|
Research and development
|
|
|
(16,728
|
)
|
|
|
(37,891
|
)
|
|
|
(38,491
|
)
|
Acquired IPR&D
|
|
|
|
|
|
|
|
|
|
|
(126,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income (loss)
|
|
|
75,315
|
|
|
|
7,974
|
|
|
|
(50,251
|
)
|
Interest income
|
|
|
17,792
|
|
|
|
12,610
|
|
|
|
13,169
|
|
Interest expense
|
|
|
(42,878
|
)
|
|
|
(43,726
|
)
|
|
|
(40,326
|
)
|
Other, net
|
|
|
1,060
|
|
|
|
1,152
|
|
|
|
(6,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
$
|
51,289
|
|
|
$
|
(21,990
|
)
|
|
$
|
(83,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2007, one customer,
McKesson Corporation, accounted for more than 10% of
consolidated product sales. Sales to McKesson Corporation and
its affiliates in the United States, Canada, and Mexico were
$132,035,000 in the year ended December 31, 2007,
representing 17% of our product sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
34,483
|
|
|
$
|
30,470
|
|
|
$
|
33,950
|
|
International
|
|
|
14,291
|
|
|
|
14,419
|
|
|
|
13,347
|
|
EMEA
|
|
|
24,071
|
|
|
|
21,963
|
|
|
|
30,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,845
|
|
|
|
66,852
|
|
|
|
77,409
|
|
Corporate expenses
|
|
|
3,655
|
|
|
|
3,912
|
|
|
|
3,238
|
|
Total specialty pharmaceuticals
|
|
|
76,500
|
|
|
|
70,764
|
|
|
|
80,647
|
|
Research and development
|
|
|
11,468
|
|
|
|
14,829
|
|
|
|
16,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87,968
|
|
|
$
|
85,593
|
|
|
$
|
97,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,731
|
|
|
$
|
8,898
|
|
|
$
|
3,279
|
|
International
|
|
|
11,309
|
|
|
|
3,580
|
|
|
|
8,401
|
|
EMEA
|
|
|
15,161
|
|
|
|
9,534
|
|
|
|
11,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,201
|
|
|
|
22,012
|
|
|
|
23,417
|
|
Corporate expenses
|
|
|
2,021
|
|
|
|
17,738
|
|
|
|
19,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
32,222
|
|
|
|
39,750
|
|
|
|
43,076
|
|
Research and development
|
|
|
|
|
|
|
1,218
|
|
|
|
2,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,222
|
|
|
$
|
40,968
|
|
|
$
|
45,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and asset impairment charges and IPR&D are
not included in the applicable segments as management excludes
these items in assessing the financial performance of these
segments, primarily due to their non-operational nature. Stock
and stock option compensation is considered a corporate cost
since the amount of such charges depends on corporate-wide
performance rather than the operating performance of any single
segment.
111
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the total assets and long-lived
assets by segment as of December 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
367,869
|
|
|
$
|
381,198
|
|
International
|
|
|
200,955
|
|
|
|
203,292
|
|
EMEA
|
|
|
493,452
|
|
|
|
514,600
|
|
Corporate
|
|
|
319,335
|
|
|
|
207,802
|
|
Research and Development Division
|
|
|
52,202
|
|
|
|
122,268
|
|
Discontinued operations
|
|
|
60,449
|
|
|
|
76,532
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,494,262
|
|
|
$
|
1,505,692
|
|
|
|
|
|
|
|
|
|
|
Long-term Assets
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
285,712
|
|
|
$
|
288,889
|
|
International
|
|
|
57,510
|
|
|
|
58,607
|
|
EMEA
|
|
|
221,596
|
|
|
|
201,420
|
|
Corporate
|
|
|
110,484
|
|
|
|
75,506
|
|
Research and Development Division
|
|
|
24,288
|
|
|
|
35,105
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
699,590
|
|
|
$
|
659,527
|
|
|
|
|
|
|
|
|
|
|
The long-term assets table above excludes $226,000 in
non-current assets of discontinued operations as of
December 31, 2006.
112
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes sales by major product for the
each of the last three years (dollar amounts in thousands). It
includes any product with annualized sales of greater than
$10,000,000 and currently promoted products with annualized
sales of greater than $5,000,000. The table is categorized by
therapeutic class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Therapeutic
Class/Product
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
|
|
|
|
Mestinon(P)
|
|
$
|
53,012
|
|
|
$
|
47,625
|
|
|
$
|
43,535
|
|
Diastat AcuDial(P)
|
|
|
51,264
|
|
|
|
50,678
|
|
|
|
47,631
|
|
Cesamet(P)
|
|
|
30,173
|
|
|
|
18,985
|
|
|
|
10,009
|
|
Librax
|
|
|
17,170
|
|
|
|
14,835
|
|
|
|
18,159
|
|
Migranal(P)
|
|
|
13,534
|
|
|
|
11,592
|
|
|
|
12,949
|
|
Dalmane/Dalmadorm(P)
|
|
|
11,432
|
|
|
|
10,957
|
|
|
|
12,277
|
|
Tasmar(P)
|
|
|
10,262
|
|
|
|
6,534
|
|
|
|
5,829
|
|
Melleril(P)
|
|
|
8,206
|
|
|
|
6,431
|
|
|
|
3,068
|
|
Zelapar(P)
|
|
|
5,747
|
|
|
|
3,981
|
|
|
|
|
|
Other Neurology
|
|
|
66,677
|
|
|
|
63,033
|
|
|
|
57,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
267,477
|
|
|
|
234,651
|
|
|
|
210,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
Efudix/Efudex(P)
|
|
|
71,714
|
|
|
|
78,336
|
|
|
|
60,177
|
|
Kinerase(P)
|
|
|
30,126
|
|
|
|
28,929
|
|
|
|
22,265
|
|
Dermatix(P)
|
|
|
14,043
|
|
|
|
10,139
|
|
|
|
9,187
|
|
Oxsoralen-Ultra(P)
|
|
|
12,377
|
|
|
|
10,527
|
|
|
|
9,365
|
|
Other Dermatology
|
|
|
39,059
|
|
|
|
42,023
|
|
|
|
38,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
167,319
|
|
|
|
169,954
|
|
|
|
139,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
Virazole(P)
|
|
|
14,350
|
|
|
|
16,552
|
|
|
|
16,547
|
|
Other Infectious Disease
|
|
|
19,813
|
|
|
|
20,144
|
|
|
|
21,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infectious Disease
|
|
|
34,163
|
|
|
|
36,696
|
|
|
|
38,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other therapeutic classes
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedoyecta(P)
|
|
|
42,384
|
|
|
|
49,935
|
|
|
|
46,762
|
|
Solcoseryl(P)
|
|
|
23,749
|
|
|
|
18,916
|
|
|
|
18,983
|
|
Bisocard(P)
|
|
|
22,559
|
|
|
|
15,927
|
|
|
|
12,847
|
|
M.V. I. (multi-vitamin infusion)(P)
|
|
|
11,708
|
|
|
|
13,350
|
|
|
|
7,602
|
|
Nyal(P)
|
|
|
11,060
|
|
|
|
10,216
|
|
|
|
13,747
|
|
Espaven(P)
|
|
|
8,458
|
|
|
|
11,147
|
|
|
|
9,258
|
|
Protamin(P)
|
|
|
6,924
|
|
|
|
6,384
|
|
|
|
6,047
|
|
Other products
|
|
|
189,969
|
|
|
|
214,386
|
|
|
|
228,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other therapeutic classes
|
|
|
316,811
|
|
|
|
340,261
|
|
|
|
343,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
785,770
|
|
|
$
|
781,562
|
|
|
$
|
731,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Promoted Product sales
|
|
$
|
453,082
|
|
|
$
|
427,141
|
|
|
$
|
368,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(P) |
Promoted Products with annualized sales of greater than
$5,000,000.
|
113
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Schering-Plough: In 1995, we entered into an
exclusive license and supply agreement with Schering-Plough (the
License Agreement). Under the License Agreement,
Schering-Plough licensed all oral forms of ribavirin for the
treatment of chronic hepatitis C. The FDA granted
Schering-Plough approval for Peg-Intron (pegylated interferon
alfa-2b) for use in Combination Therapy with Rebetol for the
treatment of chronic hepatitis C in patients with
compensated liver disease who are at least 18 years of age.
Schering-Plough markets the Combination Therapy in the United
States, Europe, Japan, and many other countries around the world
based on the U.S. and European Union regulatory approvals.
Schering-Plough has launched a generic version of ribavirin.
Under the license and supply agreement, Schering-Plough is
obligated to pay us royalties for sales of their generic
ribavirin.
In November 2000, we entered into an agreement that provides
Schering-Plough with certain rights to license various products
we may develop (the 2000 Schering-Plough Agreement).
Under the terms of the 2000 Schering-Plough Agreement,
Schering-Plough has the option to exclusively license on a
worldwide basis up to three compounds that we may develop for
the treatment of hepatitis C on terms specified in the
agreement. The option does not apply to taribavirin. The option
is exercisable as to a particular compound at any time prior to
the start of Phase II clinical studies for that compound.
Once it exercises the option with respect to a compound,
Schering-Plough is required to take over all developmental costs
and responsibility for regulatory approval for that compound.
Under the agreement, we would receive royalty revenues based on
the sales of licensed products.
Under the terms of the 2000 Schering-Plough Agreement, we also
granted Schering-Plough and an affiliate rights of first/last
refusal to license compounds relating to the treatment of
infectious disease (other than hepatitis C) or cancer
or other oncology indications as well as rights of first/last
refusal with respect to taribavirin (collectively, the
Refusal Rights). Under the terms of the Refusal
Rights, if we intend to offer a license or other rights with
respect to any of these compounds to a third party, we are
required to notify Schering-Plough. At Schering-Ploughs
request, we are required to negotiate in good faith with
Schering-Plough on an exclusive basis the terms of a mutually
acceptable exclusive worldwide license or other form of
agreement on commercial terms to be mutually agreed upon. If we
cannot reach an agreement with Schering-Plough, we are permitted
to negotiate a license agreement or other arrangement with a
third party. Prior to entering into any final arrangement with
the third party, we are required to offer substantially similar
terms to Schering-Plough, which terms Schering-Plough has the
right to match.
If Schering-Plough does not exercise its option or Refusal
Rights as to a particular compound, we may continue to develop
that compound or license that compound to other third parties.
The 2000 Schering-Plough Agreement will terminate the later of
12 years from the date of the agreement or the termination
of the 1995 License Agreement with Schering-Plough. The 2000
Schering-Plough Agreement was entered into as part of the
resolution of claims asserted by Schering-Plough against us,
including claims regarding our alleged improper hiring of former
Schering-Plough research and development personnel and claims
that we were not permitted to conduct hepatitis C research.
In January 2007, we executed a licensing agreement with
Schering-Plough for the assignment and license of development
and commercialization rights to pradefovir, which we licensed
from Metabasis Therapeutics, Inc. (Metabasis).
Schering-Ploughs license of these rights from us was
negotiated pursuant to the 2000 Schering-Plough Agreement.
Schering-Plough returned these rights to Metabasis Therapeutics,
Inc. (Metabasis) in September 2007 after the results
of a long-term preclinical study were released.
114
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have reported the royalties received from the sale of
ribavirin separately from our specialty pharmaceuticals product
sales revenue since these royalties were first received in 1998.
In 2007, we have begun presenting these royalty revenues within
a new category of revenues, alliance revenue. The
following table provides the details of our alliance revenue in
2007, 2006, and 2005, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Ribavirin royalty
|
|
$
|
67,202
|
|
|
$
|
81,242
|
|
|
$
|
91,646
|
|
Licensing payment
|
|
|
19,200
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
86,452
|
|
|
$
|
81,242
|
|
|
$
|
91,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We received a licensing payment of $19,200,000 in the first
quarter of 2007 from Schering-Plough as a payment in the
licensing of pradefovir. Alliance revenue for the year ended
December 31, 2007 also included a $50,000 payment from an
unrelated third party for a license to certain intellectual
property assets.
In June 2007, we revised our estimate of ribavirin royalties
receivable from Schering-Plough, to incorporate certain
historical data and payment patterns. This revision increased
the royalties recorded in the year ended December 31, 2007
by $246,000.
In September 2007, we decided to divest our Infergen product
rights and we sold these rights to Three Rivers Pharmaceuticals,
LLC on January 14, 2008. We will record a gain in this
transaction of approximately $16,000,000 in the first quarter of
2008.
We announced on February 4, 2008 that our board of
directors had appointed J. Michael Pearson to the position of
chief executive officer and chairman of the board of directors
effective February 1, 2008, the date of the resignation of
our former chief executive officer, Timothy C. Tyson. Robert A.
Ingram, who had served as chairman until Mr. Tysons
resignation, remains on our board of directors, serving as lead
director. In connection with the resignation of Mr. Tyson,
we have incurred employment contract termination costs of
$3,676,000 which will be expensed in the first quarter of 2008.
Additionally, the vesting of Mr. Tysons stock
compensation awards was accelerated concurrent with his
resignation, resulting in an accounting charge of $4,627,000
which will also be recorded in the first quarter of 2008.
In December 2007 we signed an agreement with Invida to sell
certain subsidiaries and product rights in Asia, in a
transaction that includes certain Valeant subsidiaries, branch
offices, and commercial rights in the Philippines, Thailand,
Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia
and Macau. This transaction also includes certain product rights
in Japan. In 2007, we recognized $3,968,000 in contract
termination and transaction costs as restructuring charges in
support of this transaction. We closed this transaction on
March 3, 2008. The assets related to this transaction have
been classified as held for sale in accordance with
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in December 2007. We received proceeds of
$37,855,000 in the closing of this transaction and anticipate
recording a gain of approximately $30,000,000.
115
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
at End
|
|
|
|
of Year
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
of Year
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
7,014
|
|
|
$
|
6,082
|
|
|
$
|
481
|
|
|
$
|
(649
|
)
|
|
$
|
12,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory obsolescence
|
|
$
|
14,297
|
|
|
$
|
12,192
|
|
|
$
|
4,895
|
|
|
$
|
(12,556
|
)
|
|
$
|
18,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
161,713
|
|
|
$
|
60,721
|
|
|
$
|
(62,724
|
)
|
|
$
|
|
|
|
$
|
159,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
5,485
|
|
|
$
|
1,641
|
|
|
$
|
478
|
|
|
$
|
(590
|
)
|
|
$
|
7,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory obsolescence
|
|
$
|
12,775
|
|
|
$
|
12,430
|
|
|
$
|
2,023
|
|
|
$
|
(12,931
|
)
|
|
$
|
14,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
148,100
|
|
|
$
|
28,106
|
|
|
$
|
|
|
|
|
(14,493
|
)
|
|
$
|
161,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
6,014
|
|
|
$
|
598
|
|
|
$
|
(420
|
)
|
|
$
|
(707
|
)
|
|
$
|
5,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory obsolescence
|
|
$
|
13,932
|
|
|
$
|
10,145
|
|
|
$
|
1,184
|
|
|
$
|
(12,486
|
)
|
|
$
|
12,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
107,225
|
|
|
$
|
56,181
|
|
|
$
|
|
|
|
|
(15,306
|
)
|
|
$
|
148,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Background
of Restatement
As disclosed in the Explanatory Note on page 1 of this
Form 10-K,
we announced on March 3, 2008 that upon recommendation of
the Finance and Audit Committee of the Board of Directors (the
FAC), on March 1, 2008 the Board of Directors
determined that certain of the Companys annual and interim
financial statements, earnings press releases and similar
communications previously issued by the Company should no longer
be relied upon. During the preparation process for this 2007
annual report on
Form 10-K,
we identified certain accounting errors (collectively
Errors) related to certain foreign operations which
primarily arose during the period January 1, 2002 to
September 30, 2007 and, in aggregate, resulted in a net
charge to income from continuing operations before income taxes
of $2,090,000 to correct the cumulative effect of the Errors in
the fourth quarter of 2007. These included errors impacting
annual periods prior to 2007 with a cumulative net charge to
income from continuing operations before income taxes of
$3,851,000 as of December 31, 2006. The Errors also
included items originating in the first, second and third
quarters of 2007 with a net benefit to income from continuing
operations before income taxes of $1,761,000. These Errors have
been determined to be, in the aggregate, material to the quarter
and year ended December 31, 2007 and to certain prior
periods including the year ended December 31, 2006 and
therefore we are restating our results for the years ended
December 31, 2003, 2004, 2005 and 2006. The Errors and the
cumulative net effect of the corrections through
December 31, 2006 and for the nine months ended
September 30, 2007 are:
i. Increase in reserves for anticipated product returns
based on historical trends and for certain credit memos in Latin
America, the cumulative effect of which is a reduction in
revenue of $3,953,000 and certain other adjustments of $127,000
through December 31, 2006 and $1,120,000 for the nine
months ended September 30, 2007;
116
ii. Decrease in revenues associated with sales to certain
customers in Italy where preexisting rights of return became
known in the fourth quarter of 2007, the cumulative effect of
which is a reduction of revenues of $290,000 through
December 31, 2006 and $1,550,000 for the nine months ended
September 30, 2007;
iii. Decrease in costs of goods sold related to bookkeeping
errors in recording inventory costing and manufacturing
variances in the UK and France, the cumulative effect of which
is a reduction in cost of goods sold and a corresponding
increase in gross profit of $4,710,000 for the nine months ended
September 30, 2007, with no effect prior to January 1,
2007;
iv. Changes in pension expense in UK, Netherlands,
Switzerland and Germany resulting from incorrect application of
Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions and Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, the cumulative effect of which is a decrease in
general and administrative expenses of $519,000 through
December 31, 2006 and a charge to general and
administrative expenses of $279,000 for the nine months ended
September 30, 2007; and
v. Increase in income tax expense due to correction of
deferred income taxes in certain foreign locations resulting in
a cumulative decrease in income of $825,000 through
December 31, 2006. Additionally income tax expense is
reduced by $1,331,000 through December 31, 2006 and
increased by $611,000 for the nine months ended
September 30, 2007, resulting from the income tax effects
of the pre-tax adjustments described in i.-iv. above.
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 CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
Our management, with the participation of our CEO and CFO,
evaluated the effectiveness of our disclosure controls and
procedures. Based on their evaluation, our CEO and CFO concluded
that the Companys disclosure controls and procedures were
not effective as of December 31, 2007 because of the
material weakness described below.
Managements
Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Our management, with the participation of our CEO and CFO,
conducted an evaluation of the effectiveness, as of
December 31, 2007, of our internal control over financial
reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
As of December 31, 2007, we did not maintain a sufficient
complement of personnel in our foreign locations with the
appropriate skills, training and experience to identify and
address the application of generally accepted accounting
principles and effective controls with respect to locations
undergoing change or experiencing staff turnover. Further, the
monitoring controls over accounting for pension plans and
product returns in foreign locations did not operate at a
sufficient level of precision to identify the accounting errors
in the foreign operations on a timely basis and did not include
a process for obtaining corroborating information to support the
analysis and conclusions regarding individually significant
transactions. This control deficiency resulted in the
restatement of the Companys
117
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. Accordingly, our management has
determined that this control deficiency constitutes a material
weakness in our internal control over financial reporting.
Because of this material weakness, management concluded that the
Company did not maintain effective internal control over
financial reporting as of December 31, 2007, based on
criteria in Internal Control Integrated
Framework issued by the COSO.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report included in this
annual report on
Form 10-K.
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 have engaged professional actuarial and accounting
consultants to review our calculation of assets and liabilities
under and accounting for our foreign pension plans. We are also
working to develop modified controls with regard to our
accounting for pension obligations.
|
|
|
|
We have designed and commenced implementation of enhancements to
our accounting for product returns and credit memos in foreign
markets.
|
|
|
|
We have reviewed the qualifications and performance of our
accounting staff in key roles in our foreign locations and
identified some critical roles in certain foreign markets where
accounting staff will be retrained or new accounting staff will
be recruited. We have assigned qualified accounting staff from
Corporate and our North American offices to review accounting
procedures in certain foreign countries and have begun to
enhance our accounting staff in various foreign locales.
|
|
|
|
We have modified our revenue recognition procedures in Italy and
other locations in order to ensure that, when required by
specific circumstances, we recognize revenue on a cash basis.
|
|
|
|
We have implemented revised review procedures over tax
accounting.
|
In addition, we are undertaking a comprehensive strategic
review. This 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 presented to 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
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2007 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
118
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required under this Item is set forth in our
definitive proxy statement to be filed in connection with our
2008 annual meeting of stockholders (the Proxy
Statement) and is incorporated by reference.
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer and principal
accounting controller. The code of ethics has been posted on our
internet website found at www.valeant.com. We intend to
satisfy disclosure requirements regarding amendments to, or
waivers from, any provisions of its code of ethics on its
website.
|
|
Item 11.
|
Executive
Compensation
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
119
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
1. Financial Statements
Financial Statements of the Registrant are listed in the index
to Consolidated Financial Statements and filed under
Item 8, Financial Statements and Supplementary
Data, in this
Form 10-K.
2. Financial Statement Schedule
Financial Statement Schedule of the Registrant is listed in the
index to Consolidated Financial Statements and filed under
Item 8, Financial Statements and Supplementary
Data, in this
Form 10-K.
Schedules not listed have been omitted because the information
required therein is not applicable or is shown in the financial
statements and the notes thereto.
3. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended to date,
previously filed as Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of
Series A Participating Preferred Stock previously filed as
Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Certificate of Correction to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as
Exhibit 3.3 to the Registrants
Form 10-Q
for the quarter ended September 30, 2007, which is
incorporated herein by reference.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of the Registrant previously filed
as Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated February 25, 2008, which is incorporated herein by
reference.
|
|
4
|
.1
|
|
Form of Rights Agreement, dated as of November 2, 1994,
between the Registrant and American Stock Transfer &
Trust Company, as trustee, previously filed as
Exhibit 4.3 to the Registrants Registration Statement
on
Form 8-A,
dated November 10, 1994, which is incorporated herein by
reference.
|
|
4
|
.2
|
|
Amended Rights Agreement, dated as of October 5, 2004,
previously filed as Exhibit 4.1 to the Registrants
Current Report on
Form 8-K,
dated October 5, 2004, which is incorporated herein by
reference.
|
|
10
|
.1
|
|
Valeant Pharmaceuticals International 1992 Non-Qualified Stock
Plan, previously filed as Exhibit 10.57 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 1992, which is incorporated
herein by reference.
|
|
10
|
.2
|
|
Valeant Pharmaceuticals International 1994 Stock Option Plan,
previously filed as Exhibit 10.30 to the Registrants
Form 10-K
for the year ended December 31, 1995, which is incorporated
herein by reference.
|
|
10
|
.3
|
|
Valeant Pharmaceuticals International 1998 Stock Option Plan,
previously filed as Exhibit 10.20 to the Registrants
Form 10-K
for the year ended December 31, 1998, which is incorporated
herein by reference.
|
|
10
|
.4
|
|
Valeant Pharmaceuticals International 2003 Equity Incentive
Plan, previously filed as Annex B to the Proxy Statement
filed on Schedule 14A on April 25, 2003, which is
incorporated herein by reference.
|
|
**10
|
.5
|
|
Exclusive License and Supply Agreement between Valeant
Pharmaceuticals International and Schering-Plough Ltd. dated
July 28, 1995 previously filed as Exhibit 10 to the
Registrants Amendment 3 to the Quarterly Report on
Form 10-Q
for the quarter ended September 30, 1996, which is
incorporated herein by reference.
|
|
**10
|
.6
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.,
previously filed as Exhibit 10.32 to the Registrants
Annual Report on
Form 10-K
for the year ended December 31, 2000, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
120
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
**10
|
.7
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.
Dated July 16, 1998, previously filed as Exhibit 10.33
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2000, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.8
|
|
Agreement among Schering Corporation, Valeant Pharmaceuticals
International and Ribapharm Inc. dated as of November 14,
2000, previously filed as Exhibit 10.34 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2000, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.9
|
|
Agreement among Valeant Pharmaceuticals International, Ribapharm
Inc., Hoffmann-La Roche, and F. Hoffmann-La Roche
Ltd, dated January 3, 2003, previously filed as
Exhibit 10.19 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002, which is incorporated
herein by reference.
|
|
10
|
.10
|
|
Indenture, dated as of December 12, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as Exhibit 4.1 to the Registrants Registration
Statement
No. 333-112906
on
Form S-4
and incorporated herein by reference.
|
|
10
|
.11
|
|
Form of 7.0% Senior Notes due 2011, previously filed as
Exhibit A-1
to Exhibit 4.1 to the Registrants Registration
Statement
No. 333-112906
on
Form S-4
and incorporated herein by reference.
|
|
10
|
.12
|
|
Indenture, dated as of November 19, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as to Exhibit 4.1 to the Registrants Current Report
on
Form 8-K
dated November 25, 2003 and incorporated by reference.
|
|
10
|
.13
|
|
Form of 3.0% Convertible Subordinated Notes due 2010,
previously filed as
Exhibit A-1
to Exhibit 4.1 to the Registrants Current Report on
Form 8-K
dated November 25, 2003 and incorporated herein by
reference.
|
|
10
|
.14
|
|
Form of 4.0% Convertible Subordinated Notes due 2013,
previously filed as
Exhibit A-2
to Exhibit 4.1 to the Registrants Current Report on
Form 8-K
dated November 25, 2003 and incorporated herein by
reference.
|
|
10
|
.15
|
|
Valeant Pharmaceuticals International 2003 Employee Stock
Purchase Plan, previously filed as Annex C to the Proxy
Statement filed on Schedule 14A on April 25, 2003,
which is incorporated herein by reference.
|
|
10
|
.16
|
|
Agreement between Valeant Pharmaceuticals International and Bary
G. Bailey, dated October 22, 2002, previously filed as
Exhibit 10.21 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
10
|
.17
|
|
Amended and Restated Executive Employment Agreement between
Valeant Pharmaceuticals International and Timothy C. Tyson,
dated March 21, 2005, previously filed as Exhibit 10.1
to the Registrants Current Report on
Form 8-K/A
dated March 25, 2005, which is incorporated herein by
reference.
|
|
10
|
.18
|
|
Form of Executive Severance Agreement between Valeant
Pharmaceuticals International and each of the following persons:
Eileen C. Pruette (entered into on April 22, 2005), Charles
Bramlage (entered into on June 16, 2005) and Wesley
Wheeler (entered into on June 16, 2005), previously filed,
with respect to Ms. Pruette, as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated April 27, 2005, which is incorporated herein by
reference, and previously filed, with respect to
Messrs. Bramlage and Wheeler, as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated June 16, 2005, which is incorporated herein by
reference.
|
|
10
|
.19
|
|
Agreement and Plan of Merger among Valeant Pharmaceuticals
International, BW Acquisition Sub, Inc. and Xcel
Pharmaceuticals, Inc. previously filed as Exhibit 99.1 to
the Registrants Current Report on
Form 8-K
dated February 1, 2005, which is incorporated herein by
reference.
|
|
**10
|
.20
|
|
Asset Purchase Agreement, dated as of January 22, 2004, by
and between Xcel Pharmaceuticals, Inc. and VIATRIS GmbH and Co.
KG., previously filed as Exhibit 10.7 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005, which is incorporated
herein by reference.
|
|
10
|
.21
|
|
Amended and Restated Diastat Asset Purchase Agreement, dated
March 31, 2001, by and among Xcel Pharmaceuticals, Inc.,
Elan Pharmaceuticals, Inc. and Elan Pharma International
Limited, previously filed as Exhibit 10.8 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005, which is incorporated
herein by reference.
|
121
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.22
|
|
Valeant Pharmaceuticals International 2006 Equity Incentive Plan
previously filed as Exhibit 10.1 to the Current Report on
Form 8-K
filed on May 25, 2006, which is incorporated herein by
reference.
|
|
10
|
.23
|
|
Form of Restricted Stock Unit Award Agreement under the 2003
Equity Incentive Plan, previously filed as Exhibit 99.1 to
the Current Report on
Form 8-K
filed on June 27, 2006, which is incorporated herein by
reference.
|
|
10
|
.24
|
|
Description of Registrants Executive Incentive Plan,
previously described in Item 5.02 of Registrants
Current Report on
Form 8-K,
dated March 28, 2007, which is incorporated herein by
reference.
|
|
10
|
.25
|
|
Form of Restricted Stock Unit Award Grant Notice for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.1 to the Registrants
Form 10-Q
for the quarter ended June 30, 2007, which is incorporated
herein by reference.
|
|
10
|
.26
|
|
Form of Restricted Stock Unit Award Agreement for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.2 to the Registrants
Form 10-Q
for the quarter ended June 30, 2007, which is incorporated
herein by reference.
|
|
**10
|
.27
|
|
Asset Purchase Agreement dated December 19, 2007 between
Three Rivers Pharmaceuticals, LLC and Valeant Pharmaceuticals
North America.
|
|
**10
|
.28
|
|
Side Letter dated January 11, 2008 between Three Rivers
Pharmaceuticals, LLC and Valeant Pharmaceuticals North America.
|
|
10
|
.29
|
|
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
|
.30
|
|
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
|
.31
|
|
Release Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.3 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.32
|
|
Separation and Release Agreement, dated as of December 13,
2007, between Valeant Pharmaceuticals International and Wesley
P. Wheeler.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer of Periodic Financial Reports pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350.
|
|
|
|
* |
|
None of the other indebtedness of the Registrant exceeds 10% of
its total consolidated assets. The Registrant will furnish
copies of the instruments relating to such other indebtedness
upon request. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |
122
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Valeant Pharmaceuticals
International
|
|
|
|
By
|
/s/ J.
Michael Pearson
|
J. Michael Pearson
Chairman and Chief Executive Officer
Date: March 17, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ J.
Michael Pearson
J.
Michael Pearson
|
|
Chief Executive Officer and Chairman of the Board (Principal
Executive Officer)
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ Peter
J. Blott
Peter
J. Blott
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ Robert
A. Ingram
Robert
A. Ingram
|
|
Lead Director
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ Richard
H. Koppes
Richard
H. Koppes
|
|
Director
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ Lawrence
N. Kugelman
Lawrence
N. Kugelman
|
|
Director
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ Theo
Melas-Kyriazi
Theo
Melas-Kyriazi
|
|
Director
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ G.
Mason Morfit
G.
Mason Morfit
|
|
Director
|
|
Date: March 17, 2008
|
|
|
|
|
|
/s/ Norma
A. Provencio
Norma
A. Provencio
|
|
Director
|
|
Date: March 17, 2008
|
123
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended to date,
previously filed as Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of
Series A Participating Preferred Stock previously filed as
Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Certificate of Correction to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as
Exhibit 3.3 to the Registrants
Form 10-Q
for the quarter ended September 30, 2007, which is
incorporated herein by reference.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of the Registrant previously filed
as Exhibit 3.1 to the Registrants Current Report on
Form 8-K,
dated February 25, 2008, which is incorporated herein by
reference.
|
|
4
|
.1
|
|
Form of Rights Agreement, dated as of November 2, 1994,
between the Registrant and American Stock Transfer &
Trust Company, as trustee, previously filed as
Exhibit 4.3 to the Registrants Registration Statement
on
Form 8-A,
dated November 10, 1994, which is incorporated herein by
reference.
|
|
4
|
.2
|
|
Amended Rights Agreement, dated as of October 5, 2004,
previously filed as Exhibit 4.1 to the Registrants
Current Report on
Form 8-K,
dated October 5, 2004, which is incorporated herein by
reference.
|
|
10
|
.1
|
|
Valeant Pharmaceuticals International 1992 Non-Qualified Stock
Plan, previously filed as Exhibit 10.57 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 1992, which is incorporated
herein by reference.
|
|
10
|
.2
|
|
Valeant Pharmaceuticals International 1994 Stock Option Plan,
previously filed as Exhibit 10.30 to the Registrants
Form 10-K
for the year ended December 31, 1995, which is incorporated
herein by reference.
|
|
10
|
.3
|
|
Valeant Pharmaceuticals International 1998 Stock Option Plan,
previously filed as Exhibit 10.20 to the Registrants
Form 10-K
for the year ended December 31, 1998, which is incorporated
herein by reference.
|
|
10
|
.4
|
|
Valeant Pharmaceuticals International 2003 Equity Incentive
Plan, previously filed as Annex B to the Proxy Statement
filed on Schedule 14A on April 25, 2003, which is
incorporated herein by reference.
|
|
**10
|
.5
|
|
Exclusive License and Supply Agreement between Valeant
Pharmaceuticals International and Schering-Plough Ltd. dated
July 28, 1995 previously filed as Exhibit 10 to the
Registrants Amendment 3 to the Quarterly Report on
Form 10-Q
for the quarter ended September 30, 1996, which is
incorporated herein by reference.
|
|
**10
|
.6
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.,
previously filed as Exhibit 10.32 to the Registrants
Annual Report on
Form 10-K
for the year ended December 31, 2000, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.7
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.
Dated July 16, 1998, previously filed as Exhibit 10.33
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2000, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.8
|
|
Agreement among Schering-Plough Corporation, Valeant
Pharmaceuticals International and Ribapharm Inc. dated as of
November 14, 2000, previously filed as Exhibit 10.34
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2000, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.9
|
|
Agreement among Valeant Pharmaceuticals International, Ribapharm
Inc., Hoffmann-La Roche, and F. Hoffmann-La Roche Ltd,
dated January 3, 2003, previously filed as
Exhibit 10.19 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002, which is incorporated
herein by reference.
|
124
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.10
|
|
Indenture, dated as of December 12, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as Exhibit 4.1 to the Registrants Registration
Statement
No. 333-112906
on
Form S-4
and incorporated herein by reference.
|
|
10
|
.11
|
|
Form of 7.0% Senior Notes due 2011, previously filed as
Exhibit A-1
to Exhibit 4.1 to the Registrants Registration
Statement
No. 333-112906
on
Form S-4
and incorporated herein by reference.
|
|
10
|
.12
|
|
Indenture, dated as of November 19, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as to Exhibit 4.1 to the Registrants Current Report
on
Form 8-K
dated November 25, 2003 and incorporated by reference.
|
|
10
|
.13
|
|
Form of 3.0% Convertible Subordinated Notes due 2010,
previously filed as
Exhibit A-1
to Exhibit 4.1 to the Registrants Current Report on
Form 8-K
dated November 25, 2003 and incorporated herein by
reference.
|
|
10
|
.14
|
|
Form of 4.0% Convertible Subordinated Notes due 2013,
previously filed as
Exhibit A-2
to Exhibit 4.1 to the Registrants Current Report on
Form 8-K
dated November 25, 2003 and incorporated herein by
reference.
|
|
10
|
.15
|
|
Valeant Pharmaceuticals International 2003 Employee Stock
Purchase Plan, previously filed as Annex C to the Proxy
Statement filed on Schedule 14A on April 25, 2003,
which is incorporated herein by reference.
|
|
10
|
.16
|
|
Agreement between Valeant Pharmaceuticals International and Bary
G. Bailey, dated October 22, 2002, previously filed as
Exhibit 10.21 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002, as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
10
|
.17
|
|
Amended and Restated Executive Employment Agreement between
Valeant Pharmaceuticals International and Timothy C. Tyson,
dated March 21, 2005, previously filed as Exhibit 10.1
to the Registrants Current Report on
Form 8-K/A
dated March 25, 2005, which is incorporated herein by
reference.
|
|
10
|
.18
|
|
Form of Executive Severance Agreement between Valeant
Pharmaceuticals International and each of the following persons:
Eileen C. Pruette (entered into on April 22, 2005), Charles
Bramlage (entered into on June 16, 2005) and Wesley
Wheeler (entered into on June 16, 2005), previously filed,
with respect to Ms. Pruette, as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated April 27, 2005, which is incorporated herein by
reference, and previously filed, with respect to
Messrs. Bramlage and Wheeler, as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated June 16, 2005, which is incorporated herein by
reference.
|
|
10
|
.19
|
|
Agreement and Plan of Merger among Valeant Pharmaceuticals
International, BW Acquisition Sub, Inc. and Xcel
Pharmaceuticals, Inc. previously filed as Exhibit 99.1 to
the Registrants Current Report on
Form 8-K
dated February 1, 2005, which is incorporated herein by
reference.
|
|
**10
|
.20
|
|
Asset Purchase Agreement, dated as of January 22, 2004, by
and between Xcel Pharmaceuticals, Inc. and VIATRIS GmbH and Co.
KG., previously filed as Exhibit 10.7 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005, which is incorporated
herein by reference.
|
|
10
|
.21
|
|
Amended and Restated Diastat Asset Purchase Agreement, dated
March 31, 2001, by and among Xcel Pharmaceuticals, Inc.,
Elan Pharmaceuticals, Inc. and Elan Pharma International
Limited, previously filed as Exhibit 10.8 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005, which is incorporated
herein by reference.
|
|
10
|
.22
|
|
Valeant Pharmaceuticals International 2006 Equity Incentive Plan
previously filed as Exhibit 10.1 to the Current Report on
Form 8-K
filed on May 25, 2006, which is incorporated herein by
reference.
|
|
10
|
.23
|
|
Form of Restricted Stock Unit Award Agreement under the 2003
Equity Incentive Plan, previously filed as Exhibit 99.1 to
the Current Report on
Form 8-K
filed on June 27, 2006, which is incorporated herein by
reference.
|
|
10
|
.24
|
|
Description of Registrants Executive Incentive Plan,
previously described in Item 5.02 of Registrants
Current Report on
Form 8-K,
dated March 28, 2007, which is incorporated herein by
reference.
|
125
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.25
|
|
Form of Restricted Stock Unit Award Grant Notice for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.1 to the Registrants
Form 10-Q
for the quarter ended June 30, 2007, which is incorporated
herein by reference.
|
|
10
|
.26
|
|
Form of Restricted Stock Unit Award Agreement for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.2 to the Registrants
Form 10-Q
for the quarter ended June 30, 2007, which is incorporated
herein by reference.
|
|
**10
|
.27
|
|
Asset Purchase Agreement dated December 19, 2007 between
Three Rivers Pharmaceuticals, LLC and Valeant Pharmaceuticals
North America.
|
|
**10
|
.28
|
|
Side Letter dated January 11, 2008 between Three Rivers
Pharmaceuticals, LLC and Valeant Pharmaceuticals North America.
|
|
10
|
.29
|
|
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
|
.30
|
|
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
|
.31
|
|
Release Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.3 to the
Registrants Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.32
|
|
Separation and Release Agreement, dated as of December 13,
2007, between Valeant Pharmaceuticals International and Wesley
P. Wheeler.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer of Periodic Financial Reports pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350.
|
|
|
|
* |
|
None of the other indebtedness of the Registrant exceeds 10% of
its total consolidated assets. The Registrant will furnish
copies of the instruments relating to such other indebtedness
upon request. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |
126