NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
1.
|
DESCRIPTION OF BUSINESS
|
Valeant Pharmaceuticals International, Inc. (the "Company") is a multinational, specialty pharmaceutical and medical device company, continued under the laws of the Province of British Columbia, that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over
100
countries.
On April 1, 2015, the Company acquired Salix Pharmaceuticals, Ltd. ("Salix"), pursuant to an Agreement and Plan of Merger dated February 20, 2015, as amended on March 16, 2015 (the "Salix Merger Agreement"), with Salix surviving as a wholly owned subsidiary of Valeant Pharmaceuticals International ("Valeant"), a subsidiary of the Company (the "Salix Acquisition").
For further information regarding the Salix Acquisition, see Note 4.
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|
2.
|
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
|
This footnote discloses the nature of the restatement matters described below and shows the impact of the restatement matters on the Company's consolidated financial statements for the three months ended March 31, 2015.
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), the Company has restated its consolidated financial statements for the year ended December 31, 2014 (including the financial information for the three months ended December 31, 2014), the three months ended March 31, 2015, six months ended June 30, 2015 and nine months ended September 30, 2015. The Company filed the 2015 Form 10-K on April 29, 2016. Additional information regarding the restatement is contained in that filing. Prior period financial information in this Form 10-Q has been amended where necessary to reflect the restatement. Therefore, this Form 10-Q should be read in conjunction with the Company’s 2015 Form 10-K.
On December 15, 2014, the Company entered into a purchase option agreement with Philidor Rx Services, LLC (“Philidor”) and its members in which the Company received an exclusive option to acquire
100%
of the equity interest in Philidor, and as of which time Philidor was consolidated with the Company for accounting purposes as a variable interest entity for which the Company was the primary beneficiary. Prior to consolidation, revenue on sales to Philidor was recognized by the Company on a sell-in basis (i.e., recorded when the Company delivered product to Philidor). The Company determined that certain sales transactions for deliveries to Philidor in the second half of 2014 leading up to the execution of the purchase option agreement were not executed in the normal course of business under applicable accounting standards and included actions taken by the Company (including fulfillment of unusually large orders with extended payment terms and increased pricing, an emphasis on delivering product prior to the execution of the purchase option agreement and seeking and filling a substitute order of equivalent value for an unavailable product) in contemplation of the purchase option agreement. As a result of these actions, revenue for certain transactions completed prior to entry into the purchase option agreement should have been recognized on a sell-through basis (i.e., record revenue when Philidor dispensed the products to patients) rather than incorrectly recognized on the sell-in basis utilized by the Company. Additionally, related to these and certain earlier transactions, the Company has since concluded that collectability was not reasonably assured at the time the revenue was originally recognized, and, thus, these transactions should have been recognized at a later date (when collectability was reasonably assured which the Company determined coincides with when the inventory is sold through to the end customer) instead of on a sell-in basis. Following the consolidation of Philidor on the date of entry into the purchase option agreement, the Company began recognizing revenue as Philidor dispensed product to patients. The restatement of previously issued financial statements, primarily for these Philidor-related adjustments, reduced revenue for the three months ended March 31, 2015 by approximately
$21 million
and increased the Company's net income attributable to Valeant Pharmaceuticals International, Inc. and diluted earnings per share for the three months ended March 31, 2015 by approximately
$24 million
or
$0.07
per share.
The following tables summarize the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the three months ended March 31, 2015, as reported on the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on April 30, 2015, compared to the restated financial statements. The individual restatement matters that underlie the restatement adjustments are described below and are reflected and quantified, as applicable, in the footnotes to the below tables.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
(a)
|
Philidor revenue recognition adjustments - The correction of the misstatement from recognizing revenue related to sales to Philidor from a sell-in to sell-through basis had the effect of eliminating certain revenue recorded in 2014 prior to the date that Philidor was consolidated as a variable interest entity. The revenue that was eliminated from 2014 did not result in an increase to revenue in subsequent periods as a result of the Company having previously recognized that revenue, subsequent to the consolidation of Philidor, when Philidor dispensed the product to patients. Under the sell-in method previously utilized by the Company with respect to sales to Philidor prior to its consolidation in December 2014, revenue was recognized upon delivery of the products to Philidor. At the date of consolidation, certain of that previously sold inventory was still held by Philidor. Subsequent to the consolidation, Philidor recognized revenue on that inventory when it dispensed products to patients, and that revenue was consolidated into the Company’s results. As long as those pre-consolidation sales transactions were in the normal course of business under applicable accounting standards and not entered into in contemplation of the purchase option agreement, the Company’s historical accounting for this revenue was in accordance with U.S. GAAP. The Company has since determined that certain sales transactions for deliveries to Philidor, leading up to the purchase option agreement, were not executed in the normal course of business under applicable accounting standards and included actions taken by the Company (including fulfillment of unusually large orders with extended payment terms and increased pricing, an emphasis on delivering product prior to the execution of the purchase option agreement and seeking and filling a substitute order of equivalent value for an unavailable product) in contemplation of the purchase option agreement. As such, revenue, net of managed care rebates, of
$58 million
previously recorded in 2014 was corrected. However, because that revenue was also recorded by Philidor subsequent to consolidation, upon dispensing of products to patients, the elimination of this revenue in 2014, prior to consolidation, did not result in additional revenue being recorded in 2015. Additionally, provisions for managed care rebates of
$21 million
previously recorded in 2014 are now recognized against that revenue in the first quarter of 2015.
|
At the time of the consolidation of Philidor in December 2014, under the acquisition method of accounting, the Company recorded the fair value of the inventory on hand at Philidor at the net price the Company previously sold the inventory to Philidor, exclusive of the impact of managed care rebates. The restatement adjustments to eliminate the revenue for certain sales transactions between the Company and Philidor prior to consolidation, resulted in a reduction, for accounting purposes, to the amount of inventory that the Company acquired from Philidor. Eliminating the pre-consolidation sales described above had the effect of reducing pre-tax profit that was recognized in 2014 by
$39 million
. The majority of this profit is now recognized in 2015 as a reduction to previously recorded Cost of Goods Sold as the restated carrying amount of this inventory does not include the stepped up value resulting from the Company's consolidation of Philidor.
|
|
(b)
|
Accrued liability adjustment - Unrelated to Philidor, the Company recorded an accrual for previously unrecorded professional fees related to acquisition-related costs.
|
|
|
(c)
|
Tax effect of restatement adjustments - The Company calculated the tax effect of the adjustments noted above.
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2015
(As Previously Reported)
|
|
Restatement
Adjustments
|
|
2015
(Restated)
|
|
Restatement
Ref
|
Revenues
|
|
|
|
|
|
|
|
Product sales
|
$
|
2,146.9
|
|
|
$
|
(20.8
|
)
|
|
$
|
2,126.1
|
|
|
(a)
|
Other revenues
|
44.0
|
|
|
—
|
|
|
44.0
|
|
|
|
|
2,190.9
|
|
|
(20.8
|
)
|
|
2,170.1
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of amortization and impairments of finite-lived
|
|
|
|
|
|
|
|
intangible assets shown separately below)
|
560.4
|
|
|
(52.5
|
)
|
|
507.9
|
|
|
(a)
|
Cost of other revenues
|
14.3
|
|
|
—
|
|
|
14.3
|
|
|
|
Selling, general and administrative
|
573.8
|
|
|
—
|
|
|
573.8
|
|
|
|
Research and development
|
55.8
|
|
|
—
|
|
|
55.8
|
|
|
|
Amortization and impairment of finite-lived intangible assets
|
365.2
|
|
|
—
|
|
|
365.2
|
|
|
|
Restructuring, integration and other costs
|
55.0
|
|
|
—
|
|
|
55.0
|
|
|
|
Acquisition-related costs
|
9.8
|
|
|
4.1
|
|
|
13.9
|
|
|
(b)
|
Acquisition-related contingent consideration
|
7.1
|
|
|
—
|
|
|
7.1
|
|
|
|
Other expense
|
6.1
|
|
|
—
|
|
|
6.1
|
|
|
|
|
1,647.5
|
|
|
(48.4
|
)
|
|
1,599.1
|
|
|
|
Operating income
|
543.4
|
|
|
27.6
|
|
|
571.0
|
|
|
|
Interest income
|
0.9
|
|
|
—
|
|
|
0.9
|
|
|
|
Interest expense
|
(297.8
|
)
|
|
—
|
|
|
(297.8
|
)
|
|
|
Loss on extinguishment of debt
|
(20.0
|
)
|
|
—
|
|
|
(20.0
|
)
|
|
|
Foreign exchange and other
|
(71.1
|
)
|
|
—
|
|
|
(71.1
|
)
|
|
|
Income before provision for income taxes
|
155.4
|
|
|
27.6
|
|
|
183.0
|
|
|
|
Provision for income taxes
|
80.9
|
|
|
3.6
|
|
|
84.5
|
|
|
(c)
|
Net income
|
74.5
|
|
|
24.0
|
|
|
98.5
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
|
Net income attributable to Valeant Pharmaceuticals International, Inc.
|
$
|
73.7
|
|
|
$
|
24.0
|
|
|
$
|
97.7
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.22
|
|
|
$
|
0.07
|
|
|
$
|
0.29
|
|
|
|
Diluted
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (in millions)
|
|
|
|
|
|
|
|
Basic
|
336.8
|
|
|
|
|
336.8
|
|
|
|
Diluted
|
343.4
|
|
|
|
|
343.4
|
|
|
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
There was no net impact of the 2015 restatement adjustments on net cash provided by operating activities, net cash used in investing activities and net cash provided by financing activities in the Consolidated Statement of Cash Flows. The adjustments only had an impact on certain captions within cash flows from operating activities.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2015
(As Previously Reported)
|
|
Restatement
Adjustments
|
|
2015
(Restated)
|
|
Restatement
Ref
|
Cash Flow From Operating Activities
|
|
|
|
|
|
|
|
Net income
|
$
|
74.5
|
|
|
$
|
24.0
|
|
|
$
|
98.5
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization, including impairments of finite-lived intangible assets
|
407.0
|
|
|
—
|
|
|
407.0
|
|
|
|
Amortization and write-off of debt discounts and debt issuance costs
|
10.5
|
|
|
—
|
|
|
10.5
|
|
|
|
Acquisition accounting adjustment on inventory sold
|
24.5
|
|
|
—
|
|
|
24.5
|
|
|
|
Acquisition-related contingent consideration
|
7.1
|
|
|
—
|
|
|
7.1
|
|
|
|
Allowances for losses on accounts receivable and inventories
|
12.2
|
|
|
—
|
|
|
12.2
|
|
|
|
Deferred income taxes
|
62.4
|
|
|
3.6
|
|
|
66.0
|
|
|
(c)
|
Additions to accrued legal settlements
|
1.5
|
|
|
—
|
|
|
1.5
|
|
|
|
Payments of accrued legal settlements
|
(3.0
|
)
|
|
—
|
|
|
(3.0
|
)
|
|
|
Share-based compensation
|
35.0
|
|
|
—
|
|
|
35.0
|
|
|
|
Tax benefits from share based compensation
|
(17.9
|
)
|
|
—
|
|
|
(17.9
|
)
|
|
|
Foreign exchange loss
|
75.9
|
|
|
—
|
|
|
75.9
|
|
|
|
Loss on extinguishment of debt
|
20.0
|
|
|
—
|
|
|
20.0
|
|
|
|
Payment of accreted interest on contingent consideration
|
(2.2
|
)
|
|
—
|
|
|
(2.2
|
)
|
|
|
Other
|
(7.2
|
)
|
|
—
|
|
|
(7.2
|
)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade receivables
|
(67.0
|
)
|
|
—
|
|
|
(67.0
|
)
|
|
|
Inventories
|
(38.5
|
)
|
|
(52.5
|
)
|
|
(91.0
|
)
|
|
(a)
|
Prepaid expenses and other current assets
|
(45.1
|
)
|
|
—
|
|
|
(45.1
|
)
|
|
|
Accounts payable, accrued and other liabilities
|
(58.6
|
)
|
|
24.9
|
|
|
(33.7
|
)
|
|
(a), (b)
|
Net cash provided by operating activities
|
491.1
|
|
|
—
|
|
|
491.1
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
(11,240.5
|
)
|
|
—
|
|
|
(11,240.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
12,306.3
|
|
|
—
|
|
|
12,306.3
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(15.1
|
)
|
|
—
|
|
|
(15.1
|
)
|
|
|
Net increase in cash and cash equivalents
|
1,541.8
|
|
|
—
|
|
|
1,541.8
|
|
|
|
Cash and cash equivalents, beginning of period
|
322.6
|
|
|
—
|
|
|
322.6
|
|
|
|
Cash and cash equivalents, end of period
|
$
|
1,864.4
|
|
|
$
|
—
|
|
|
$
|
1,864.4
|
|
|
|
|
|
|
|
|
|
|
|
Non- Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
Acquisition of businesses, contingent consideration at fair value
|
$
|
(286.9
|
)
|
|
$
|
—
|
|
|
$
|
(286.9
|
)
|
|
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
3.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying unaudited consolidated financial statements (the “unaudited consolidated financial statements”) have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these condensed notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in the Company’s 2015 Form 10-K. The unaudited consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2015. The unaudited consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
Use of Estimates
In preparing the unaudited consolidated financial statements, management is required 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 unaudited consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.
Adoption of New Accounting Standards
In February 2015, the FASB issued guidance which amends certain consolidation requirements. The new guidance has the following stipulations, among others: (i) eliminates the presumption that a general partner should consolidate a limited partnership and eliminates the consolidation model specific to limited partnerships, (ii) clarifies when fees paid to a decision maker should be a factor to include in the consolidation of VIEs, (iii) amends the guidance for assessing how relationships of related parties affect the consolidation analysis of VIEs, and (iv) reduces the number of VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds. The guidance was effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2015. The Company adopted this standard as of January 1, 2016 using the modified retrospective approach, as permitted, and, as such, prior periods were not retrospectively adjusted. The adoption of this standard did not have a material impact on the presentation of the Company's results of operations, cash flows or financial position.
Recently Issued Accounting Standards, Not Adopted as of
March 31, 2016
In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity will: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition to these provisions, the new standard provides implementation guidance on several other topics, including the accounting for certain revenue-related costs, as well as enhanced disclosure requirements. The new guidance requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued an amendment to clarify the implementation guidance around considerations of whether an entity is a principal or an agent, impacting whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued an amendment to
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
clarify guidance on identifying performance obligations and the implementation guidance on licensing. In May 2016, the FASB issued amendments to certain aspects of the new revenue guidance (including transition, collectability, noncash consideration and the presentation of sales and other similar taxes) and provided certain practical expedients. The guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early application is permitted but not before the annual reporting period (and interim reporting period) beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In August 2014, the FASB issued guidance which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new guidance, disclosures are required when conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have any impact on the Company’s financial position and results of operations and, at this time, the Company does not expect any impact on its disclosures.
In July 2015, the FASB issued guidance which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In January 2016, the FASB issued guidance which amends the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured under the fair value option. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In February 2016, the FASB issued new guidance on leases. The new guidance will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions. Current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions. Consistent with the current lease standard, the new guidance addresses two types of leases: finance leases and operating leases. Finance leases will be accounted for in substantially the same manner as capital leases are accounted for under current GAAP. Operating leases will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with operating leases under existing GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception. The new guidance will also require lessees and lessors to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities. The new guidance is effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2018. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and cash flows.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
The Company’s business strategy has involved selective acquisitions with a focus on core geographies and therapeutic classes.
Business combinations in 2015 included the following:
Amoun
Description of the Transaction
On October 19, 2015, the Company acquired Mercury (Cayman) Holdings, the holding company of Amoun Pharmaceutical Company S.A.E. (“Amoun”), for consideration of approximately
$911 million
, including contingent payments (the “Amoun Acquisition”). Amoun develops and markets a wide range of pharmaceutical brands in therapeutic areas such as anti-hypertensives, broad spectrum antibiotics, and anti-diarrheals primarily in North Africa and the Middle East.
Fair Value of Consideration Transferred
The fair value of consideration transferred to effect the Amoun Acquisition consisted of
$847 million
in cash, plus contingent consideration based upon the achievement of specified sales-based milestones. The range of potential milestone payments as of the acquisition date is from nil, if none of the milestones are achieved, to a maximum of up to approximately
$75 million
over time, if all milestones are achieved, in the aggregate. The total fair value of the contingent consideration of
$64 million
as of the acquisition date was determined using probability-weighted discounted cash flows. Refer to Note 6 for additional information regarding contingent consideration. The Company recognized a post-combination expense of
$12 million
within Other expense (income) in the fourth quarter of 2015 related to cash bonuses paid to Amoun employees.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:
|
|
•
|
amounts for intangible assets, property, plant and equipment, certain liabilities, and other working capital balances pending finalization of the valuation;
|
|
|
•
|
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
|
|
|
•
|
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
|
The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the provisional amounts recognized at the acquisition date in the reporting period in which the adjustments are determined. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
(a)
|
|
Measurement
Period
Adjustments
|
|
Amounts
Recognized as of
March 31, 2016
(as adjusted)
|
Cash
|
|
$
|
43.5
|
|
|
$
|
—
|
|
|
$
|
43.5
|
|
Accounts receivable
(b)
|
|
64.2
|
|
|
—
|
|
|
64.2
|
|
Inventories
|
|
37.9
|
|
|
—
|
|
|
37.9
|
|
Other current assets
|
|
12.2
|
|
|
—
|
|
|
12.2
|
|
Property, plant and equipment
|
|
96.4
|
|
|
(1.0
|
)
|
|
95.4
|
|
Identifiable intangible assets, excluding acquired in-process research and development ("IPR&D")
(c)
|
|
528.0
|
|
|
(0.2
|
)
|
|
527.8
|
|
Acquired IPR&D
|
|
18.5
|
|
|
(1.1
|
)
|
|
17.4
|
|
Other non-current assets
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Current liabilities
|
|
(30.8
|
)
|
|
—
|
|
|
(30.8
|
)
|
Deferred tax liability, net
(d)
|
|
(130.5
|
)
|
|
0.5
|
|
|
(130.0
|
)
|
Other non-current liabilities
|
|
(11.2
|
)
|
|
2.9
|
|
|
(8.3
|
)
|
Total identifiable net assets
|
|
628.3
|
|
|
1.1
|
|
|
629.4
|
|
Goodwill
(e)
|
|
282.0
|
|
|
(0.2
|
)
|
|
281.8
|
|
Total fair value of consideration transferred
|
|
$
|
910.3
|
|
|
$
|
0.9
|
|
|
$
|
911.2
|
|
________________________
|
|
(a)
|
As previously reported in the Company’s 2015 Form 10-K.
|
|
|
(b)
|
The fair value of trade accounts receivable acquired was
$64 million
, with the gross contractual amount being
$66 million
, of which the Company expects that
$2 million
will be uncollectible.
|
|
|
(c)
|
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Useful Lives
(Years)
|
|
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
|
|
Measurement
Period
Adjustments
|
|
Amounts
Recognized as of
March 31, 2016
(as adjusted)
|
Product brands
|
|
9
|
|
$
|
490.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
490.7
|
|
Corporate brand
|
|
15
|
|
37.2
|
|
|
(0.1
|
)
|
|
37.1
|
|
Total identifiable intangible assets acquired
|
|
9
|
|
$
|
528.0
|
|
|
$
|
(0.2
|
)
|
|
$
|
527.8
|
|
|
|
(d)
|
Comprised of deferred tax liabilities partially offset by nominal deferred tax assets.
|
|
|
(e)
|
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
|
|
|
•
|
the Company’s expectation to develop and market new products and expand its business to new geographic markets;
|
|
|
•
|
the value of the continuing operations of Amoun's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
|
|
|
•
|
intangible assets that do not qualify for separate recognition (for instance, Amoun's assembled workforce).
|
The provisional amount of goodwill has been allocated to the Company’s Emerging Markets segment.
Sprout
Description of the Transaction
On October 1, 2015, the Company acquired Sprout Pharmaceuticals, Inc. (“Sprout”), pursuant to the merger agreement, among Sprout, the Company, Valeant, Miranda Acquisition Sub, Inc., a wholly owned subsidiary of Valeant, and Shareholder Representative Services LLC, as stockholder representative, on a debt-free basis (the “Sprout Acquisition”), for an aggregate purchase price of
$1.45 billion
, which includes cash plus contingent consideration. Sprout has focused solely on the delivery
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
of a treatment option for the unmet need of pre-menopausal women with acquired, generalized hypoactive sexual desire disorder (HSDD) as characterized by low sexual desire that causes marked distress or interpersonal difficulty and is not due to a co-existing medical or psychiatric condition, problems within the relationship, or the effects of a medication or other drug substance. In August 2015, Sprout received approval from the U.S. Food and Drug Administration ("FDA") on its New Drug Application ("NDA") for flibanserin, which is being marketed as Addyi® in the U.S. (launched in the U.S. in October 2015). Sprout also has global rights to flibanserin. In connection with the acquisition of Sprout, the Company has a contractual obligation for expenditures of at least
$200 million
with respect to Addyi® for selling, general and administrative, marketing and research and development expenses from the period commencing January 1, 2016 through June 30, 2017.
Fair Value of Consideration Transferred
The Company paid approximately
$530 million
, inclusive of customary purchase price adjustments, upon closing of the transaction in October 2015, and an additional payment in the amount of
$500 million
(acquisition date fair value of
$495 million
), included in accrued and other current liabilities as of December 31, 2015, was paid in the first quarter of 2016. In addition, the transaction includes contingent consideration representing payments to the former shareholders and former holders of vested stock appreciation rights of Sprout for a share of future profits. The share of future profits with the former shareholders and former holders of vested stock appreciation rights of Sprout is uncapped and commences on the date that the earlier of the following events occurs (a) net cumulative worldwide sales of flibanserin products (plus any amounts received from sublicenses on the sale of flibanserin products) exceed
$1 billion
or (b) July 1, 2017, and continues until December 31, 2030. The total fair value of the contingent consideration of
$422 million
as of the acquisition date was determined using a Monte Carlo Simulation. Refer to Note 6 for additional information regarding contingent consideration.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:
|
|
•
|
amounts for intangible assets, certain liabilities, and other working capital balances pending finalization of the valuation;
|
|
|
•
|
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
|
|
|
•
|
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
|
The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the provisional amounts recognized at the acquisition date in the reporting period in which the adjustments are determined. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
|
|
|
|
|
|
|
|
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
(a)
|
Cash and cash equivalents
|
|
$
|
26.6
|
|
Inventories
|
|
11.0
|
|
Other assets
|
|
1.6
|
|
Identifiable intangible assets
(b)
|
|
993.7
|
|
Current liabilities
|
|
(4.4
|
)
|
Deferred income taxes, net
|
|
(351.9
|
)
|
Total identifiable net assets
|
|
676.6
|
|
Goodwill
(c)
|
|
769.9
|
|
Total fair value of consideration transferred
|
|
$
|
1,446.5
|
|
________________________
|
|
(a)
|
As previously reported in the Company’s 2015 Form 10-K.
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
(b)
|
Consists of product rights with a weighted-average useful life of
11
years.
|
|
|
(c)
|
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
|
|
|
•
|
the Company’s potential ability to develop and market the product to additional types of patients/indications and launch the product in a variety of new geographies;
|
|
|
•
|
the value of the continuing operations of Sprout's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
|
|
|
•
|
intangible assets that do not qualify for separate recognition (for instance, Sprout's assembled workforce).
|
The provisional amount of goodwill has been allocated to the Company’s Developed Markets segment.
Salix
Description of the Transaction
On April 1, 2015, the Company acquired Salix, pursuant to the Salix Merger Agreement, among the Company, Valeant, Sun Merger Sub, Inc., a wholly owned subsidiary of Valeant (“Sun Merger Sub”), and Salix. Salix is a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of variety of gastrointestinal ("GI") disorders with a portfolio of over
20
marketed products, including Xifaxan®, Uceris®, Apriso®, Glumetza®, and Relistor®.
In accordance with the terms of the Salix Merger Agreement, Sun Merger Sub commenced a tender offer (the “Offer”) for all of Salix’s outstanding shares of common stock, par value
$0.001
per share (the “Salix Shares”), at a purchase price of
$173.00
per Salix Share, net to the holder in cash, without interest, less any applicable withholding taxes. The Offer expired on April 1, 2015, as scheduled. A sufficient number of Salix Shares were validly tendered in the Offer such that the minimum tender condition to the Offer was satisfied, and Sun Merger Sub accepted for payment all such tendered Salix Shares. Following the expiration of the Offer on April 1, 2015, Sun Merger Sub merged with and into Salix, with Salix surviving as a wholly owned subsidiary of Valeant (the “Merger”). The Merger was governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the Merger. At the effective time of the Merger, each Salix Share then outstanding was converted into the right to receive
$173.00
in cash, without interest, less any applicable withholding taxes, except for Salix Shares then owned by the Company or Salix or their respective wholly owned subsidiaries, which Salix Shares were cancelled for no consideration.
In connection with the Merger, each unexpired and unexercised option to purchase Salix Shares (the “Salix Options”), whether or not then exercisable or vested, was cancelled and, in exchange therefor, each former holder of any such cancelled Salix Options was entitled to receive, a payment in cash (subject to any applicable withholding or other taxes required by applicable law to be withheld) of an amount equal to the product of (i) the total number of Salix Shares previously subject to such Salix Options and (ii) the excess, if any, of
$173.00
over the exercise price per Salix Share previously subject to such Salix Options. Each unvested Salix Share subject to forfeiture restrictions, repurchase rights or other restrictions (the “Salix Restricted Stock”) automatically became fully vested and was cancelled and, in exchange therefor, each former holder of such cancelled Salix Restricted Stock was entitled to receive, a payment in cash (subject to any applicable withholding or other taxes required by applicable law to be withheld) equal to
$173.00
per share of Salix Restricted Stock.
The Salix Acquisition (including the Offer and the Merger), as well as related transactions and expenses, were funded through a combination of: (i) the proceeds from an issuance of senior unsecured notes that closed on March 27, 2015; (ii) the proceeds from incremental term loan commitments; (iii) the proceeds from a registered offering of the Company’s common shares in the United States that closed on March 27, 2015; and (iv) cash on hand.
Fair Value of Consideration Transferred
The following table indicates the consideration transferred to effect the Salix Acquisition:
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(In millions except per share data)
|
|
Conversion
Calculation
|
|
Fair
Value
|
Number of shares of Salix common stock outstanding as of acquisition date
|
|
64.3
|
|
|
|
|
Multiplied by Per Share Merger Consideration
|
|
$
|
173.00
|
|
|
$
|
11,123.9
|
|
Number of outstanding stock options of Salix cancelled and exchanged for cash
(a)
|
|
0.1
|
|
|
10.1
|
|
Number of outstanding restricted stock of Salix cancelled and exchanged for cash
(a)
|
|
1.1
|
|
|
195.0
|
|
|
|
|
|
11,329.0
|
|
Less: Cash consideration paid for Salix’s restricted stock that was accelerated at the closing of the Salix Acquisition
(a)
|
|
|
|
(164.5
|
)
|
Add: Payment of Salix’s Term Loan B Credit Facility
(b)
|
|
|
|
1,125.2
|
|
Add: Payment of Salix’s 6.00% Senior Notes due 2021
(b)
|
|
|
|
842.3
|
|
Total fair value of consideration transferred
|
|
|
|
|
$
|
13,132.0
|
|
___________________________________
|
|
(a)
|
The purchase consideration paid to holders of Salix stock options and restricted stock attributable to pre-combination services was included as a component of the purchase price. Purchase consideration of
$165 million
paid for outstanding restricted stock that was accelerated by the Company in connection with the Salix Acquisition was excluded from the purchase price and accounted for as post-combination expense within Other expense (income) in the second quarter of 2015.
|
|
|
(b)
|
The repayment of Salix’s Term Loan B Credit Facility has been reflected as part of the purchase consideration as the debt was repaid concurrently with the consummation of the Salix Acquisition and was not assumed by the Company as part of the acquisition. Similarly, the redemption of Salix’s
6.00%
Senior Notes due 2021 has been reflected as part of the purchase consideration as the indenture governing the
6.00%
Senior Notes due 2021 was satisfied and discharged concurrently with the consummation of the Salix Acquisition and was not assumed by the Company as part of the acquisition.
|
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
(a)
|
|
Measurement
Period
Adjustments
(b)
|
|
Amounts
Recognized as of
December 31, 2015
(as adjusted)
|
Cash and cash equivalents
|
|
$
|
113.7
|
|
|
$
|
—
|
|
|
$
|
113.7
|
|
Inventories
(c)
|
|
233.2
|
|
|
(0.6
|
)
|
|
232.6
|
|
Other assets
(d)
|
|
1,400.3
|
|
|
10.1
|
|
|
1,410.4
|
|
Property, plant and equipment, net
|
|
24.3
|
|
|
—
|
|
|
24.3
|
|
Identifiable intangible assets, excluding acquired IPR&D
(e)
|
|
6,756.3
|
|
|
—
|
|
|
6,756.3
|
|
Acquired IPR&D
(f)
|
|
5,366.8
|
|
|
(183.9
|
)
|
|
5,182.9
|
|
Current liabilities
(g)
|
|
(1,764.2
|
)
|
|
(175.0
|
)
|
|
(1,939.2
|
)
|
Contingent consideration, including current and long-term portion
(h)
|
|
(327.9
|
)
|
|
(6.2
|
)
|
|
(334.1
|
)
|
Long-term debt, including current portion
(i)
|
|
(3,123.1
|
)
|
|
—
|
|
|
(3,123.1
|
)
|
Deferred income taxes, net
(j)
|
|
(3,512.0
|
)
|
|
84.1
|
|
|
(3,427.9
|
)
|
Other non-current liabilities
|
|
(7.3
|
)
|
|
(36.0
|
)
|
|
(43.3
|
)
|
Total identifiable net assets
|
|
5,160.1
|
|
|
(307.5
|
)
|
|
4,852.6
|
|
Goodwill
(k)
|
|
7,971.9
|
|
|
307.5
|
|
|
8,279.4
|
|
Total fair value of consideration transferred
|
|
$
|
13,132.0
|
|
|
$
|
—
|
|
|
$
|
13,132.0
|
|
________________________
|
|
(a)
|
As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.
|
|
|
(b)
|
The measurement period adjustments primarily reflect: (i) a reduction in acquired IPR&D assets, specifically for the Oral Relistor® program based mainly on refinement of the pricing assumptions and cost projections (see further discussion of IPR&D programs in (f) below) and (ii) the tax impact of pre-tax measurement period adjustments as well as reclassifications of certain tax balances impacting current liabilities. The measurement period
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s consolidated financial statements. As the measurement period for the Salix Acquisition closed in the fourth quarter of 2015, there were no measurement period adjustments recorded in the first quarter of 2016.
|
|
(c)
|
Includes an estimated fair value step-up adjustment to inventory of
$108 million
.
|
|
|
(d)
|
Primarily includes an estimated fair value of
$1.27 billion
to record the capped call transactions and convertible bond hedge transactions that were entered into by Salix prior to the Salix Acquisition in connection with its
1.5%
Convertible Senior Notes due 2019 and
2.75%
Convertible Senior Notes due 2015. These instruments were settled on the date of the Salix Acquisition and, as such, the fair value was based on the settlement amounts. Other assets also includes an estimated insurance recovery of
$80 million
, based on estimated fair value, related to the legal matters discussed in (g) below.
|
|
|
(e)
|
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Useful Lives
(Years)
|
|
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
|
|
Measurement
Period
Adjustments
|
|
Amounts
Recognized as of
December 31, 2015
(as adjusted)
|
Product brands
|
|
10
|
|
$
|
6,088.3
|
|
|
$
|
1.3
|
|
|
$
|
6,089.6
|
|
Corporate brand
|
|
20
|
|
668.0
|
|
|
(1.3
|
)
|
|
666.7
|
|
Total identifiable intangible assets acquired
|
|
11
|
|
$
|
6,756.3
|
|
|
$
|
—
|
|
|
$
|
6,756.3
|
|
|
|
(f)
|
A multi-period excess earnings methodology (income approach) was used to determine the estimated fair values of the acquired IPR&D assets from a market participant perspective. The projected cash flows from these assets were adjusted for the probabilities of successful development and commercialization of each project, and the Company used risk-adjusted discount rates of
9.5%
-
11%
to present value the projected cash flows.
|
The IPR&D assets primarily relate to Xifaxan® 550 mg for the treatment of irritable bowel syndrome with diarrhea (new indication) in adults ("Xifaxan® IBS-D"). In determining the fair value of Xifaxan® IBS-D (
$4.79 billion
as of the acquisition date), the Company assumed material cash inflows would commence in 2015. In May 2015, Xifaxan® IBS-D received approval from the FDA, and, accordingly, such asset has been reclassified to an amortizable intangible asset as of the approval date and is being amortized over a period of
10
years.
Other IPR&D assets include, among others, Oral Relistor® for the treatment of opioid-induced constipation in adult patients with chronic non-cancer pain and Rifaximin soluble solid dispersion ("SSD") for the treatment of early decompensated liver cirrhosis. In September 2015, the Company announced that the FDA accepted for review the Company's NDA for Oral Relistor®, and the FDA assigned a Prescription Drug User Fee Act (PDUFA) action date of April 19, 2016. In April 2016, the Company announced that the FDA had extended the PDUFA action date for Oral Relistor® to July 19, 2016 to allow time for a full review of the Company's responses to certain information requests from the FDA. In the third quarter of 2015, the Company terminated the Rifaximin SSD IPR&D program and recognized an impairment charge as described in Note 8.
|
|
(g)
|
Primarily includes an estimated fair value of
$1.08 billion
to record the warrant transactions that were entered into by Salix prior to the Salix Acquisition in connection with its
1.5%
Convertible Senior Notes due 2019 (these instruments were settled on the date of the Salix Acquisition and, as such, the fair value was based on the settlement amounts), as well as accruals for (i) the estimated fair value of
$336 million
(exclusive of the related insurance recovery described in (d) above) for potential losses and related costs associated with legal matters relating to the legacy Salix business (See Note 16 for additional information regarding these legal matters) and (ii) product returns and rebates of
$375 million
.
|
|
|
(h)
|
The contingent consideration consists of potential payments to third parties including developmental milestone payments due upon specified regulatory achievements, commercialization milestones contingent upon achieving specified targets for net sales, and royalty-based payments. As of the acquisition date, the range of potential milestone payments (excluding royalty-based payments) is from
nil
, if
none
of the milestones are achieved, to a maximum of up to approximately
$650 million
(the majority of which relates to sales-based milestones) over time, if all milestones are achieved, in the aggregate, to third parties. This amount includes up to
$250 million
in developmental and sales-based milestones to Progenics Pharmaceuticals, Inc. related to Relistor® (including Oral Relistor®), and various other developmental and sales-based milestones. The total fair value of the contingent consideration of
$334 million
as of the acquisition date was determined using probability-weighted discounted cash flows. Refer to Note 6 for additional information regarding the contingent consideration.
|
|
|
(i)
|
The following table summarizes the fair value of long-term debt assumed as of the acquisition date:
|
|
|
|
|
|
|
|
|
Amounts
Recognized as of
Acquisition Date
|
1.5% Convertible Senior Notes due 2019
(1)
|
|
$
|
1,837.1
|
|
2.75% Convertible Senior Notes due 2015
(1)
|
|
1,286.0
|
|
Total long-term debt assumed
|
|
$
|
3,123.1
|
|
____________________________________
|
|
(1)
|
The Company subsequently redeemed these amounts in full in the second quarter of 2015, except for a nominal amount of the
1.5%
Convertible Senior Notes due 2019.
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
(j)
|
Comprises deferred tax assets (
$303 million
) and deferred tax liabilities (
$3.73 billion
).
|
|
|
(k)
|
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
|
|
|
•
|
the Company’s expectation to develop and market new product brands, product lines and technology;
|
|
|
•
|
cost savings and operating synergies expected to result from combining the operations of Salix with those of the Company;
|
|
|
•
|
the value of the continuing operations of Salix’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
|
|
|
•
|
intangible assets that do not qualify for separate recognition (for instance, Salix’s assembled workforce).
|
Goodwill has been allocated to the Company’s Developed Markets segment
.
Other 2015 Business Combinations (excluding the Amoun Acquisition, the Sprout Acquisition, and the Salix Acquisition)
Description of the Transactions
In the year ended December 31, 2015, the Company completed other business combinations (excluding the Amoun Acquisition, the Sprout Acquisition, and the Salix Acquisition), which included the acquisition of the following businesses, for an aggregate purchase price of
$1.41 billion
. The other business combinations completed during the year ended December 31, 2015 included contingent consideration arrangements with an aggregate acquisition date fair value of
$191 million
, primarily related to the acquisition of certain assets of Marathon Pharmaceuticals, LLC ("Marathon") (see below), as well as milestone payments and royalties related to other smaller acquisitions. Refer to Note 6 for additional information regarding contingent consideration.
|
|
•
|
On February 23, 2015, the Company, completed via a "stalking horse bid" in a sales process conducted under the U.S. Bankruptcy Code, acquired certain assets of Dendreon Corporation ("Dendreon") for a purchase price of
$415 million
, net of cash received (
$495 million
less cash received of
$80 million
). The purchase price included approximately
$50 million
in stock consideration, and such shares were issued in June 2015. The assets acquired from Dendreon included the worldwide rights to the Provenge® product (an immunotherapy treatment designed to treat men with advanced prostate cancer).
|
|
|
•
|
On February 10, 2015, the Company acquired certain assets of Marathon. The assets acquired from Marathon comprised a portfolio of hospital products, including Nitropress®, Isuprel®, Opium Tincture, Pepcid®, Seconal® Sodium, Amytal® Sodium, and Iprivask® for an aggregate purchase price of
$286 million
(which is net of a
$64 million
assumed liability owed to a third party which is reflected in the table below). Also, as part of this acquisition, the Company assumed a contingent consideration liability as described further below.
|
|
|
•
|
In the year ended December 31, 2015, the Company completed other smaller acquisitions which are not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below.
|
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the business combinations, in the aggregate, as of the applicable acquisition dates. The following recognized amounts related to certain smaller acquisitions are provisional and subject to change:
|
|
•
|
amounts for intangible assets, property and equipment, inventories, receivables and other working capital adjustments pending finalization of the valuation;
|
|
|
•
|
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
|
|
|
•
|
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
|
The Company will finalize these amounts as it obtains the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in adjustments to the
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
provisional amounts recognized at the acquisition dates. These changes could be significant. The Company will finalize these amounts no later than one year from the respective acquisition dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized as of
Acquisition Dates(as previously reported)
|
|
Measurement
Period
Adjustments
(a)
|
|
Amounts
Recognized as of
March 31, 2016
(as adjusted)
|
Cash
|
|
$
|
92.2
|
|
|
$
|
—
|
|
|
$
|
92.2
|
|
Accounts receivable
(b)
|
|
49.5
|
|
|
(3.0
|
)
|
|
46.5
|
|
Inventories
|
|
142.9
|
|
|
(2.2
|
)
|
|
140.7
|
|
Other current assets
|
|
20.2
|
|
|
(0.2
|
)
|
|
20.0
|
|
Property, plant and equipment
|
|
94.6
|
|
|
(15.0
|
)
|
|
79.6
|
|
Identifiable intangible assets, excluding acquired IPR&D
(c)
|
|
1,121.6
|
|
|
(36.8
|
)
|
|
1,084.8
|
|
Acquired IPR&D
|
|
57.5
|
|
|
(3.7
|
)
|
|
53.8
|
|
Other non-current assets
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
Deferred tax (liability) asset, net
|
|
(54.7
|
)
|
|
60.8
|
|
|
6.1
|
|
Current liabilities
(d)
|
|
(123.9
|
)
|
|
(3.9
|
)
|
|
(127.8
|
)
|
Long-term debt
|
|
(6.1
|
)
|
|
—
|
|
|
(6.1
|
)
|
Non-current liabilities
(d)
|
|
(117.4
|
)
|
|
0.2
|
|
|
(117.2
|
)
|
Total identifiable net assets
|
|
1,279.3
|
|
|
(3.8
|
)
|
|
1,275.5
|
|
Goodwill
(e)
|
|
141.9
|
|
|
(5.2
|
)
|
|
136.7
|
|
Total fair value of consideration transferred
|
|
$
|
1,421.2
|
|
|
$
|
(9.0
|
)
|
|
$
|
1,412.2
|
|
________________________
|
|
(a)
|
The measurement period adjustments primarily relate to the acquisition of certain assets of Dendreon and reflect: (i) an increase to the deferred tax assets based on further assessment of the Dendreon net operating losses ("NOLs") available to the Company post-acquisition, (ii) a reduction in the estimated fair value of intangible assets based on further assessment of assumptions related to the probability-weighted cash flows, (iii) a reduction in the estimated fair value of property, plant and equipment driven by further assessment of the fair value of a manufacturing facility, and (iv) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. The adjustments recorded in the current period did not have a significant impact on the Company’s consolidated financial statements.
|
|
|
(b)
|
The fair value of trade accounts receivable acquired was
$47 million
, with the gross contractual amount being
$51 million
, of which the Company expects that
$4 million
will be uncollectible.
|
|
|
(c)
|
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Useful Lives
(Years)
|
|
Amounts
Recognized as of
Acquisition Dates (as previously reported)
|
|
Measurement
Period
Adjustments
|
|
Amounts
Recognized as of
March 31, 2016
(as adjusted)
|
Product brands
|
|
7
|
|
$
|
741.2
|
|
|
$
|
0.4
|
|
|
$
|
741.6
|
|
Product rights
|
|
3
|
|
42.7
|
|
|
(0.7
|
)
|
|
42.0
|
|
Corporate brands
|
|
16
|
|
6.6
|
|
|
—
|
|
|
6.6
|
|
Partner relationships
|
|
8
|
|
7.8
|
|
|
—
|
|
|
7.8
|
|
Technology/know-how
|
|
10
|
|
321.3
|
|
|
(36.5
|
)
|
|
284.8
|
|
Other
|
|
6
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Total identifiable intangible assets acquired
|
|
8
|
|
$
|
1,121.6
|
|
|
$
|
(36.8
|
)
|
|
$
|
1,084.8
|
|
|
|
(d)
|
As part of the acquisition of certain assets of Marathon, the Company assumed a contingent consideration liability related to potential payments, in the aggregate, of up to approximately
$200 million
as of the acquisition date, for Isuprel® and Nitropress®, the amounts of which are dependent on the timing of generic entrants for these products. The fair value of the liability as of the acquisition date was determined using probability-weighted projected cash flows, with
$41 million
classified in Current liabilities and
$46 million
classified in Non-current liabilities in the table above. As of
March 31, 2016
, the assumptions used for determining the fair value of the contingent consideration liability have not changed significantly from those used as of the acquisition date. The Company made contingent consideration payments related to the Marathon acquisition of
$35 million
during 2015 and an additional
$10 million
during the first quarter of 2016.
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
(e)
|
The goodwill relates primarily to certain smaller acquisitions and the acquisition of certain assets of Marathon. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. The majority of the goodwill is not expected to be deductible for tax purposes.
The goodwill represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations with those of the Company.
|
The provisional amount of goodwill has been allocated primarily to the Company’s Developed Markets segment.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for the
three-month period ended March 31, 2015
, as if the 2015 acquisitions had occurred as of January 1,
2014
.
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2015
(restated)
|
Revenues
|
|
$
|
2,271.2
|
|
Net loss attributable to Valeant Pharmaceuticals International, Inc.
|
|
(269.8
|
)
|
|
|
|
Loss per share attributable to Valeant Pharmaceuticals International, Inc.:
|
|
|
Basic
|
|
$
|
(0.78
|
)
|
Diluted
|
|
$
|
(0.78
|
)
|
The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and the acquired businesses described above. Except to the extent realized in the
three-month period ended March 31, 2015
, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the
three-month period ended March 31, 2015
, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with those of the acquired businesses.
The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the 2015 acquisitions been completed on January 1, 2014. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily the following adjustments:
|
|
•
|
elimination of historical intangible asset amortization expense of these acquisitions;
|
|
|
•
|
additional amortization expense related to the fair value of identifiable intangible assets acquired;
|
|
|
•
|
additional depreciation expense related to fair value adjustment to property, plant and equipment acquired;
|
|
|
•
|
additional interest expense associated with the financing obtained by the Company in connection with the Salix Acquisition; and
|
|
|
•
|
the exclusion of
$24 million
related to the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition dates.
|
In addition, all of the above adjustments were adjusted for the applicable tax impact.
2015 Asset Acquisitions
On October 1, 2015, pursuant to an agreement entered into with AstraZeneca Collaboration Ventures, LLC (“AstraZeneca”), the Company was granted an exclusive license to develop and commercialize brodalumab. Brodalumab is an IL-17 receptor monoclonal antibody in development for patients with moderate-to-severe plaque psoriasis and psoriatic arthritis. Under the agreement, the Company holds the exclusive rights to develop and commercialize brodalumab globally, except in Japan and certain other Asian countries where rights are held by Kyowa Hakko Kirin Co., Ltd under a prior arrangement with Amgen Inc., the originator of brodalumab. The Company assumed all remaining development obligations associated with the regulatory approval for brodalumab subsequent to the acquisition. Regulatory submission in the U.S. and European Union for brodalumab
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
in moderate-to-severe psoriasis occurred in November 2015, and, in January 2016, the Company announced that the FDA accepted for review the Biologics License Application ("BLA") for brodalumab and assigned a PDUFA action date of November 16, 2016. Under the terms of the agreement, the Company made an up-front payment to AstraZeneca of
$100 million
in October 2015, which was recognized in In-process research and development impairments and other charges in the fourth quarter of 2015 in the consolidated statement of (loss) income as the product has not yet received regulatory approval at the time of the acquisition. In addition, the Company may pay additional pre-launch milestones of up to
$170 million
and sales-related milestone payments of up to
$175 million
following launch. Upon launch, AstraZeneca and the Company will share profits.
|
|
5.
|
RESTRUCTURING, INTEGRATION AND OTHER COSTS
|
In connection with the Salix Acquisition, as well as other acquisitions, the Company has implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:
|
|
•
|
workforce reductions across the Company and other organizational changes;
|
|
|
•
|
closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;
|
|
|
•
|
leveraging research and development spend; and/or
|
Salix Acquisition-Related Cost-Rationalization and Integration Initiatives
The Company estimates that it will incur total costs of approximately
$300 million
in connection with the cost-rationalization and integration initiatives relating to the Salix Acquisition, which the Company expects to substantially complete by mid-2016. Since the acquisition date, total costs of
$238 million
have been incurred through
March 31, 2016
, including (i)
$123 million
of integration expenses, (ii)
$100 million
of restructuring expenses, and (iii)
$15 million
of acquisition-related costs. The estimate of total costs to be incurred primarily includes: employee termination costs payable to approximately
475
employees of the Company and Salix who have been terminated as a result of the Salix Acquisition; potential IPR&D termination costs related to the transfer to other parties of product-development programs that do not align with the Company's research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs.
Salix Restructuring Costs
The following table summarizes the major components of the restructuring costs incurred in connection with the Salix Acquisition since the acquisition date through
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Related Benefits
|
|
Contract
Termination,
Facility Closure
and Other Costs
|
|
Total
|
Balance, January 1, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs incurred and/or charged to expense
|
|
90.6
|
|
|
0.9
|
|
|
91.5
|
|
Cash payments
|
|
(57.8
|
)
|
|
(0.3
|
)
|
|
(58.1
|
)
|
Non-cash adjustments
|
|
2.2
|
|
|
—
|
|
|
2.2
|
|
Balance, December 31, 2015
|
|
$
|
35.0
|
|
|
$
|
0.6
|
|
|
$
|
35.6
|
|
Costs incurred and/or charged to expense
|
|
0.7
|
|
|
7.7
|
|
|
8.4
|
|
Cash payments
|
|
(11.1
|
)
|
|
(0.3
|
)
|
|
(11.4
|
)
|
Balance, March 31, 2016
|
|
$
|
24.6
|
|
|
$
|
8.0
|
|
|
$
|
32.6
|
|
Salix Integration Costs
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
As mentioned above, the Company has incurred
$123 million
of integration costs related to the Salix Acquisition since the acquisition date. In the
three-month period ended March 31, 2016
, the Company incurred
$13 million
, which related primarily to integration consulting, duplicate labor, transition service, and other costs. The Company made payments of
$8 million
related to Salix integration costs during
three-month period ended March 31, 2016
.
Other Restructuring and Integration-Related Costs (Excluding Salix)
In the
three-month period ended March 31, 2016
, in addition to the restructuring and integration costs associated with the Salix Acquisition described above, the Company incurred an additional
$17 million
of other restructuring, integration-related and other costs. These costs included (i)
$13 million
of integration consulting, duplicate labor, transition service, and other costs, (ii)
$2 million
of severance costs, and (iii)
$2 million
of facility closure costs. These costs primarily related to restructuring and integration costs for other smaller acquisitions. The Company made payments of
$20 million
during the
three-month period ended March 31, 2016
(in addition to the payments related to the Salix Acquisition described above).
In the
three-month period ended March 31, 2015
, the Company incurred an additional
$55 million
of other restructuring, integration-related and other costs. These costs included (i)
$28 million
of integration consulting, duplicate labor, transition service, and other costs, (ii)
$24 million
of severance costs, (iii)
$2 million
of facility closure costs, and (iv)
$1 million
of other costs. These costs primarily related to restructuring and integration costs for the acquired assets of Dendreon and other smaller acquisitions. The Company made payments of
$65 million
during the
three-month period ended March 31, 2015
.
|
|
6.
|
FAIR VALUE MEASUREMENTS
|
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
|
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
|
Carrying
Value
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Carrying
Value
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
|
$
|
920.3
|
|
|
$
|
902.0
|
|
|
$
|
18.3
|
|
|
$
|
—
|
|
|
$
|
167.2
|
|
|
$
|
156.1
|
|
|
$
|
11.1
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration
|
|
$
|
(1,098.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,098.0
|
)
|
|
$
|
(1,155.9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,155.9
|
)
|
___________________________________
|
|
(1)
|
Cash equivalents include highly liquid investments with an original maturity of
three
months or less at acquisition, primarily including money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
In March 2015, the Company entered into foreign currency forward-exchange contracts to sell
€1.53 billion
and buy U.S. Dollars in order to reduce its exposure to the variability in expected cash inflows attributable to the changes in foreign exchange rates related to the
€1.50 billion
aggregate principal amount and related interest of
4.50%
senior unsecured notes due 2023 (the "Euro Notes") issued on March 27, 2015, the proceeds of which were used to finance the Salix Acquisition. These derivative contracts were not designated as hedges for accounting purposes, and such contracts matured on April 1, 2015 (which coincides with the consummation of the Salix Acquisition). A foreign exchange loss of
$26 million
was recognized in Foreign exchange and other in the consolidated statement of (loss) income for the three-month period ended March 31, 2015.
In addition to the above, the Company has time deposits valued at cost, which approximates fair value due to their short-term maturities. The carrying value of
$16 million
as of both
March 31, 2016
and
December 31, 2015
, related to these investments is classified within Prepaid expenses and other current assets in the consolidated balance sheets. These investments are Level 2.
There were
no
transfers between Level 1 and Level 2 during the
three-month period ended March 31, 2016
.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis or Monte Carlo Simulation, using unobservable (Level 3) inputs. These inputs may include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows; and (iv) volatility of projected performance (Monte Carlo Simulation). Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the
three-month period ended March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1,
2016
|
|
Payments/
Settlements
(a)
|
|
Net
Unrealized
Loss
|
|
Foreign
Exchange
(b)
|
|
Balance,
March 31,
2016
|
Acquisition-related contingent consideration
|
$
|
(1,155.9
|
)
|
|
$
|
52.4
|
|
|
$
|
(2.4
|
)
|
|
$
|
7.9
|
|
|
$
|
(1,098.0
|
)
|
____________________________________
|
|
(a)
|
Primarily relates to the settlement of contingent consideration obligation in connection with the termination of the arrangements with and relating to Philidor and payments of acquisition-related contingent consideration related to the acquisition of certain assets of Marathon, the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL in June 2011 (the "Elidel®/Xerese®/Zovirax® agreement"), and other smaller acquisitions.
|
|
|
(b)
|
Included in other comprehensive income.
|
There were no transfers into or out of Level 3 during the
three-month period ended March 31, 2016
.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
There were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis subsequent to initial recognition in the
three-month period ended March 31, 2016
.
For further information regarding asset impairment charges, see Note 8.
The components of inventories as of
March 31, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31,
2016
|
|
As of
December 31,
2015
|
Raw materials
(1)
|
|
$
|
324.1
|
|
|
$
|
289.3
|
|
Work in process
(1)
|
|
141.7
|
|
|
152.7
|
|
Finished goods
(1)
|
|
854.4
|
|
|
814.6
|
|
|
|
$
|
1,320.2
|
|
|
$
|
1,256.6
|
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
___________________________________
|
|
(1)
|
The components of inventories shown in the table above are net of allowance for obsolescence.
|
|
|
8.
|
INTANGIBLE ASSETS AND GOODWILL
|
Intangible Assets
The major components of intangible assets as of
March 31, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization,
Including
Impairments
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization,
Including
Impairments
|
|
Net
Carrying
Amount
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product brands
|
|
$
|
22,124.1
|
|
|
$
|
(5,798.3
|
)
|
|
$
|
16,325.8
|
|
|
$
|
22,082.8
|
|
|
$
|
(5,236.4
|
)
|
|
$
|
16,846.4
|
|
Corporate brands
|
|
1,047.1
|
|
|
(116.6
|
)
|
|
930.5
|
|
|
1,066.1
|
|
|
(107.1
|
)
|
|
959.0
|
|
Product rights/patents
|
|
4,300.1
|
|
|
(1,845.2
|
)
|
|
2,454.9
|
|
|
4,339.9
|
|
|
(1,711.7
|
)
|
|
2,628.2
|
|
Partner relationships
|
|
175.2
|
|
|
(131.5
|
)
|
|
43.7
|
|
|
217.6
|
|
|
(170.3
|
)
|
|
47.3
|
|
Technology and other
|
|
449.3
|
|
|
(164.5
|
)
|
|
284.8
|
|
|
480.3
|
|
|
(186.1
|
)
|
|
294.2
|
|
Total finite-lived intangible assets
(1)
|
|
28,095.8
|
|
|
(8,056.1
|
)
|
|
20,039.7
|
|
|
28,186.7
|
|
|
(7,411.6
|
)
|
|
20,775.1
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D
(2)
|
|
608.8
|
|
|
—
|
|
|
608.8
|
|
|
610.4
|
|
|
—
|
|
|
610.4
|
|
Corporate brand
(3)
|
|
1,697.5
|
|
|
—
|
|
|
1,697.5
|
|
|
1,697.5
|
|
|
—
|
|
|
1,697.5
|
|
|
|
$
|
30,402.1
|
|
|
$
|
(8,056.1
|
)
|
|
$
|
22,346.0
|
|
|
$
|
30,494.6
|
|
|
$
|
(7,411.6
|
)
|
|
$
|
23,083.0
|
|
____________________________________
|
|
(1)
|
In the fourth quarter of 2015, the Company recognized impairment charges of
$79 million
related to the write-off of intangible assets and
$23 million
related to the write-off of property, plant and equipment, in connection with the termination (the termination was announced in October 2015) of the arrangements with and relating to Philidor (Developed Markets segment). In addition, in the fourth quarter of 2015, the Company recognized an impairment charge of
$27 million
related to the write-off of ezogabine/retigabine (immediate-release formulation) (Developed Markets segment) resulting from further analysis of commercialization strategy and projections. GlaxoSmithKline plc (‘‘GSK’’) controls all sales force promotion for ezogabine/retigabine.
|
In the third quarter of 2015, the Company recognized an impairment charge of
$26 million
related to Zelapar® (Developed Markets segment), resulting from declining sales trends.
These impairment charges were recognized in Amortization and impairments of finite-lived intangible assets in the consolidated statements of (loss) income for the respective periods.
|
|
(2)
|
The Company acquired certain IPR&D assets as part of the Salix Acquisition, as described further in Note 4.
|
In the fourth quarter of 2015, the Company wrote off an IPR&D asset of
$28 million
related to the Emerade® development program in the U.S. (Developed Markets segment) based on analysis of feedback received from the FDA, and such program was terminated in the U.S.
In the third quarter of 2015, the Company wrote off an IPR&D asset of
$90 million
related to the Rifaximin SSD development program (Developed Markets segment) based on analysis of Phase 2 study data, and the program was subsequently terminated.
In the second quarter of 2015, the Company wrote off an IPR&D asset of
$12 million
related to the Arestin
®
Peri-Implantitis development program (Developed Markets segment), resulting from analysis of Phase 3 study data.
The write-offs of the IPR&D assets were recognized in In-process research and development impairments and other charges in the consolidated statements of (loss) income for the respective periods.
|
|
(3)
|
Represents the corporate trademark, related to the acquisition of Bausch & Lomb Holdings Inc. ("B&L") in August 2013, which has an indefinite useful life and is therefore not amortized.
|
Estimated aggregate amortization expense, as of
March 31, 2016
, for each of the
five
succeeding years ending
December 31
is as follows:
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
Amortization expense
(1)
|
|
$
|
2,683.3
|
|
|
$
|
2,615.6
|
|
|
$
|
2,485.6
|
|
|
$
|
2,357.6
|
|
|
$
|
2,150.6
|
|
____________________________________
|
|
(1)
|
Estimated amortization expense shown in the table above does not include potential future impairments of finite-lived intangible assets, if any.
|
Goodwill
The changes in the carrying amount of goodwill in the
three-month period ended March 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
Markets
|
|
Emerging
Markets
|
|
Total
|
Balance, January 1, 2016
|
|
$
|
16,141.3
|
|
|
$
|
2,411.5
|
|
|
$
|
18,552.8
|
|
Additions
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Reclassification
(1)
|
|
(36.2
|
)
|
|
—
|
|
|
(36.2
|
)
|
Foreign exchange and other
|
|
75.5
|
|
|
7.9
|
|
|
83.4
|
|
Balance, March 31, 2016
|
|
$
|
16,181.3
|
|
|
$
|
2,419.4
|
|
|
$
|
18,600.7
|
|
____________________________________
|
|
(1)
|
Relates to the reclassification of goodwill attributable to a group of assets that has been classified as assets held for sale (included in prepaid expenses and other current assets) as of March 31, 2016.
|
As described in Note 4, the allocations of the goodwill balance associated with certain acquisitions are provisional and subject to the completion of the valuation of the assets acquired and liabilities assumed.
Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company operates in
two
operating and reportable segments: Developed Markets and Emerging Markets. The Developed Markets segment consists of
four
reporting units based on geography, namely (i) U.S., (ii) Canada and Australia, (iii) Western Europe, and (iv) Japan. The Emerging Markets segment consists of
three
reporting units based on geography, namely (i) Central and Eastern Europe, Middle East and Africa, (ii) Latin America, and (iii) Asia. The Company conducted its annual goodwill impairment test in the fourth quarter of 2015 which resulted in no goodwill impairment. Given the challenges facing the Company in certain businesses, primarily in dermatology and GI, management, under the direction of the Company's new Chief Executive Officer, performed a review of the Company's current forecast for fiscal year 2016 (the “2016 forecast”), which resulted in a reduction in the 2016 forecast. The Company considered this reduction in its 2016 forecast to constitute a triggering event requiring the performance of an updated goodwill impairment analysis as of March 31, 2016. The Company estimated the fair values of its reporting units using a discounted cash flow analysis approach. These calculations contain uncertainties as they require management to make assumptions about future cash flows and the appropriate discount rate to reflect the risk inherent in the future cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on the Company's results of operations. As a result of this goodwill impairment analysis, despite a decline in the estimated fair value of the U.S. reporting unit, the Company determined that none of the goodwill associated with its reporting units was impaired as of March 31, 2016. The estimated fair values of each reporting unit exceeded their carrying values at the date of testing. The Company applied a hypothetical
15%
decrease to the fair values of each reporting unit, which at such date, would not have triggered additional impairment testing and analysis.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
A summary of the Company’s consolidated long-term debt as of
March 31, 2016
and
December 31, 2015
is outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
Date
|
|
As of
March 31,
2016
|
|
As of
December 31,
2015
|
Revolving Credit Facility
(1)
|
|
April 2018
|
|
$
|
1,450.0
|
|
|
$
|
250.0
|
|
Series A-1 Tranche A Term Loan Facility
(1)
|
|
April 2016
|
|
—
|
|
|
140.4
|
|
Series A-2 Tranche A Term Loan Facility
(1)
|
|
April 2016
|
|
—
|
|
|
137.3
|
|
Series A-3 Tranche A Term Loan Facility
(1)
|
|
October 2018
|
|
1,780.6
|
|
|
1,881.5
|
|
Series A-4 Tranche A Term Loan Facility
(1)
|
|
April 2020
|
|
939.4
|
|
|
951.3
|
|
Series D-2 Tranche B Term Loan Facility
(1)
|
|
February 2019
|
|
1,089.2
|
|
|
1,087.5
|
|
Series C-2 Tranche B Term Loan Facility
(1)
|
|
December 2019
|
|
836.4
|
|
|
835.1
|
|
Series E-1 Tranche B Term Loan Facility
(1)
|
|
August 2020
|
|
2,532.1
|
|
|
2,531.2
|
|
Series F Tranche B Term Loan Facility
(1)
|
|
April 2022
|
|
4,047.8
|
|
|
4,055.8
|
|
Senior Notes:
|
|
|
|
|
|
|
7.00%
|
|
October 2020
|
|
688.1
|
|
|
688.0
|
|
6.75%
|
|
August 2021
|
|
646.3
|
|
|
646.1
|
|
7.25%
|
|
July 2022
|
|
542.4
|
|
|
542.1
|
|
6.375%
|
|
October 2020
|
|
2,227.7
|
|
|
2,226.5
|
|
6.75%
|
|
August 2018
|
|
1,589.9
|
|
|
1,588.8
|
|
7.50%
|
|
July 2021
|
|
1,610.4
|
|
|
1,609.7
|
|
5.625%
|
|
December 2021
|
|
893.5
|
|
|
893.2
|
|
5.50%
|
|
March 2023
|
|
991.0
|
|
|
990.6
|
|
5.375%
|
|
March 2020
|
|
1,981.0
|
|
|
1,979.9
|
|
5.875%
|
|
May 2023
|
|
3,216.1
|
|
|
3,215.0
|
|
4.50%
(2)
|
|
May 2023
|
|
1,689.2
|
|
|
1,611.8
|
|
6.125%
|
|
April 2025
|
|
3,215.1
|
|
|
3,214.3
|
|
Other
(3)
|
|
Various
|
|
12.3
|
|
|
12.3
|
|
|
|
|
|
31,978.5
|
|
|
31,088.4
|
|
Less current portion
|
|
|
|
(675.1
|
)
|
|
(823.0
|
)
|
Total long-term debt
|
|
|
|
$
|
31,303.4
|
|
|
$
|
30,265.4
|
|
____________________________________
|
|
(1)
|
Together, the “Senior Secured Credit Facilities” under the Company’s Third Amended and Restated Credit and Guaranty Agreement, as amended (the “Credit Agreement”).
|
|
|
(2)
|
Represents the U.S. dollar equivalent of Euro-denominated debt (discussed below).
|
|
|
(3)
|
Relates primarily to the debentures assumed in the acquisition of B&L.
|
The Company’s Senior Secured Credit Facilities and indentures governing its senior notes contain customary affirmative and negative covenants, including, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates. The indentures relating to the senior notes issued by the Company’s subsidiary Valeant contain similar covenants.
The Company’s Senior Secured Credit Facilities also contain specified financial maintenance covenants (consisting of a secured leverage ratio and an interest coverage ratio) and specified events of default. The Company’s and Valeant’s senior note indentures also contain certain specified events of default.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
In addition, the recent amendment to the Credit Agreement, effective April 11, 2016 (the “April 2016 amendment”), imposes a number of additional restrictions on the Company until the Company achieves specified leverage ratios. See Note 18 for additional details on these restrictions.
The Company's delay in filing its 2015 Form 10-K resulted in a violation of covenants contained in the Company's Credit Agreement and senior note indentures, for which the Company received several notices of default in April 2016 in respect of certain series of the Company's senior notes. All defaults under the Credit Agreement resulting from the failure to timely deliver the 2015 Form 10-K were waived by the requisite lenders under the Credit Agreement by the April 2016 amendment, and the 2015 Form 10-K was filed within the extended timeframe granted to the Company as part of that amendment and waiver. The default under the Company’s senior note indentures arising from the failure to timely file the 2015 Form 10-K was cured in all respects by the filing of the 2015 Form 10-K on April 29, 2016. In addition, the Company's delay in filing this Form 10-Q resulted in a violation of covenants contained in the Company's senior note indentures, for which the Company received a notice of default in May 2016 and an additional notice of default in June 2016 in respect of certain series of the Company's senior notes. Any defaults under the Credit Agreement resulting from the failure to timely deliver the Form 10-Q were waived by the requisite lenders under the Credit Agreement by the April 2016 amendment and this Form 10-Q has been filed within the extended timeframe granted to the Company as part of that amendment and waiver. The default under the Company’s senior note indentures arising from the failure to timely file this Form 10-Q has been cured in all respects by the filing of this Form 10-Q. See Note 18 for additional information regarding the amendment and waiver to the Credit Agreement and these notices of default.
The total fair value of the Company’s long-term debt, with carrying values of
$31.98 billion
and
$31.09 billion
at
March 31, 2016
and
December 31, 2015
, was
$27.72 billion
and
$29.60 billion
, respectively. The fair value of the Company’s long-term debt is estimated using the quoted market prices for the same or similar debt issuances (Level 2).
Senior Secured Credit Facilities
The effective rates of interest for the three-month period ended
March 31, 2016
and the applicable margins available as of
March 31, 2016
on the Company's borrowings under the Senior Secured Credit Facilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Margins
(2)
|
|
Effective Interest Rate
|
|
Base Rate Borrowings
|
|
LIBO Rate Borrowings
|
Revolving Credit Facility
|
2.87
|
%
|
|
1.25
|
%
|
|
2.25
|
%
|
Series A-1 Tranche A Term Loan Facility
|
2.68
|
%
|
|
1.25
|
%
|
|
2.25
|
%
|
Series A-2 Tranche A Term Loan Facility
|
2.68
|
%
|
|
1.25
|
%
|
|
2.25
|
%
|
Series A-3 Tranche A Term Loan Facility
|
2.72
|
%
|
|
1.25
|
%
|
|
2.25
|
%
|
Series A-4 Tranche A Term Loan Facility
|
2.90
|
%
|
|
1.25
|
%
|
|
2.25
|
%
|
Series D-2 Tranche B Term Loan Facility
(1)
|
3.52
|
%
|
|
1.75
|
%
|
|
2.75
|
%
|
Series C-2 Tranche B Term Loan Facility
(1)
|
3.77
|
%
|
|
2.00
|
%
|
|
3.00
|
%
|
Series E-1 Tranche B Term Loan Facility
(1)
|
3.75
|
%
|
|
2.00
|
%
|
|
3.00
|
%
|
Series F Tranche B Term Loan Facility
(1)
|
4.00
|
%
|
|
2.25
|
%
|
|
3.25
|
%
|
____________________________________
|
|
(1)
|
Subject to a
1.75%
base rate floor and a
0.75%
LIBO rate floor.
|
|
|
(2)
|
The applicable margins included in the table do not reflect the changes from the April 2016 amendment. See Note 18 for additional information regarding the amendment and waiver to the Credit Agreement.
|
On April 1, 2016, the Company made a voluntary prepayment in the amount of
$125 million
that was applied pro rata across the Company's term loans. The voluntary prepayment represented an estimate of the mandatory excess cash flow payment for the fiscal year ended December 31, 2015 based on preliminary 2015 results at the time.
|
|
10.
|
PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS
|
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
The Company sponsors defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers certain U.S. employees and employees in certain other countries.
Net Periodic (Benefit) Cost
The following table provides the components of net periodic (benefit) cost for the Company’s defined benefit pension plans and postretirement benefit plan for the
three-month periods ended March 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefit Plans
|
|
Postretirement
Benefit
Plan
|
|
U.S. Plan
|
|
Non-U.S. Plans
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
$
|
0.6
|
|
|
$
|
0.8
|
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
Interest cost
|
|
2.0
|
|
|
2.4
|
|
|
1.4
|
|
|
1.6
|
|
|
0.4
|
|
|
0.5
|
|
Expected return on plan assets
|
|
(3.3
|
)
|
|
(3.6
|
)
|
|
(1.7
|
)
|
|
(2.0
|
)
|
|
—
|
|
|
(0.1
|
)
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Amortization of net loss
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
Net periodic (benefit) cost
|
|
$
|
(0.8
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
0.3
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
During the
three-month period ended March 31, 2016
, the Company contributed
$2 million
to the non-U.S. pension benefit plans. In
2016
, the Company does not expect to make contributions to the U.S. pension benefit plan. The Company expects to contribute
$6 million
to the non-U.S. pension benefit plans in
2016
, in the aggregate, inclusive of amounts contributed to the plans during the
three-month period ended March 31, 2016
.
|
|
11.
|
SHARE-BASED COMPENSATION
|
In May 2014, shareholders approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”) which replaced the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) for future equity awards granted by the Company. The Company transferred the common shares available under the 2011 Plan to the 2014 Plan. The maximum number of common shares that may be issued to participants under the 2014 Plan is equal to
18,000,000
common shares, plus the number of common shares under the 2011 Plan reserved but unissued and not underlying outstanding awards and the number of common shares becoming available for reuse after awards are terminated, forfeited, cancelled, exchanged or surrendered under the 2011 Plan and the Company’s 2007 Equity Compensation Plan. The Company registered, in the aggregate,
20,000,000
common shares of common stock for issuance under the 2014 Plan. Approximately
13,926,435
shares were available for future grants as of
March 31, 2016
. The Company uses reserved and unissued common shares to satisfy its obligation under its share-based compensation plans.
The following table summarizes the components and classification of share-based compensation expense related to stock options and restricted share units (“RSUs”) for the
three-month periods ended March 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Stock options
|
$
|
3.2
|
|
|
$
|
3.9
|
|
RSUs
|
60.3
|
|
|
31.1
|
|
Share-based compensation expense
|
$
|
63.5
|
|
|
$
|
35.0
|
|
|
|
|
|
Research and development expenses
|
$
|
1.7
|
|
|
$
|
1.5
|
|
Selling, general and administrative expenses
|
61.8
|
|
|
33.5
|
|
Share-based compensation expense
|
$
|
63.5
|
|
|
$
|
35.0
|
|
In the
three-month periods ended March 31, 2016 and 2015
, the Company granted approximately
750
stock options with a weighted-average exercise price of
$89.35
per option and approximately
72,000
stock options with a weighted-average exercise
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
price of
$192.62
per option, respectively. The weighted-average fair values of all stock options granted to employees in the
three-month periods ended March 31, 2016 and 2015
were
$44.48
and
$63.11
, respectively.
In March 2016, the Company announced that the Board of Directors had initiated a search to identify a candidate for a new Chief Executive Officer to succeed the Company's then current Chief Executive Officer, who would continue to serve in that role until his replacement was appointed. On May 2, 2016, the Company's new Chief Executive Officer assumed the role, succeeding the Company's former Chief Executive Officer. See Note 18 for additional information regarding the appointment of the Company's new Chairman and Chief Executive Officer. Pursuant to the terms of his employment agreement dated January 2015, the former Chief Executive Officer was entitled to certain share-based awards and payments upon termination. Under his January 2015 employment agreement, the former Chief Executive Officer received performance-based RSUs that vest when certain market conditions (namely total shareholder return) are met at the defined dates, provided continuing employment through those dates. Under the termination provisions of his employment agreement, upon termination of the former Chief Executive Officer, the defined dates for meeting the market conditions of the performance-based RSUs were eliminated and, as a result, vesting was based solely on the attainment of the applicable level of total shareholder return through the date of termination and the resulting number of common shares, if any, to be awarded to the former Chief Executive Officer was determined on a pro-rata basis for service provided under the original performance period, with credit given for an additional year of service. Because the total shareholder return at the time of the former Chief Executive Officer’s termination did not meet the performance threshold, no common shares were issued and no value was ultimately received by the former Chief Executive Officer pursuant to this performance-based RSU award. However, an incremental share-based compensation expense of
$25 million
has been recognized in the first quarter of 2016, which represents the additional year of service credit consistent with the grant date fair value calculated using a Monte Carlo Simulation Model in the first quarter of 2015, notwithstanding the fact that no value was ultimately received by the former Chief Executive Officer. In addition to the acceleration of his performance-based RSUs, the former Chief Executive Officer was also entitled to a cash severance payment of
$9 million
and a pro-rata annual cash bonus of approximately
$2 million
pursuant to his employment agreement. The cash severance payments, the pro-rata cash bonus and the associated payroll taxes have also been recognized as expense in the first quarter of 2016.
In the
three-month periods ended March 31, 2016 and 2015
, the Company granted approximately
16,000
time-based RSUs with a weighted-average grant date fair value of
$79.89
per RSU and approximately
5,000
time-based RSUs with a weighted-average grant date fair value of
$196.71
per RSU, respectively.
In the
three-month period ended March 31, 2016
, the Company did
not
grant performance-based RSUs. In the
three-month period ended March 31, 2015
, the Company granted approximately
600,000
performance-based RSUs with a weighted-average grant date fair value of
$307.21
per RSU.
As of
March 31, 2016
, the total remaining unrecognized compensation expense related to non-vested stock options, time-based RSUs and performance-based RSUs amounted to
$237 million
, in the aggregate, which will be amortized over a weighted-average period of
2.38
years.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valeant Pharmaceuticals International, Inc. Shareholders
|
|
|
|
|
|
Common Shares
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Valeant
Pharmaceuticals
International, Inc.
Shareholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total
Equity
|
|
Shares
(in millions)
|
|
Amount
|
|
|
|
|
|
|
Balance, January 1, 2015 (restated)
|
334.4
|
|
|
$
|
8,349.2
|
|
|
$
|
243.9
|
|
|
$
|
(2,397.8
|
)
|
|
$
|
(915.9
|
)
|
|
$
|
5,279.4
|
|
|
$
|
122.3
|
|
|
$
|
5,401.7
|
|
Issuance of common stock (see below)
|
7.3
|
|
|
1,431.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,431.9
|
|
|
—
|
|
|
1,431.9
|
|
Common shares issued under share-based compensation plans
|
0.6
|
|
|
29.2
|
|
|
(14.7
|
)
|
|
—
|
|
|
—
|
|
|
14.5
|
|
|
—
|
|
|
14.5
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
35.0
|
|
|
—
|
|
|
—
|
|
|
35.0
|
|
|
—
|
|
|
35.0
|
|
Employee withholding taxes related to share-based awards
|
—
|
|
|
—
|
|
|
(21.2
|
)
|
|
—
|
|
|
—
|
|
|
(21.2
|
)
|
|
—
|
|
|
(21.2
|
)
|
Excess tax benefits from share-based compensation
|
—
|
|
|
—
|
|
|
17.9
|
|
|
—
|
|
|
—
|
|
|
17.9
|
|
|
—
|
|
|
17.9
|
|
|
342.3
|
|
|
9,810.3
|
|
|
260.9
|
|
|
(2,397.8
|
)
|
|
(915.9
|
)
|
|
6,757.5
|
|
|
122.3
|
|
|
6,879.8
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (restated)
|
—
|
|
|
—
|
|
|
—
|
|
|
97.7
|
|
|
—
|
|
|
97.7
|
|
|
0.8
|
|
|
98.5
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(411.7
|
)
|
|
(411.7
|
)
|
|
(0.2
|
)
|
|
(411.9
|
)
|
Total comprehensive loss (restated)
|
|
|
|
|
|
|
|
|
|
|
(314.0
|
)
|
|
0.6
|
|
|
(313.4
|
)
|
Balance, March 31, 2015 (restated)
|
342.3
|
|
|
$
|
9,810.3
|
|
|
$
|
260.9
|
|
|
$
|
(2,300.1
|
)
|
|
$
|
(1,327.6
|
)
|
|
$
|
6,443.5
|
|
|
$
|
122.9
|
|
|
$
|
6,566.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
342.9
|
|
|
$
|
9,897.4
|
|
|
$
|
304.9
|
|
|
$
|
(2,749.7
|
)
|
|
$
|
(1,541.6
|
)
|
|
$
|
5,911.0
|
|
|
$
|
118.8
|
|
|
$
|
6,029.8
|
|
Common shares issued under share-based compensation plans
|
0.1
|
|
|
8.5
|
|
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
63.5
|
|
|
—
|
|
|
—
|
|
|
63.5
|
|
|
—
|
|
|
63.5
|
|
Employee withholding taxes related to share-based awards
|
—
|
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
|
(7.7
|
)
|
Excess tax expense from share-based compensation
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
|
(1.4
|
)
|
|
343.0
|
|
|
9,905.9
|
|
|
351.6
|
|
|
(2,749.7
|
)
|
|
(1,541.6
|
)
|
|
5,966.2
|
|
|
118.8
|
|
|
6,085.0
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
—
|
|
|
—
|
|
|
—
|
|
|
(373.7
|
)
|
|
—
|
|
|
(373.7
|
)
|
|
0.8
|
|
|
(372.9
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63.0
|
|
|
63.0
|
|
|
0.5
|
|
|
63.5
|
|
Total comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
(310.7
|
)
|
|
1.3
|
|
|
(309.4
|
)
|
Balance, March 31, 2016
|
343.0
|
|
|
$
|
9,905.9
|
|
|
$
|
351.6
|
|
|
$
|
(3,123.4
|
)
|
|
$
|
(1,478.6
|
)
|
|
$
|
5,655.5
|
|
|
$
|
120.1
|
|
|
$
|
5,775.6
|
|
On March 27, 2015, the Company completed, pursuant to an Underwriting Agreement dated March 17, 2015 with Deutsche Bank Securities Inc. on behalf of several underwriters, a registered offering in the United States of
7,286,432
of its common shares, no par value, at a price of
$199.00
per common share, for aggregate gross proceeds of approximately
$1.45 billion
. In connection with the issuance of these new common shares, the Company incurred approximately
$18 million
of issuance costs,
which has been reflected as reduction to the gross proceeds from the equity issuance. The proceeds of this offering were used to fund the Salix Acquisition. The Company granted the underwriters an option to purchase additional common shares equal to up to
15%
of the common shares initially issued in the offering. This option was not exercised by the underwriters.
|
|
13.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The components of accumulated other comprehensive loss as of
March 31, 2016
and 2015, were as follows:
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Pension Adjustment
|
|
Total
|
Balance, January 1, 2015
|
|
$
|
(886.5
|
)
|
|
$
|
(29.4
|
)
|
|
$
|
(915.9
|
)
|
Foreign currency translation adjustment
|
|
(411.3
|
)
|
|
—
|
|
|
(411.3
|
)
|
Pension adjustment
(1)
|
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Balance, March 31, 2015
|
|
$
|
(1,297.8
|
)
|
|
$
|
(29.8
|
)
|
|
$
|
(1,327.6
|
)
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
$
|
(1,529.4
|
)
|
|
$
|
(12.2
|
)
|
|
$
|
(1,541.6
|
)
|
Foreign currency translation adjustment
|
|
63.4
|
|
|
—
|
|
|
63.4
|
|
Pension adjustment
(1)
|
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Balance, March 31, 2016
|
|
$
|
(1,466.0
|
)
|
|
$
|
(12.6
|
)
|
|
$
|
(1,478.6
|
)
|
____________________________________
|
|
(1)
|
Reflects changes in defined benefit obligations and related plan assets of the Company’s defined benefit pension plans and the U.S. postretirement benefit plan (see Note 10).
|
Income taxes are not provided for foreign currency translation adjustments arising on the translation of the Company’s operations having a functional currency other than the U.S. dollar. Income taxes allocated to reclassification adjustments were not material.
In the
three-month period ended March 31, 2016
, the Company recognized an income tax provision of
$7 million
, comprised of
$7 million
related to the expected tax provision in tax jurisdictions outside of Canada and an income tax provision of an immaterial amount related to Canadian income taxes. In the three-month period ended March 31, 2016, the Company’s effective tax rate was different from the Company’s statutory Canadian tax rate due to tax expense generated from the Company’s annualized mix of earnings by jurisdiction, the recording of valuation allowance on entities for which no tax benefit of losses is expected and the quarterly accrual of interest on uncertain tax positions.
The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets is estimated to be
$1.46 billion
as of
March 31, 2016
and was
$1.37 billion
as of
December 31, 2015
. The Company will continue to assess this amount for appropriateness on a go-forward basis associated with the deferred tax assets previously established.
As of March 31, 2016
, the Company had
$347 million
of unrecognized tax benefits, which included
$46 million
relating to interest and penalties. Of the total unrecognized tax benefits,
$126 million
would reduce the Company’s effective tax rate, if recognized. The Company anticipates that an immaterial amount of unrecognized tax benefits may be resolved within the next 12 months.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2016 and 2015, the Company had accrued
$40 million
and
$33 million
for interest and
$6 million
and
$7 million
for penalties, respectively.
The Company is currently under examination by the Canada Revenue Agency for three separate cycles: (a) years 2005 to 2006, (b) 2007 through 2009, and (c) 2010 through 2011. In February 2013, the Company received a proposed audit adjustment for the years 2005 through 2007. The Company disagrees with the adjustments and has filed a Notice of Objection. The total proposed adjustment would result in a loss of tax attributes which are subject to a full valuation allowance and would not result in a material change to the provision for income taxes.
The Company’s U.S. consolidated federal income tax return for the 2013 and 2014 tax years is currently under examination by the Internal Revenue Service. The Company remains under examination for various state tax audits in the U.S. for years 2002 to 2014. In addition, certain affiliates of the Company in other regions outside of Canada and the U.S. are currently under examination by relevant taxing authorities, and all necessary accruals have been recorded, including uncertain tax benefits. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's consolidated financial statements.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
|
|
15.
|
(LOSS) EARNINGS PER SHARE
|
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc. for the
three-month periods ended March 31, 2016 and 2015
were calculated as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
(restated)
|
Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
|
$
|
(373.7
|
)
|
|
$
|
97.7
|
|
|
|
|
|
Basic weighted-average number of common shares outstanding
|
344.9
|
|
|
336.8
|
|
Diluted effect of stock options, RSUs and other
(a)
|
—
|
|
|
6.6
|
|
Diluted weighted-average number of common shares outstanding
|
344.9
|
|
|
343.4
|
|
|
|
|
|
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
|
|
|
|
Basic
|
$
|
(1.08
|
)
|
|
$
|
0.29
|
|
Diluted
|
$
|
(1.08
|
)
|
|
$
|
0.28
|
|
____________________________________
|
|
(a)
|
In the three-month period ended March 31, 2016, all potential common shares issuable for stock options and RSUs were excluded from the calculation of diluted loss per share, as the effect of including them would have been anti-dilutive. The dilutive effect of potential common shares issuable for stock options and RSUs on the weighted-average number of common shares outstanding would have been as follows:
|
|
|
|
|
|
|
|
Three Months
Ended
March 31
|
|
|
2016
|
Basic weighted-average number of common shares outstanding
|
|
344.9
|
|
Diluted effect of stock options, RSUs and other
|
|
4.8
|
|
Diluted weighted-average number of common shares outstanding
|
|
349.7
|
|
In the
three-month period ended March 31, 2016
and
2015
, stock options to purchase approximately
1,118,000
and
143,000
common shares of the Company, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive under the treasury stock method.
From time to time, the Company becomes involved in various legal and administrative proceedings, which include product liability, intellectual property, commercial, antitrust, governmental and regulatory investigations, related private litigation and ordinary course employment-related issues. From time to time, the Company also initiates actions or files counterclaims. The Company could be subject to counterclaims or other suits in response to actions it may initiate. The Company believes that the prosecution of these actions and counterclaims is important to preserve and protect the Company, its reputation and its assets. Certain of these proceedings and actions are described below.
Unless otherwise indicated, the Company cannot reasonably predict the outcome of these legal proceedings, nor can it estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An adverse outcome in certain of these proceedings could have a material adverse effect on the Company’s business, financial condition and results of operations, and could cause the market value of its common shares and/or debt securities to decline.
Governmental and Regulatory Inquiries
ISTA Settlement with Department of Justice
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
On or about May 24, 2013 (prior to the Company’s acquisition of B&L in August 2013), B&L’s subsidiary, ISTA Pharmaceuticals, Inc. (“ISTA”), reached agreement with the U.S. government to resolve and conclude civil and criminal allegations against ISTA. The settlement involved conduct by ISTA that occurred between January 2006 and March 2011, prior to B&L’s acquisition of ISTA in June 2012. B&L was aware of the government investigation prior to its acquisition, and fully cooperated with the government to resolve the matter. In connection with the settlement, ISTA pled guilty to certain charges and paid approximately
$34 million
in civil and criminal fines, including interest and attorney’s fees. In addition, B&L agreed to maintain a specified compliance and ethics program and to annually certify compliance with this requirement to the Department of Justice for a period of
three
years. Failure to comply with the requirements of the settlement could result in fines. The Company submitted its final annual report to the Department of Justice on February 29, 2016. The matter has concluded with the Department of Justice.
Letter from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania
The Company has received a letter dated September 10, 2015 from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania stating that they are investigating potential violations of the False Claims Act arising out of Biovail Pharmaceuticals, Inc.'s treatment of certain service agreements with wholesalers when calculating and reporting Average Manufacturer Prices in connection with the Medicaid Drug Rebate Program. The letter requests that the Company voluntarily produce documents and information relating to the investigation. The Company produced certain documents in response to the request and is cooperating with the government’s investigation. The Company cannot predict the outcome or the duration of these investigations or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of these investigations.
U.S. Department of Justice Investigation
On September 15, 2015, B&L received a subpoena from the Criminal Division of the U.S. Department of Justice regarding agreements and payments between B&L and medical professionals related to its surgical products Crystalens® IOL and Victus® femtosecond laser platform. The government has indicated that the subpoena was issued in connection with a criminal investigation into possible violations of Federal health care laws. B&L produced certain documents in response to the subpoena and is cooperating with the investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Southern District of New York
In or about October 2015, the Company received subpoenas from the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York. The materials requested by those offices, pursuant to the subpoenas and follow-up requests, include documents with respect to the Company’s patient assistance programs (including financial support provided to patients); its former relationship with Philidor and other pharmacies; the Company’s accounting treatment for sales by specialty pharmacies; information provided to the Centers for Medicare and Medicaid Services; the Company’s pricing (including discounts and rebates), marketing and distribution of its products; the Company’s compliance program; and employee compensation. The Company is cooperating with these investigations. The Company cannot predict the outcome or the duration of these investigations or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of these investigations.
Voluntary Request Letter from the U.S. Federal Trade Commission
On or about October 16, 2015, the Company received a voluntary request letter from the Federal Trade Commission ("FTC") with respect to its non-public investigation into the Company's recent acquisition of Paragon Holdings I, Inc. (“Paragon”). In the letter, the FTC has requested that the Company provide, on a voluntary basis, certain information and documentation relating to its acquisition of Paragon. The Company produced certain documents and information in response to the request and is cooperating with the FTC in connection with this investigation.
Congressional Inquiries
Beginning in November 2015, the Company has received from the United States Senate Special Committee on Aging various document requests, as well as subpoenas for documents, depositions and a hearing which was held on April 27, 2016. Certain directors, officers and other employees of the Company have also received from the United States Senate Special Committee on Aging subpoenas for depositions and/or hearings. In January 2016, the Company received from the United States House
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
Committee on Oversight and Government Reform a document request and an invitation for the Company’s then interim CEO to testify at a hearing, at which he testified on February 4, 2016. Most of the materials requested to date relate to the Company’s pricing decisions on particular drugs, as well as revenue, expense and profit information, and also include requests relating to financial support provided by the Company for patients and financial data related to the Company’s research and development program, Medicare and Medicaid. The Company is cooperating with these inquiries; however, the Company cannot predict their outcome or duration.
SEC Investigation
On November 18, 2015, the Company received a document subpoena from the staff of the Los Angeles Regional Office of the SEC related to its investigation of the Company, including requests for documents concerning the Company's former relationship with Philidor, its accounting practices and policies, its public disclosures and other matters. The Company is cooperating with the SEC in this matter. The Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of the SEC investigation.
Investigation by the State of North Carolina Department of Justice
In the beginning of March 2016, the Company received an investigative demand from the State of North Carolina Department of Justice. The materials requested relate to the Company's Nitropress®, Isuprel® and Cuprimine® products, including documents relating to the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, such products, as well as issues relating to the Company's pricing decisions for certain of its other products. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Request for Information from the AMF
On April 12, 2016, the Company received a request letter from the Autorité des marchés financiers (the “AMF”) requesting documents concerning the work of the Company’s ad hoc committee of independent directors (the “Ad Hoc Committee”) (established to review certain allegations regarding the Company’s former relationship with Philidor and related matters), the Company’s former relationship with Philidor, the Company's accounting practices and policies and other matters. The Company is cooperating with the AMF in this matter. The Company has not received any notice of investigation from the AMF, and the Company cannot predict whether any investigation will be commenced by the AMF or, if commenced, whether any enforcement action against the Company would result from any such investigation.
Investigation by the State of New Jersey Department of Law and Public Safety, Division of Consumer Affairs, Bureau of Securities
On April 20, 2016, the Company received a document subpoena from the New Jersey State Bureau of Securities. The materials requested include documents concerning the Company’s former relationship with Philidor, its accounting treatment for sales to Philidor, its financial reporting and public disclosures and other matters. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigation by the State of Texas
On May 27, 2014, the State of Texas served Bausch & Lomb, Inc. (“B&L Inc.”) with a Civil Investigative Demand concerning various price reporting matters relating to the State's Medicaid program and the amounts the State paid in reimbursement for B&L products for the period from 1995 to the date of the Civil Investigative Demand. The Company and B&L Inc. have cooperated fully with the State's investigation and have produced all of the documents requested by the State. In April 2016, the State sent B&L Inc. a demand letter claiming damages in the amount of
$20 million
. The Company and B&L Inc. are currently evaluating this demand letter, and at this time are unable to estimate what liability, if any, they may have with respect to this matter.
California Department of Insurance Investigation
On May 4, 2016, Bausch & Lomb International, Inc. (“B&L International”) received from the Office of the California Insurance Commissioner an administrative subpoena to produce books, records and documents. The requested books, records and
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
documents are being requested in connection with an investigation by the California Department of Insurance and relate to, among other things, consulting agreements and financial arrangements between B&L and healthcare professionals in California, the provision of ocular equipment, including the Victus® femtosecond laser platform, by B&L to healthcare professionals in California and prescribing data for prescriptions written by healthcare professionals in California for certain of B&L’s products, including the Crystalens®, Lotemax®, Besivance® and Prolensa®. B&L International and the Company are cooperating with the investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Securities and Other Class Actions
Allergan Shareholder Class Action
On December 16, 2014, Anthony Basile, an alleged shareholder of Allergan filed a lawsuit on behalf of a putative class of Allergan shareholders against the Company, Valeant, AGMS, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman in the U.S. District Court for the Central District of California (Basile v. Valeant Pharmaceuticals International, Inc., et al., Case No. 14-cv-02004-DOC). On June 26, 2015, lead plaintiffs the State Teachers Retirement System of Ohio, the Iowa Public Employees Retirement System and Patrick T. Johnson filed an amended complaint against the Company, Valeant, J. Michael Pearson, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman. The amended complaint alleges claims on behalf of a putative class of sellers of Allergan securities between February 25, 2014 and April 21, 2014, against all defendants contending that various purchases of Allergan securities by AGMS were made while in possession of material, non-public information concerning a potential tender offer by the Company for Allergan stock, and asserting violations of Section 14(e) of the Exchange Act and rules promulgated by the SEC thereunder and Section 20A of the Exchange Act. The amended complaint also alleges violations of Section 20(a) of the Exchange Act against Pershing Square, PS Management, GP, LLC, William A. Ackman and J. Michael Pearson. The amended complaint seeks, among other relief, money damages, equitable relief, and attorneys’ fees and costs. On August 7, 2015, the defendants moved to dismiss the amended complaint in its entirety, and, on November 9, 2015, the court denied that motion. The Company intends to vigorously defend these matters.
Salix Shareholder Class Actions
Following the announcement of the execution of the Salix Merger Agreement with Salix, between February 25, 2015 and March 12, 2015,
six
purported stockholder class actions were filed challenging the Salix Acquisition. All of the actions were filed in the Delaware Court of Chancery, and alleged claims against some or all of the board of directors of Salix (the “Salix Board”), the Company, Salix, Valeant and Sun Merger Sub. On March 17, 2015, the Court consolidated the actions under the caption Salix Pharmaceuticals, Ltd. Shareholder Litigation, Consolidated C.A. No.10721-CB. On September 25, 2015, Plaintiffs filed an amended complaint. The operative complaint alleges generally that the members of the Salix Board breached their fiduciary duties to stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell Salix through an allegedly inadequate sales process and for allegedly inadequate consideration and by agreeing to allegedly preclusive deal protections. The complaint also alleges that the Schedule 14D-9 filed by Salix in connection with the Salix Acquisition contained inaccurate or materially misleading information about, among other things, the Salix Acquisition and the sales process leading up to the Salix Merger Agreement. The complaint seeks, among other things, money damages and unspecified attorneys’ and other fees and costs. Defendants’ Motions to Dismiss were fully briefed as of February 19, 2016. In an oral ruling given on May 19, 2016, the Court dismissed the consolidated action against all defendants.
Synergetics Shareholder Class Actions
On September 1, 2015, Valeant entered into a merger agreement, whereby it would acquire all shares of Synergetics USA, Inc. (“Synergetics”). The merger was announced on September 2, 2015. Following the announcement of the merger,
four
putative stockholder class actions were filed challenging the merger.
Three
of these actions were filed in the Eleventh Judicial Circuit of the State of Missouri and name as defendants all members of the Synergetics Board of Directors, Synergetics, Valeant and Blue Subsidiary Corp. (a wholly-owned subsidiary of Valeant). Those actions are captioned as follows: Murphy, et al. v. Synergetics USA Inc., et al., C.A. No. 1511-CC00778 (filed September 15, 2015 and amended September 23, 2015 (the “Murphy Action”)); Glorioso, et al., v. Synergetics USA Inc., et al., C.A. No. 1511-CC00803 (filed September 23, 2015 (the “Glorioso Action”)); and Scarantino, et al. v. Synergetics USA Inc., et al., C.A. No. 1511-CC00810 (filed September 28, 2015 (the “Scarantino Action”)) (collectively, the “Missouri Actions”). The fourth action, captioned Nilsen, et al. v. Valeant Pharmaceuticals International, et al., C.A. No. 11552-VCL (the “Delaware Action,” and together with the Missouri Actions, the “Actions”) was filed on September 28, 2015, in the Delaware Court of Chancery and named as defendants all members
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
of the Synergetics Board of Directors, Valeant, and Blue Subsidiary Corp. The Actions generally allege that the members of the Synergetics Board of Directors breached their fiduciary duties to Synergetics stockholders by, among other things, conducting a flawed process in considering the transaction, agreeing to an inadequate offer price, providing incomplete and misleading information to Synergetics stockholders, and accepting unreasonable deal protection measures in the merger agreement that allegedly dissuaded other potential bidders from making competing offers. The Actions also allege that Valeant and Blue Subsidiary Corp. aided and abetted these alleged breaches of fiduciary duties. The Missouri Actions sought, among other things, an order enjoining consummation of the merger, rescission of the merger or awarding damages to members of the class, and an award of fees and expenses. The Delaware Action sought, among other things, an order awarding damages to members of the class, and an award of fees and expenses.
On October 2, 2015, Synergetics, each member of the Synergetics Board of Directors, Valeant, and Blue Subsidiary Corp. entered into a Memorandum of Understanding (the “MOU”) with the plaintiffs in the Actions, which sets forth the parties’ agreement in principle for a settlement of the Actions on the basis of the additional disclosures made in a supplement to the Schedule 14D-9 filed with the SEC on October 2, 2015, in exchange for the release of, among other things, certain claims relating to the Actions, the merger and disclosures made in connection therewith. On October 8, 2015 the Delaware Court of Chancery unilaterally dismissed the Delaware Action. In October 2015, the Missouri Actions were consolidated into the Murphy Action. In January 2016, the parties engaged in confirmatory discovery, including additional documents produced by Defendants and conducting
two
depositions.
Thereafter, the parties negotiated and reached agreement on a stipulation of settlement and ancillary settlement documents, which were filed with the Court on April 25, 2016. A hearing with the Court was held on April 29, 2016. At that hearing, the Court signed the scheduling order, which governs settlement proceedings, and set a final settlement hearing for July 29, 2016. On May 26, 2016, notice of the proposed settlement was mailed to Synergetics record holders that are members of the class. The parties continue to negotiate attorneys' fees. Any amount payable by the Company in this matter is expected to be nominal.
Valeant U.S. Securities Class Action
From October 22, 2015 to October 30, 2015,
four
putative securities class actions were filed in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors. Those four actions, captioned Potter v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7658), Chen v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7679), Yang v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7746), and Fein v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7809), all assert securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of putative classes of persons who purchased or otherwise acquired the Company's' stock during various time periods between February 28, 2014 and October 21, 2015. The allegations relate to, among other things, allegedly false and misleading statements and/or failures to disclose information about the Company’s business and prospects, including relating to drug pricing, the Company’s use of specialty pharmacies, and the Company’s relationship with Philidor. On May 31, 2016, the Court entered an order consolidating the
four
actions under the caption In re Valeant Pharmaceuticals International, Inc. Securities Litigation, Case No. 3:15-cv-07658, and appointing a lead plaintiff and lead plaintiff’s counsel. The parties anticipate that the Court will shortly enter an order setting a schedule providing for, among other things, the filing of a consolidated amended complaint and defendants’ response to that amended complaint. The Company believes the actions are without merit and intends to defend itself vigorously.
Canadian Securities Class Actions
In 2015,
six
putative class actions were filed and served against the Company in Canada in the provinces of British Columbia, Ontario and Quebec. These actions are captioned: (a) Alladina v. Valeant, et al. (Case No. S-1594B6) (Supreme Court of British Columbia) (filed November 17, 2015); (b) Kowalyshyn v. Valeant, et al. (CV-15-540593-00CP) (Ontario Superior Court) (filed November 16, 2015); (c) Kowalyshyn et al. v. Valeant, et al. (CV-15-541082-00CP (Ontario Superior Court) (filed November 23, 2015); (d) O’Brien v. Valeant et al. (CV-15-543678-00CP) (Ontario Superior Court) (filed December 30, 2015); (e) Catucci v. Valeant, et al. (Court File No. 540-17-011743159) (Quebec Superior Court) (filed October 26, 2015); and (f) Rousseau-Godbout v. Valeant, et al. (Court File No. 500-06-000770-152) (Quebec Superior Court) (filed October 27, 2015). The Alladina, Kowalyshyn, O’Brien, Catucci and Rousseau-Godbout actions also name, among others, certain current or former directors and officers of the Company. The Rosseau-Godbout action was subsequently stayed by the Quebec Superior Court by consent order.
Each of the
five
remaining actions alleges violations of Canadian provincial securities legislation on behalf of putative classes of persons who purchased or otherwise acquired securities of the Company for periods commencing as early as January 1,
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
2013 and ending as late as November 16, 2015. The alleged violations relate to, among other things, alleged misrepresentations and/or failures to disclose material information about the Company’s business and prospects, relating to drug pricing, the Company’s policies and accounting practices, the Company’s use of specialty pharmacies and, in particular, the Company’s relationship with Philidor. The Alladina, Kowalyshyn and O’Brien actions also assert common law claims for negligent misrepresentation, and the Alladina claim additionally asserts common law negligence, conspiracy, and claims under the British Columbia Business Corporations Act, including the statutory oppression remedies in that legislation. The Catucci action asserts claims under the Quebec Civil Code, alleging the Company breached its duty of care under the civil standard of liability contemplated by the Code.
The Company is aware of two additional putative class actions that have been filed with the applicable court but which have not yet been served on the Company. These actions are captioned: (i) Okeley v. Valeant, et al. (Case No. S-159991) (Supreme Court of British Columbia) (filed December 2, 2015); and (ii) Sukenaga v Valeant et al. (CV-15-540567-00CP) (Ontario Superior Court) (filed November 16, 2015), and the factual allegations made in these actions are substantially similar to those outlined above. The Company has been advised that the plaintiffs in these actions do not intend to pursue the actions.
The Company expects that certain of these actions will be consolidated or stayed prior to proceeding to motions for leave and certification and that no more than one action will proceed in any jurisdiction. In particular, on April 8, 2016, motions were heard by the Ontario Superior Court of Justice to determine which of the actions filed in that court will proceed.
In the Catucci action, a schedule has been set for the week of January 23, 2017 for the hearing of motions for leave under the Quebec Securities Act and for authorization as a class proceeding.
The Company believes that it has viable defenses to each of the actions, and in each case intends to defend itself vigorously.
RICO Class Action
On May 27, 2016, two employee benefit funds filed an action in the U.S. District Court for the District of New Jersey against the Company and Philidor, alleging claims under the federal Racketeer Influenced Corrupt Organizations Act (“RICO”) on behalf of a putative class of certain third party payors that paid claims submitted by Philidor for certain Valeant branded drugs between January 2, 2013 and November 9, 2015 (Airconditioning and Refrigeration Industry Health and Welfare Trust Fund et al. v. Valeant Pharmaceuticals International. Inc. et al., No. 3:16-cv-03087). The complaint alleges, among other things, that the Defendants committed predicate acts of mail and wire fraud by submitting or causing to be submitted prescription reimbursement requests that misstated or omitted facts regarding (1) the identity and licensing status of the dispensing pharmacy; (2) the resubmission of previously denied claims; (3) patient co-pay waivers; (4) the availability of generic alternatives; and (5) the insured’s consent to renew the prescription. The complaint further alleges that these acts constitute a pattern of racketeering or a racketeering conspiracy in violation of the RICO statute and caused plaintiffs and the putative class unspecified damages, which may be trebled under the RICO statute. The Company believes these claims are without merit and intends to defend itself vigorously.
Antitrust
Solodyn® Antitrust Class Actions
Beginning in July 2013, a number of civil antitrust class action suits were filed against Medicis, Valeant Pharmaceuticals International, Inc. (“VPII”) and various manufacturers of generic forms of Solodyn, alleging that the defendants engaged in an anticompetitive scheme to exclude competition from the market for minocycline hydrochloride extended release tablets, a prescription drug for the treatment of acne marketed by Medicis under the brand name, Solodyn. The plaintiffs in such suits alleged violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and of various state antitrust and consumer protection laws, and further alleged that the defendants have been unjustly enriched through their alleged conduct. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, multiple, punitive and/or other damages, including attorneys’ fees. By order dated February 25, 2014, the Judicial Panel for Multidistrict Litigation (‘‘JPML’’) centralized the suits in the District of Massachusetts, under the caption In re Solodyn (Minocycline Hydrochloride) Antitrust Litigation, Case No. 1:14-md-02503-DJC, before U.S. District Judge Denise Casper. After the Direct Purchaser Class Plaintiffs and the End-Payor Class Plaintiffs each filed a consolidated amended class action complaint on September 12, 2014, the defendants jointly moved to dismiss those complaints. On August 14, 2015, the Court granted the Defendants' motion to dismiss with respect to claims brought under Sherman Act, Section 2 and various state laws but denied the motion to dismiss with respect to claims brought under Sherman Act, Section 1 and other state laws. VPII was dismissed from the case, but the litigation continues against Medicis and the generic manufacturers as to the remaining claims. The actions are currently in discovery. On March
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
26, 2015, and on April 6, 2015, while the motion to dismiss the class action complaints was pending,
two
additional non-class action complaints were filed against Medicis by certain retail pharmacy and grocery chains ("Individual Plaintiffs") making similar allegations and seeking similar relief to that sought by Direct Purchaser Class Plaintiffs. Those suits have been centralized with the class action suits in the District of Massachusetts. Following the Court's August 14, 2015 decision on the motion to dismiss, the Individual Plaintiffs each filed amended complaints on October 1, 2015, and Medicis answered on December 7, 2015. A third non-class action was filed by another retail pharmacy against Medicis on January 26, 2016, and Medicis answered on March 28, 2016. The Company intends to vigorously defend all of these actions.
Contact Lens Antitrust Class Actions
Beginning in March 2015, a number of civil antitrust class action suits were filed by purchasers of contact lenses against B&L, three other contact lens manufacturers, and a contact lens distributor, alleging that the defendants engaged in an anticompetitive scheme to eliminate price competition on certain contact lens lines through the use of unilateral pricing policies. The plaintiffs in such suits alleged violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and of various state antitrust and consumer protection laws, and further alleged that the defendants have been unjustly enriched through their alleged conduct. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, punitive and/or other damages, including attorneys’ fees. By order dated June 8, 2015, the JPML centralized the suits in the Middle District of Florida, under the caption In re Disposable Contact Lens Antitrust Litigation, Case No. 3:15-md-02626-HES-JRK, before U.S. District Judge Harvey E. Schlesinger. After the Class Plaintiffs filed a corrected consolidated class action complaint on December 16, 2015, the defendants jointly moved to dismiss those complaints. The defendants’ motion to dismiss is currently pending in the district court, and the actions are currently in discovery. The Company intends to vigorously defend all of these actions.
Intellectual Property
AntiGrippin® Litigation
A suit was brought against the Company’s subsidiary, Natur Produkt International, JSC ("Natur Produkt") seeking lost profits in connection with the registration by Natur Produkt of its AntiGrippin® trademark. The plaintiff in this matter alleged that Natur Produkt violated Russian competition law by preventing plaintiff from producing and marketing its products under certain brand names. The matter (Case No. A-56-23056/2013, Arbitration Court of St. Petersburg) was accepted for proceedings on June 24, 2013 and a hearing was held on November 28, 2013. In a decision dated December 4, 2013, the court found in favor of the plaintiff (AnviLab) and awarded the plaintiff lost profits in the amount of approximately RUR
1.66 billion
(being approximately
$50 million
at the December 4, 2013 decision date). This charge was recognized in the fourth quarter of 2013 in Other expense (income) in the consolidated statements of income. Natur Produkt appealed this decision, and a hearing in the appeal proceeding was held on March 16, 2014. The appeal court found in favor of Natur Produkt and dismissed the plaintiff’s claim in full. Following this decision, the Company concluded that the potential loss was no longer probable, and therefore the reserve was reversed in the first quarter of 2014 in Other expense (income) in the consolidated statements of income. AnviLab appealed the appeal court’s decision to the cassation court. On June 19, 2014, the cassation court resolved that the matter is within the jurisdiction of the Intellectual Property ("IP") Court in this instance. The hearing before the IP Court was held on July 30, 2014 and August 1, 2014. The IP Court found in favor of the plaintiff and ruled to send the case for the second review to the court of the first instance, indicating that the court of the first instance should decide on the amount of damages suffered by AnviLab. Natur Produkt appealed the decision of the IP Court to the Supreme Court on September 15, 2014, but, on October 22, 2014, the Supreme Court denied that appeal and the matter was sent back to the court of first instance for the second review. The court of first instance appointed an expert to provide a report on the claimed lost profit amount, which was provided on or about March 10, 2015. Hearings before the court of first instance in this matter were held on March 12, 2015 and April 9, 2015. Following the April 9, 2015 hearing, the court of first instance ruled in favor of the plaintiff and awarded the plaintiff lost profits in the amount of approximately RUR
1.66 billion
. Natur Produkt filed an appeal against this decision, both as to the merits and the quantum of damages, to the appeal court on May 15, 2015. The hearing before the appeal court was held on July 28, 2015 and the court ruled in favor of the plaintiff. Subsequently, Natur Produkt filed an appeal to the IP Court. At a hearing held on October 6, 2015, the IP Court ruled in favor of the plaintiff and upheld the decision of the appeal court. Natur Produkt appealed to the Supreme Court for review of the IP Court’s decision and, on December 30, 2015, the Supreme Court rejected Natur Produkt’s request for appeal. In January 2016, Natur Produkt requested clarification of this decision of the Supreme Court, but it is not anticipated that this request will result in a modification to or reversal of the Supreme Court’s decision to reject Natur Produkt’s appeal. As Natur Produkt’s appeal to the IP Court did not delay enforcement of the appeal court’s decision, Natur Produkt was required to pay the claimed amount of RUR
1.66 billion
(being approximately
$25 million
as of the payment date) to the plaintiff, via bailiffs’ account, on September 28, 2015. The
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
Company recognized the
$25 million
charge in the third quarter of 2015 in Other expense (income) in the consolidated statements of (loss) income.
Following the decision of the IP Court, AnviLab filed two more claims against Natur Produkt relating to the matter described above (the “Original AnviLab Matter”). The first claim by AnviLab was filed on December 3, 2015 with the Saint Petersburg Arbitration Tribunal (Case No. A-56-89244/2015) and seeks an amount in respect of the interest payable on the amount awarded by the appeal court in the Original AnviLab Matter for the period between the date the amount was awarded by the appeal court (August 4, 2015) and the date AnviLab received the payment (September 29, 2015). A hearing in this matter was held on March 24, 2016 and a subsequent hearing was held on April 14, 2016. The second claim by AnviLab was filed on December 15, 2015 with the Saint Petersburg Arbitration Tribunal (Case No.A-56-23056/2013) and seeks an amount in respect of litigation costs related to Original AnviLab Matter. A hearing in this matter was held on February 25, 2016 and a subsequent hearing was held on April 14, 2016. The Court awarded amounts to AnviLab with respect to each of these claims. For both of these claims, the amount awarded to AnviLab was insignificant. On May 25, 2016, Natur Produkt appealed both of these decisions.
Patent Litigation/Paragraph IV Matters
The Company (and/or certain of its affiliates) is also party to certain patent infringement proceedings in the United States and Canada, including as arising from claims filed by the Company (or that the Company anticipates filing within the required time periods) in connection with Notices of Paragraph IV Certification (in the United States) and Notices of Allegation (in Canada) received from third party generic manufacturers respecting their pending applications for generic versions of certain products sold by or on behalf of the Company, including Onexton®, Relistor®, Prolensa®, Apriso®, Uceris®, Moviprep®, Acanya® and Bepreve® in the United States and Sublinox® in Canada, or other similar suits. These matters are proceeding in the ordinary course.
In addition, on or about February 16, 2016, the Company received a Notice of Paragraph IV Certification dated February 11, 2016, from Actavis Laboratories FL, Inc. (“Actavis”), in which Actavis asserted that the following U.S. patents, each of which is listed in the FDA’s Orange Book for Salix Pharmaceuticals, Inc.’s (“Salix Inc.”) Xifaxan® tablets, 550 mg, are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Actavis’ generic rifaximin tables, 550 mg, for which an ANDA has been filed by Actavis: U.S. Patent No. 8,309,569 (the “‘569 patent”), U.S. Patent No. 8,642,573 (the “‘573 patent”), U.S. Patent No. 8,829,017 (the “‘017 patent”), U.S. Patent No. 8,946,252 (the “‘252 patent”), U.S. Patent No. 8,969,398 (the “‘398 patent”), U.S. Patent No. 7,045,620 (the “‘620 patent”), U.S. Patent No. 7,612,199 (the “‘199 patent”), U.S. Patent No. 7,902,206 (the “‘206 patent”), U.S. Patent No. 7,906,542 (the “‘542 patent”), U.S. Patent No. 7,915,275 (the “‘275 patent”), U.S. Patent No. 8,158,644 (the “‘644 patent”), U.S. Patent No. 8,158,781 (the “‘781 patent”), U.S. Patent No. 8,193,196 (the “‘196 patent”), U.S. Patent No. 8,518,949 (the “‘949 patent”), U.S. Patent No. 8,741,904 (the “‘904 patent”), U.S. Patent No. 8,835,452 (the “‘452 patent”), U.S. Patent No. 8,853,231 (the “‘231 patent”), U.S. Patent No. 6,861,053 (the “‘053 patent”), U.S. Patent No. 7,452,857 (the “‘857 patent”), U.S. Patent No. 7,605,240 (the “‘240 patent”), U.S. Patent No. 7,718,608 (the “‘608 patent”) and U.S. Patent No. 7,935,799 (the “‘799 patent”) (collectively, the “Xifaxan® Patents”). Salix Inc. holds the NDA for Xifaxan® and its affiliate, Salix Pharmaceuticals, Ltd. (“Salix Ltd.”), is the owner of the ‘569 patent, the ‘573 patent, the ‘017 patent, the ‘252 patent and the ‘398 patent. Alfa Wassermann S.p.A. (“Alfa Wassermann”) is the owner of the ‘620 patent, the ‘199 patent, the ‘206 patent, the ‘542 patent, the ‘275 patent, the ‘644 patent, the ‘781 patent, the ‘196 patent, the ‘949 patent, the ‘904 patent, the ‘452 patent and the ‘231 patent, each of which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Pharmaceuticals Luxembourg S.à r.l. (“Valeant Luxembourg”) to market Xifaxan® tablets, 550 mg. Cedars-Sinai Medical Center (“Cedars-Sinai”) is the owner of the ‘053 patent, the ‘857 patent, the ‘240 patent, the ‘608 patent and the ‘799 patent , each of which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Luxembourg, to market Xifaxan® tablets, 550 mg. On March 23, 2016, Salix Inc. and its affiliates, Salix Ltd. and Valeant Luxembourg, Alfa Wassermann and Cedars-Sinai filed suit against Actavis in the U.S. District Court for the District of Delaware (Case No. 1:16-cv-00188), pursuant to the Hatch-Waxman Act, alleging infringement by Actavis of one or more claims of each of the Xifaxan® Patents, thereby triggering a 30-month stay of the approval of Actavis’ ANDA for rifaximin tablets, 550 mg. On May 24, 2016, Actavis filed its answer in this matter. The Company believes the allegations raised in Actavis’ notice are without merit and intends to vigorously pursue this suit.
General Civil Actions
Afexa Class Action
On March 9, 2012, a Notice of Civil Claim was filed in the Supreme Court of British Columbia which seeks an order certifying a proposed class proceeding against the Company and a predecessor, Afexa Life Sciences Inc. ("Afexa") (Case No. NEW-
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
S-S-140954). The proposed claim asserts that Afexa and the Company made false representations respecting Cold-FX® to residents of British Columbia who purchased the product during the applicable period and that the proposed class has suffered damages as a result. On November 8, 2013, the Plaintiff served an amended notice of civil claim which sought to re-characterize the representation claims and broaden them from what was originally claimed. On December 8, 2014, the Company filed a motion to strike certain elements of the Plaintiff’s claim for failure to state a cause of action. In response, the Plaintiff proposed further amendments to its claim. The hearing on the motion to strike and the Plaintiff’s amended claim was held on February 4, 2015. The Court allowed certain amendments, while it struck others. The hearing to certify the class was held on April 4-8, 2016 and a decision is pending. The Company denies the allegations being made and is vigorously defending this matter.
R&O Pharmacy Complaint
On October 6, 2015, R&O Pharmacy, LLC ("R&O") filed a complaint against Valeant Pharmaceuticals North America LLC (“VPNA”) in the U.S. District Court for the Central District of California (Case No. 2:15-cv-07846). R&O’s lawsuit did not seek damages, but sought a declaration of rights against VPNA that R&O owes no duties or amounts to VPNA with respect to certain Company products ordered by and shipped to R&O. On October 29, 2015, VPNA filed its answer to R&O’s complaint. Also on that date, VPNA filed a counterclaim against R&O, including claims for breach of contract, unjust enrichment, accounting, and an open book account, with respect to these unpaid amounts. VPNA’s counterclaim sought damages in excess of
$19 million
. On November 19, 2015, R&O filed its answer to VPNA’s counterclaim. R&O did not assert any counterclaims. R&O generally claimed an entitlement to hold the funds achieved from the sale of Company products as an offset to potential claims arising out of Philidor’s conduct, which R&O asserts is attributable to the Company under an alter ego theory (being the theory that the Company should be responsible for Philidor’s actions in disregard of the fact that the two are separate legal entities). The Court held a scheduling conference with the parties on February 8, 2016 and set a November 2016 trial date. Subsequently, on March 8, 2016, the parties reached a confidential settlement that resolved all claims between them and, on March 10, 2016, the Court dismissed the lawsuit with prejudice. While the terms of the settlement are confidential, the resolution includes a payment by R&O to VPNA for less than the damages sought by VPNA in its counterclaim. VPNA firmly believes it acted appropriately and refutes any suggestion of wrongdoing.
Salix Legal Proceedings
The estimated fair values of the potential losses regarding the matters described below, along with other matters, are included as part of contingent liabilities assumed in the Salix Acquisition. Refer to Note 4 for additional information. Each of the Salix legal proceeding matters set out below was commenced prior to the Company’s acquisition of Salix.
DOJ Subpoena
On February 1, 2013, Salix received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents regarding sales and promotional practices for its Xifaxan®, Relistor® and Apriso® products. The Company, the United States and the state Medicaid Fraud Control Unit negotiating team have agreed to resolve the investigation as to the Company for approximately
$54 million
, plus payment of applicable interest and reasonable attorneys’ fees. In June 2016, the Company and the United States executed a settlement agreement concerning the federal portion of the settlement, which requires payment of approximately
$47 million
plus interest and which will likely become effective by mid-June 2016, pending the receipt of certain approval. The Company’s settlement agreement with the states, the total amount of which is approximately
$8 million
plus interest, is pending review and approval by the various state attorneys general. The Company can provide no assurance as to whether or when the settlement will be finalized, in whole or in part. The amount of the settlement (including the interest and attorneys’ fees payable in connection therewith) is included within the liability recorded at fair value as part of the Salix Acquisition and an adjustment, if any, to this liability will be recorded when and if the settlement is finalized.
Salix SEC Investigation
The SEC is conducting a formal investigation into possible securities law violations by Salix relating to disclosures by Salix of inventory amounts in the distribution channel and related issues in press releases, on analyst calls and in Salix’s various SEC filings, as well as related accounting issues. Salix and the Company are cooperating with the SEC in its investigation, including through the production of documents to the SEC Enforcement Staff. The Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on Salix or the Company arising out of the SEC investigation.
Salix Securities Litigation
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
Beginning on November 7, 2014,
three
putative class action lawsuits were filed by shareholders of Salix, each of which generally alleges that Salix and certain of its former officers and directors violated federal securities laws in connection with Salix’s disclosures regarding certain products, including with respect to disclosures concerning historic wholesaler inventory levels, business prospects and demand, reserves and internal controls.
Two
of these actions were filed in the U.S. District Court for the Southern District of New York, and are captioned: Woburn Retirement System v. Salix Pharmaceuticals, Ltd., et al. (Case No: 1:14-CV-08925 (KMW)), and Bruyn v. Salix Pharmaceuticals, Ltd., et al. (Case No. 1:14-CV-09226 (KMW)). These two actions have been consolidated under the caption In re Salix Pharmaceuticals, Ltd. (Case No. 14-CV-8925 (KMW)). Defendants’ Motions to Dismiss were fully briefed as of August 3, 2015. The Court denied the Motions to Dismiss in an order dated March 31, 2016 for the reasons stated in an opinion dated April 22, 2016. Defendants’ Answers to the operative Complaint were filed on May 31, 2016. Salix and the Company are vigorously defending this consolidated matter. A third action was filed in the U.S. District Court for the Eastern District of North Carolina under the caption Grignon v. Salix Pharmaceuticals, Ltd. et al. (Case No. 5:14-cv-00804-D), but was subsequently voluntarily dismissed.
Philidor Matters
As mentioned above in this section, the Company is involved in certain investigations, disputes and other proceedings related to the Company’s now terminated relationship with Philidor. These include the putative class action litigation and the investigations by certain offices of the Department of Justice, the SEC, the request for documents and other information received from the AMF and certain Congressional committees and a document subpoena from the New Jersey State Bureau of Securities. There can be no assurances that governmental agencies or other third parties will not commence additional investigations or assert claims relating to the Company’s former relationship with Philidor or Philidor’s business practices, including claims that Philidor or its affiliated pharmacies improperly billed third parties or that that the Company is liable, directly or indirectly, for such practices. The Company is cooperating with all existing governmental investigations related to Philidor and is vigorously defending the putative class action litigation. No assurance can be given regarding the ultimate outcome of any present or future proceedings relating to Philidor.
Reportable Segments
The Company has
two
operating and reportable segments: (i) Developed Markets and (ii) Emerging Markets. The following is a brief description of the Company’s segments as of
March 31, 2016
:
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•
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Developed Markets
consists of (i) sales in the U.S. of pharmaceutical products, OTC products, and medical device products, as well as alliance and contract service revenues, in the areas of dermatology and podiatry, neurology, gastrointestinal disorders, eye health, oncology and urology, dentistry, aesthetics, and women's health and (ii) pharmaceutical products, OTC products, and medical device products sold in Western Europe, Canada, Japan, Australia and New Zealand.
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|
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•
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Emerging Markets
consists of branded generic pharmaceutical products and branded pharmaceuticals, OTC products, and medical device products. Products are sold primarily in Central and Eastern Europe (primarily Poland and Russia), Asia, Latin America (Mexico, Brazil, Argentina, and Colombia and exports out of Mexico to other Latin American markets), Africa and the Middle East.
|
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as restructuring and acquisition-related costs, other (income) expense, and in-process research and development impairments and other charges, are not included in the measure of segment profit, as management excludes these items in assessing financial performance.
Corporate includes the finance, treasury, tax and legal operations of the Company’s businesses and maintains and/or incurs certain assets, liabilities, expenses, gains and losses related to the overall management of the Company, which are not allocated to the other business segments. In addition, a portion of share-based compensation is considered a corporate cost, since the amount of such expense depends on Company-wide performance rather than the operating performance of any single segment.
Segment Revenues and Profit
Segment revenues and profit for the
three-month periods ended March 31, 2016 and 2015
were as follows:
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
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Three Months Ended
March 31,
|
|
2016
|
|
2015
(restated)
|
Revenues:
|
|
|
|
Developed Markets
(1)
|
$
|
1,929.9
|
|
|
$
|
1,743.6
|
|
Emerging Markets
(2)
|
441.7
|
|
|
426.5
|
|
Total revenues
|
2,371.6
|
|
|
2,170.1
|
|
|
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|
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Segment profit:
|
|
|
|
Developed Markets
(3)
|
259.6
|
|
|
667.7
|
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Emerging Markets
(4)
|
18.3
|
|
|
54.6
|
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Total segment profit
|
277.9
|
|
|
722.3
|
|
|
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|
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Corporate
(5)
|
(146.4
|
)
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(69.2
|
)
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Restructuring, integration and other costs
|
(38.0
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)
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|
(55.0
|
)
|
Acquisition-related costs
|
(1.8
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)
|
|
(13.9
|
)
|
Acquisition-related contingent consideration
|
(2.4
|
)
|
|
(7.1
|
)
|
Other expense
|
(23.1
|
)
|
|
(6.1
|
)
|
Operating income
|
66.2
|
|
|
571.0
|
|
Interest income
|
0.9
|
|
|
0.9
|
|
Interest expense
|
(426.6
|
)
|
|
(297.8
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
(20.0
|
)
|
Foreign exchange and other
|
(6.2
|
)
|
|
(71.1
|
)
|
(Loss) income before provision for income taxes
|
$
|
(365.7
|
)
|
|
$
|
183.0
|
|
____________________________________
|
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(1)
|
Developed Markets segment revenues reflect incremental product sales revenue in the
three-month period ended March 31, 2016
from 2015 acquisitions of
$513 million
, in the aggregate, primarily from the Salix Acquisition and the acquisition of certain assets of Dendreon.
|
|
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(2)
|
Emerging Markets segment revenues reflect incremental product sales revenue in the
three-month period ended March 31, 2016
from 2015 acquisitions of
$59 million
, in the aggregate, primarily from the Amoun Acquisition.
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(3)
|
Developed Markets segment profit in the
three-month period ended March 31, 2016
reflects the impact of acquisition accounting adjustments related to the fair value adjustments to inventory and identifiable intangible assets of
$637 million
, in the aggregate, primarily from the Salix Acquisition, compared with
$314 million
in the corresponding period of 2015.
|
|
|
(4)
|
Emerging Markets segment profit in the
three-month period ended March 31, 2016
reflects the impact of acquisition accounting adjustments related to the fair value adjustments to inventory and identifiable intangible assets of
$86 million
, in the aggregate, compared with
$76 million
in the corresponding period of 2015.
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(5)
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Corporate reflects non-restructuring-related share-based compensation expense of
$50 million
in the
three-month period ended March 31, 2016
, compared with
$24 million
in the corresponding period of 2015. The expense in the three-month period ended March 31, 2016, included a charge relating to the acceleration of vesting of the performance-based RSUs held by the Company's former Chief Executive Officer. See Note 11 for additional information.
|
Segment Assets
Total assets by segment as of
March 31, 2016
and
December 31, 2015
were as follows:
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
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As of
March 31,
2016
|
|
As of
December 31,
2015
|
Assets:
|
|
|
|
Developed Markets
|
$
|
40,580.6
|
|
|
$
|
41,182.7
|
|
Emerging Markets
|
6,861.5
|
|
|
6,897.4
|
|
|
47,442.1
|
|
|
48,080.1
|
|
Corporate
|
1,577.8
|
|
|
884.4
|
|
Total assets
|
$
|
49,019.9
|
|
|
$
|
48,964.5
|
|
Appointment of Chairman and Chief Executive Officer
On May 2, 2016, Joseph C. Papa assumed the role of the Company’s Chairman and Chief Executive Officer, succeeding J. Michael Pearson as Chief Executive Officer and Robert A. Ingram as Chairman of the Board of Directors. The Company had previously announced on April 25, 2016 that Mr. Papa would become Chairman and Chief Executive Officer. Mr. Papa joined the Company from Perrigo Company plc, where he served as CEO since 2006 and as Chairman of the Board of Directors since 2007.
Notices of Default Under Senior Note Indentures
As a result of the delay in the Company filing its 2015 Form 10-K, on April 12, 2016, the Company received a notice of default from certain holders of its
5.50%
Notes due 2023 and, on April 22, 2016, the Company received additional notices of default from the trustee under the respective indentures governing the Company’s
5.375%
Senior Notes due 2020 and
7.50%
Senior Notes due 2021 and Valeant's
6.375%
Senior Notes due 2020 and
7.250%
Senior Notes due 2022. The filing of the 2015 Form 10-K on April 29, 2016 cured in all respects the default under the Company’s senior note indentures triggered by the failure to timely file the 2015 Form 10-K.
As a result of the delay in the Company filing this Form 10-Q, on May 19, 2016, the Company received a notice of default from the trustee under the indenture governing the Company’s
5.50%
Notes due 2023 and, on June 2, 2016, the Company received an additional notice of default from the trustee under the respective indentures governing Valeant's
7.250%
Senior Notes due 2022 and the Company’s
7.50%
Senior Notes due 2021. The filing of this Form 10-Q has cured in all respects the default under the Company’s senior note indentures triggered by the failure to timely file this Form 10-Q.
If the Company is delinquent in filing future reports, the Company may receive similar notices of default from the trustee or noteholders under the Company’s senior note indentures.
Credit Facility Amendment
On April 11, 2016, the Company obtained an amendment and waiver to its Credit Agreement. Pursuant to the amendment, the Company obtained an extension to the deadline for filing (i) the Company's 2015 Form 10-K to May 31, 2016 and (ii) this Form 10-Q to July 31, 2016. The amendment also waived, among other things, the cross-default under the Credit Agreement to the Company's indentures that arose when the 2015 Form 10-K was not filed by March 15, 2016, any cross default under the Credit Agreement that may have arisen under the Company's other indebtedness from the failure to timely deliver the 2015 Form 10-K, and the cross default under the Credit Agreement to the Company's indentures that arose when this Form 10-Q was not filed by May 16, 2016 or any cross default under the Credit Agreement to the Company’s other indebtedness as a result of the delay in filing this Form 10-Q. The amendment modified, among other things, the interest coverage financial maintenance covenant from
3.00
to 1.00 to
2.75
to 1.00 from the fiscal quarter ending June 30, 2016 through the fiscal quarter ending March 31, 2017. Certain financial definitions were also amended, including the definition of “Consolidated Adjusted EBITDA” which has been modified to add back fees and expenses in connection with any amendment or modification of the Credit Agreement or any other indebtedness, and to permit up to
$175,000,000
to be added back in connection with costs, fees and expenses relating to, among other things, Philidor-related matters and/or product pricing-related matters and any review by the Board and the Ad Hoc Committee related to such matters. The amendment also modified certain existing add-backs to Consolidated Adjusted EBITDA under the Credit Agreement, including increasing the add-back for (i) restructuring charges in any twelve-month period to
$200,000,000
from
$125,000,000
and (ii) fees and expenses in connection with any
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
proposed or actual issuance of debt, equity, acquisitions, investments, assets sales or divestitures to
$150,000,000
from
$75,000,000
for any twelve month period ending on or prior to March 31, 2017.
The terms of the amendment impose a number of restrictions on the Company and its subsidiaries until the time that (i) the Company delivers its 2015 Form 10-K (which was filed on April 29, 2016) and this Form 10-Q (such requirements, the "Financial Reporting Requirements") and (ii) the leverage ratio of the Company and its subsidiaries (being the ratio, as of the last day of any fiscal quarter, of Consolidated Total Debt (as defined in the Credit Agreement) as of such day to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the four fiscal quarter period ending on such date) is less than
4.50
to 1.00, including imposing (i) a
$250,000,000
aggregate cap (the "Transaction Cap") on acquisitions (although the Transaction Cap does not apply to any portion of acquisition consideration paid for by either the issuance of the Company’s equity or the proceeds of any such equity issuance), (ii) a restriction on the incurrence of debt to finance such acquisitions and (iii) a requirement that the net proceeds from certain asset sales be used to repay the term loans under the Credit Agreement, instead of investing such net proceeds in real estate, equipment, other tangible assets or intellectual property useful in the business. In addition, the Company's ability to make investments, dividends, distributions, share repurchases and other restricted payments is also restricted and subject to the Transaction Cap until such time as the Financial Reporting Requirements are satisfied and the leverage ratio of the Company and its subsidiaries is less than
4.00
to 1.00 (unless such investments or restricted payments can fit within other existing exceptions set out in the Credit Agreement). The amendment also increased the interest rate applicable to the Company's loans under the Credit Agreement by
1.00%
until delivery of the Company's financial statements for the fiscal quarter ending June 30, 2017. Thereafter, the interest rate applicable to the loans will be determined on the basis of a pricing grid tied to the Company's secured leverage ratio. With the filing of this Form 10-Q, the Financial Reporting Requirements have been satisfied in all respects.
Management Cease Trade Orders
On March 21, 2016, the Company applied for a customary management cease trade order (the “MCTO”) from the AMF, the Company's principal securities regulator in Canada. The application was made in connection with the Company’s anticipated delay in filing its audited consolidated annual financial statements for the fiscal year ended December 31, 2015, the related management’s discussion and analysis, certificates of its Chief Executive Officer and Chief Financial Officer and its 2015 Form 10-K (collectively, the “Required Annual Canadian Filings”) with Canadian securities regulators until after the March 30, 2016 filing deadline. This MCTO (the “March MCTO”) was issued on March 31, 2016 and prohibited the trading in or acquisition of any securities of the Company, directly or indirectly, by each of the Company’s then-current Chief Executive Officer, Chief Financial Officer and each other member of the Board. The March MCTO did not affect the ability of other shareholders of the Company to trade in the Company’s securities. A similar order was issued by the Ontario Securities Commission with respect to a director of the Company who is resident in that province. The Company made the Required Annual Canadian Filings on April 29, 2016 and, as of that date, the March MCTOs and the corresponding trading restrictions were lifted.
On May 11, 2016, the Company applied for a further customary MCTO from the AMF in connection with its previously announced delay in filing its interim consolidated financial statements for the quarter ended March 31, 2016, the related management’s discussion and analysis and certificates of its current Chief Executive Officer and Chief Financial Officer (collectively, the “Required Interim Canadian Filings”) with Canadian securities regulators until after the May 15, 2016 filing deadline. This MCTO (the “May MCTO”) was issued on May 17, 2016 and prohibits the trading in or acquisition of any securities of the Company, directly or indirectly, by each of the Company’s current Chief Executive Officer, Chief Financial Officer and each other member of the Board. A similar order was issued by the Ontario Securities Commission with respect to a director of the Company who is resident in that province. These trading restrictions are expected to remain in place until shortly after the Required Interim Canadian Filings are made. The May MCTO does not affect the ability of other shareholders of the Company to trade in the Company’s securities.
New Patient Access and Pricing Committee
On May 5, 2016, the Company announced the formation of a new Patient Access and Pricing Committee that is responsible for the pricing of the Company’s drugs. The Patient Access and Pricing Committee, which is overseen by the Company’s Board of Directors, includes a multi-disciplinary team of the Company's employees, including doctors, scientists and other executives, and is chaired by the Company’s new Chairman and Chief Executive Officer. On May 16, 2016, the Company announced that, pursuant to a recommendation of the Patient Access and Pricing Committee, effective immediately, the Company would make available to all hospitals in the U.S. an enhanced rebate program to reduce the price of the Company’s Nitropress® and Isuprel® products. Under the enhanced program, all hospitals are eligible for a rebate of at least
10%
, with
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
rebates totaling
20%
,
30%
or
40%
based on volume purchased during a calendar quarter for hospitals that purchase large volumes of the applicable product. The Patient Access and Pricing Committee also confirmed that there would be no further price increases for these products or reductions to the discount levels in the rebate program.