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Our 2015 operating income compared to our 2014 operating income reflects among other factors: • an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of intangible assets) of $1,892 million primarily attributable to incremental contribution from the Salix Acquisition and other acquisitions; • an increase in SG&A of $674 million primarily attributable to (i) incremental SG&A from the Salix Acquisition and other 2015 and 2014 acquisitions and (ii) costs incurred in support of product launches in dermatology in the second half of 2014; • an increase in R&D of $88 million primarily attributable to incremental expenditures in support of the product portfolios acquired in the Salix Acquisition and the acquisition of certain assets of Dendreon Corporation; • an increase in amortization of finite-lived assets of $830 million as we began amortizing intangible assets acquired in the second half of 2014 and during 2015; • an increase in in-process R&D costs of $86 million primarily related to a $100 million upfront payment to acquire certain multi-year licensing rights to brodalumab (to be marketed as Siliq™ in the U.S.) expensed in 2015; • a net gain of approximately $251 million associated with the sales of business assets primarily related to the divestiture of facial aesthetic fillers and toxins included in other (income) expense for 2014 and not occurring in 2015; and • post-combination compensation expenses in 2015 of approximately $183 million associated with two acquisitions in 2015 included in other (income) expense and not occurring in 2014. |
The increase was primarily driven by the following factors: • incremental SG&A related to the Salix Acquisition, the Amoun Acquisition and other acquisitions of $193 million; • termination benefits associated with our former Chief Executive Officer of $38 million recognized in the first quarter consisting of (i) the pro-rata vesting of performance-based restricted stock units ("RSUs") (no shares were issued on vesting of these performance-based RSUs because the associated market-based performance condition was not attained), (ii) a cash severance payment and (iii) a pro-rata annual cash bonus; • professional fees in connection with recent legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices of $65 million; • severance and other benefits paid to our exiting executives (excluding benefits paid to the former Chief Executive Officer) and costs associated with recruiting and on-boarding new executive team members; and • an increase in legal and professional fees in connection with ongoing corporate and business matters. |
The increase was primarily driven by the following factors: • an increase in advertising and promotion to support the U.S. operations, primarily to support product launches in dermatology during the second half of 2014 (including Jublia® and Onexton®) and the contact lens business; • incremental SG&A related to the Salix Acquisition, the acquisition of certain assets of Dendreon Corporation and other acquisitions of $311 million; • increased share-based compensation expense of $62 million primarily driven by (i) new awards granted in 2015, (ii) accelerated vesting related to certain performance-based RSUs and (iii) a modification made to certain share-based awards; • a charge in the fourth quarter for incremental trade receivable reserves primarily related to (i) a settlement with R&O Pharmacy, LLC and (ii) certain Philidor Rx Services, LLC ("Philidor") customers; and • a fourth quarter charge taken to reduce the carrying value of certain property, plant and equipment in connection with the termination of the arrangements with Philidor of $23 million. |
The increase was primarily driven by additional interest of (i) $135 million from the issuances of senior unsecured notes, in connection with the Salix Acquisition, (ii) $107 million related to increases in interest rates, primarily due to an increase in interest rates applicable to our term loans and revolving credit facility under our senior secured credit facilities as a result of the amendment and waiver to our Third Amended and Restated Credit and Guaranty Agreement, as amended (the "Credit Agreement") that the Company entered into on April 11, 2016 (the “April 2016 amendment”) and the amendment to its Credit Agreement that the Company entered into on August 23, 2016 (the “August 2016 amendment”), (iii) $48 million related to issuances of incremental term loans in connection with the Salix Acquisition (excluding the impact of the April 2016 amendment and the August 2016 amendment), (iv) $44 million related to non-cash amortization and write-off of debt discounts and debt issuance costs, (v) $24 million primarily related to higher borrowings under our revolving credit facility, partially offset by (vi) a decrease of $72 million related to financing costs associated with the commitment letter entered into in connection with the Salix Acquisition in the first quarter of 2015, which did not similarly occur in 2016 and (vii) a net decrease of $5 million primarily due to principal repayments on our term loans. |
These factors were partially offset by: • payment of $168 million in the second quarter of 2015 for outstanding restricted stock that was accelerated in connection with the Salix Acquisition, which did not similarly occur in 2016; • lower payments of restructuring and integration costs of $216 million, primarily attributable to payments made in 2015 in connection with the Salix Acquisition, the acquisition of certain assets of Dendreon Corporation, and the B&L Acquisition; and • a decreased investment in working capital primarily related to (i) a true-up payment of $110 million, related to price appreciation credits, received in the first quarter of 2016 under a distribution service agreement with one of our wholesalers, (ii) the post-acquisition build up in trade receivables in 2015 related to the Salix Acquisition and the acquisition of certain assets of Marathon where minimal trade receivable balances were acquired, which did not similarly occur in 2016 and (iii) the impact of changes related to timing of payments and receipts in the ordinary course of business. |
See Note 23, "PS FUND 1 INVESTMENT" to our audited Consolidated Financial Statements for further details; • an increased investment in working capital primarily related to (i) the post-acquisition build up in trade receivables for recent acquisitions (primarily the Salix Acquisition and the acquisition of certain assets of Marathon), where minimal trade receivable balances were acquired, (ii) higher payments related to interest and product sales provisions (such as managed care rebates, government rebates, and patient subsidies), (iii) slower account receivable collections in Russia and (iv) the impact of changes related to timing of payments and receipts in the ordinary course of business, partially offset by (v) changes in geographic and product mix, in particular the impact on receivables from lower product sales for the U.S. dermatology business in the month of December and (vi) true-up payments, related to price appreciation credits, received under our distribution service agreements; • payment of $168 million in the second quarter of 2015 for outstanding restricted stock that was accelerated in connection with the Salix Acquisition, which includes $3 million of related payroll taxes (recognized as a post-combination expense within Other expense (income)); and • a payment of approximately $25 million related to the AntiGrippin® litigation. |
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects, forecasts and changes thereto, product pipeline, prospective products or product approvals, product development and distribution plans, future performance or results of current and anticipated products; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; the impact of our distribution, fulfillment and other third party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meet the financial and other covenants contained in our Credit Agreement and indentures; and our impairment assessments, including the assumptions used therein and the results thereof. |
Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: • the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New York and the State of North Carolina Department of Justice, the pending investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, pending investigations by the U.S. Senate Special Committee on Aging and the U.S. House Committee on Oversight and Government Reform, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the document subpoena from the New Jersey State Bureau of Securities, the pending investigation by the California Department of Insurance, a number of pending putative class action litigations in the U.S. and Canada and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted; • our ability to manage the transition to our new management team (including our new Chairman and Chief Executive Officer, new Chief Financial Officer, new General Counsel, new Corporate Controller and Chief Accounting Officer and new Chief Quality Officer), the success of new management in assuming their new roles and the ability of new management to implement and achieve the strategies and goals of the Company as they develop; • our ability to manage the transition to our new Board of Directors and the success of these individuals in their new roles as members of the Board of Directors of the Company; • the impact of the changes in and reorganizations to our business structure, including changes to our operating and reportable segments; • the effect of the misstatements identified in, and the resultant restatement of, certain of our previously issued financial statements and results; the material weaknesses in our internal control over financial reporting that were identified by the Company; and any claims, investigations or proceedings (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity or reputational harm that has arisen or may arise as a result; • the effectiveness of the measures implemented to remediate the material weaknesses in our internal control over financial reporting that were identified by the Company, our deficient control environment and the contributing factors leading to the misstatement of our results and the impact such measures may have on the Company and our businesses; • potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the recent public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor and/or its management and/or employees; • the current scrutiny of our business practices including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York, the U.S. Senate Special Committee on Aging, the U.S. House Committee on Oversight and Government Reform and the State of North Carolina Department of Justice) and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof; • pricing decisions that we have implemented, or may in the future, elect to implement (whether as a result of recent scrutiny or otherwise, such as the decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products, the decision to take no pricing adjustments on our dermatology and ophthalmology products in 2016, the Patient Access and Pricing Committee’s commitment that the average annual price increase for our prescription pharmaceutical products will be set at no greater than single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which will be responsible for the pricing of our drugs); • legislative or policy efforts, including those that may be introduced and passed by the Republican-controlled Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions); • ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA"), and the results thereof, such as the inspections by the FDA of the Company's facilities in Tampa, Florida and Rochester, New York, and the results thereof; • any default under the terms of our senior notes indentures or Credit Agreement and our ability, if any, to cure or obtain waivers of such default; • any delay in the filing of any future financial statements or other filings and any default under the terms of our senior notes indentures or Credit Agreement as a result of such delays; • our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels in accordance with our stated intention and the resulting impact on our financial condition, cash flows and results of operations; • our ability to meet the financial and other covenants contained in our Credit Agreement, indentures and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional debt we are able to incur where not prohibited, and restrictions on our ability to make certain investments and other restricted payments; • any further downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances; • any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2017 or beyond, which could lead to, among other things, (i) a failure to meet the financial and/or other covenants contained in our Credit Agreement and/or indentures, and/or (ii) impairment in the goodwill associated with certain of our reporting units (including our Salix reporting unit) or impairment charges related to certain of our products (in particular, our Addyi® product) or other intangible assets, which impairments could be material; • changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products (in particular, our Addyi® product) or other intangible assets; • the pending and additional divestitures of certain of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such pending or future divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant write-downs of goodwill, or any adverse tax consequences suffered as a result of any such divestitures; • our shift in focus to much lower business development activity through acquisitions for the foreseeable future as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we achieve a specified leverage ratio; • the uncertainties associated with the acquisition and launch of new products (such as our Addyi® product and our recently approved Siliq™ product (brodalumab)), including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges; • our ability to retain, motivate and recruit executives and other key employees, including subsequent to retention payments being paid out and as a result of the reputational challenges we face and may continue to face; • our ability to implement effective succession planning for our executives and key employees; • the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly; • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Credit Agreement, indentures and the agreements governing our other indebtedness; • the success of our recent and future fulfillment and other arrangements with Walgreen Co. ("Walgreens"), including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, pharmacy benefit managers ("PBMs"), third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws, and our ability to successfully negotiate any improvements to our arrangements with Walgreens; • the extent to which our products are reimbursed by government authorities, PBMs and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our former relationship with Philidor, any alleged wrongdoing by Philidor and our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products; • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries, including the impact on such matters of the proposals published by the Organization for Economic Co-operation and Development ("OECD") respecting base erosion and profit shifting ("BEPS") and various corporate tax reform proposals being considered in the U.S.; • the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations); • adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the current or recent instability in Brazil, Russia, Ukraine, Argentina, Egypt, certain other countries in Africa and the Middle East, the devaluation of the Egyptian pound, and the adverse economic impact and related uncertainty caused by the United Kingdom's decision to leave the European Union (Brexit)); • our ability to reduce or maintain wholesaler inventory levels in certain countries, such as Russia and Poland, in-line with our targeted levels for such markets; • our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property; • the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights; • once the additional limitations in our Credit Agreement restricting our ability to make acquisitions are no longer applicable, and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis; • factors relating to the acquisition and integration of the companies, businesses and products that have been acquired by the Company and that may in the future be acquired by the Company (once the additional limitations in our Credit Agreement restricting our ability to make acquisitions are no longer applicable and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, the risks associated with the acquired companies, businesses and products and our ability to achieve the anticipated benefits and synergies from such acquisitions and integrations, including as a result of cost-rationalization and integration initiatives. |
Factors impacting the achievement of anticipated benefits and synergies may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions; • the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof; • our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • interest rate risks associated with our floating rate debt borrowings; • our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our recent arrangements with Walgreens; • our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market; • the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith; • the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products (such as our Addyi® product and our recently approved Siliq™ product (brodalumab)), which could lead to material impairment charges; • the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; • compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential repeal or amendment thereof and other legislative and regulatory healthcare reforms in the countries in which we operate, including with respect to recent government inquiries on pricing; • the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products; • the impact of changes in federal laws and policy under consideration by the new administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential repeal of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions); • potential ramifications, including legal sanctions and/or financial penalties, relating to the restatement by Salix Pharmaceuticals, Ltd. ("Salix") of its historical financial results prior to our acquisition of Salix in April 2015; • illegal distribution or sale of counterfeit versions of our products; • interruptions, breakdowns or breaches in our information technology systems; and • risks in “Risk Factors” in Item 1A in this Form 10-K and risks detailed from time to time in our filings with the SEC and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing. |
Other Information Amended Claw Back Policy On February 22, 2017, the Company amended its claw back policy (which previously permitted the Board to claw back certain incentive compensation from executives in the event of certain material financial restatements as a result of such executive’s knowing or intentional fraudulent or illegal misconduct) to provide that the Board of Directors may exercise its discretion to require any employee who receives equity-based compensation to reimburse bonus, incentive or equity-based compensation awarded to such employees beginning in 2017 in the event of: • a material restatement or adjustment to the Company’s financial statements as a result of such employee’s knowing or intentional fraudulent or illegal misconduct; or • such employee’s detrimental conduct that has caused material financial, operational or reputational harm to the Company, including (i) acts of fraud or dishonesty during the course of employment; (ii) improper conduct that causes material harm to the Company or its affiliates; (iii) improper disclosure of confidential material that causes material harm to the Company or its affiliates; (iv) the commission of a felony or crime of comparable magnitude that subject the Company to material reputational harm; (v) commission of an act or omission that cause a violation of federal or other applicable securities law; or (vi) gross negligence in exercising supervisory authority. |
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the years 2016 and 2015: ____________________________________ (1) For the year ended December 31, 2016, a net gain of $13 million was recognized as Acquisition-related contingent consideration in the consolidated statements of (loss) income, primarily reflecting (i) the accretion for the time value of money for the Sprout Acquisition, the Salix Acquisition and other smaller acquisitions, more than offset by (ii) the resulting fair value adjustments of $29 million to the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL in June 2011 (the "Elidel®/Xerese®/Zovirax® agreement"), (iii) the resulting fair value adjustments of $29 million to the Amoun Acquisition due to the devaluation of the Egyptian Pound currency in the fourth quarter of 2016 that affected sales-based milestones pegged to the U.S. dollar and (iv) the resulting fair value adjustments of Commonwealth, Inc. program to development milestones and sales-based milestones of $27 million primarily in the third quarter of 2016. |
The terms of the April 2016 amendment impose a number of restrictions on the Company and its subsidiaries until the time that (i) the Company delivers the 2015 Form 10-K (which was filed on April 29, 2016) and the March 31, 2016 Form 10-Q (which was filed on June 7, 2016) (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 million 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. |
On February 10, 2017, the Company, Valeant (together, the “Valeant Co Parties”) and J. Michael Pearson (together, the “Valeant Parties”) and Pershing Square Capital Management, L.P., Pershing Square Holdings, Ltd., Pershing Square International, Ltd., Pershing Square, L.P., Pershing Square II, L.P., PS Management GP, LLC, PS Fund 1, LLC, Pershing Square GP, LLC (together, “Pershing Square”), and William A. Ackman (“Ackman” and, together with Pershing Square, the “Pershing Square Parties”) entered into a litigation management agreement (the “Litigation Management Agreement”), pursuant to which the parties agreed to certain provisions with respect to the management of this litigation, including all cases currently consolidated with the California action described above and any opt-out litigation or individual actions brought by members of the putative class in the California action asserting the same or similar allegations or claims (collectively, the “Allergan Litigation”), including the following: • In respect of any settlement relating to the Allergan Litigation that receives the mutual consent of both the Valeant Parties and the Pershing Square Parties, the payments in connection with such settlement will be paid 60% by the Valeant Co Parties and 40% by the Pershing Square Parties. |
Segment Revenues and Profit Segment revenues and profits for the years ended December 31, 2016, 2015 and 2014 were as follows: Segment Assets Total assets by segment as of December 31, 2016 and 2015 were as follows: Capital Expenditures, Depreciation and Amortization of intangible assets, and Asset Impairments Capital expenditures, depreciation and amortization of intangible assets, and asset impairments by segment for the years ended December 31, 2016, 2015 and 2014 were as follows: Revenues by Product Category Revenues by product category for the years ended December 31, 2016, 2015 and 2014 were as follows: Geographic Information Revenues are attributed to a geographic region based on the location of the customer for the years ended December 31, 2016, 2015 and 2014 were as follows: Long-lived assets consisting of property, plant and equipment, net of accumulated depreciation, are attributed to geographic regions based on their physical location as of December 31, 2016 and 2015 were as follows: ____________________________________ (1) In 2015, Long-lived assets associated with the Company's Ireland manufacturing facility were incorrectly included within the U.S. and Puerto Rico balances, have been revised to properly reflect those assets as Ireland assets. |
We are the subject of a number of recent legal proceedings and investigations and inquiries by governmental agencies, including the following: (i) investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York relating to certain matters, including the Company’s patient assistance programs, its former relationship with Philidor and other pharmacies, its accounting treatment for sales by specialty pharmacies, financial support provided by the Company for patients, distribution of the Company's products, information provided to the Centers for Medicare and Medicaid Services, discounts and rebates on the Company's products and issues related to the Company’s pricing decisions; (ii) the investigation by the SEC of the Company relating to certain matters, including the Company’s former relationship with Philidor, its accounting practices and policies and its public disclosures; (iii) investigations by the U.S. Senate Special Committee on Aging and the U.S. House Committee on Oversight and Government Reform relating to certain matters, including the Company’s pricing decisions on particular drugs, as well as financial support provided by the Company for patients and matters relating to the Company’s research and development program, Medicare, and Medicaid; (iv) an investigation by the State of North Carolina Department of Justice relating to certain matters, including the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, the Company's Nitropress®, Isuprel® and Cuprimine® products and the Company's pricing decisions for certain of its other products; (v) a request for documents and other information received by the Company from the AMF relating to certain matters, including with respect to its former relationship with Philidor and its accounting practices and policies; (vi) a document subpoena from the New Jersey State Bureau of Securities relating to the Company’s former relationship with Philidor, its accounting treatment for sales to Philidor, its financial reporting and public disclosures and other matters; and (vii) a number of purported class action securities litigations in the U.S. and Canada have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about the Company’s business and prospects, including relating to drug pricing, the Company’s policies and accounting practices, the Company’s use of specialty pharmacies, and the Company’s former relationship with Philidor. |
Such restrictions, prohibitions and limitations could impact our ability to implement elements of our strategy in the following ways: • our ability to obtain additional debt financing on favorable terms or at all could be limited; • there may be instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required payments on our debt, which circumstances may result in the acceleration of the maturity of some or all of our outstanding indebtedness (which we may not have the ability to pay); • there may be instances in which we are unable to meet the financial covenants contained in our debt agreements, at which time we may be prohibited from incurring any additional debt until such covenants are met; • in 2016 and possibly beyond, a substantial portion of our cash flow from operations will be allocated (and, in future years, may be allocated) to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations; • we may issue debt or equity securities or sell some of our assets (subject to certain restrictions under our existing indebtedness) to meet payment obligations or to reduce our financial leverage, and we cannot assure you whether such transactions will be on favorable terms; • our flexibility to plan for, or react to, competitive challenges in our business and the pharmaceutical and medical device industries may be compromised; • we may be put at a competitive disadvantage relative to competitors that do not have as much debt as we have, and competitors that may be in a more favorable position to access additional capital resources; and • as further described below, our ability to make acquisitions and execute business development activities through acquisitions will be limited and may, in future years, continue to be limited. |
Levels of market acceptance for our new products (such as Addyi®) could be impacted by several factors, some of which are not within our control, including but not limited to the: • safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors; • scope of approved uses and marketing approval; • availability of patent or regulatory exclusivity; • timing of market approvals and market entry; • ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy (REMS) programs; • any restrictions or “black box” warnings required on the labeling of such products: • availability of alternative products from our competitors; • acceptance of the price of our products; • effectiveness of our sales forces and promotional efforts; • the level of reimbursement of our products; • acceptance of our products on government and private formularies; • ability to market our products effectively at the retail level or in the appropriate setting of care; and • the reputation of our products. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act ("FCPA"), and other applicable worldwide anti-bribery laws; • price and currency exchange controls; • restrictions on the repatriation of funds; • scarcity of hard currency, including the U.S. dollar, such as is the case currently in Egypt, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis; • political and economic instability; • compliance with multiple regulatory regimes; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • credit market uncertainty; • differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • manufacturing and supply interruptions; • our responses to price competition; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases; • general economic and industry conditions, including potential fluctuations in interest rates; • changes in seasonality of demand for certain of our products; • foreign currency exchange rate fluctuations; • changes to, or the confidence in, our business strategy; • changes to, or the confidence in, our management; and • expectations for future growth. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such terms are defined in the Canadian Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property. |
Net income attributable to Valeant Pharmaceuticals International, Inc. was $881 million in 2014, compared with net loss attributable to Valeant Pharmaceuticals International, Inc. of $866 million in 2013, reflecting the following factors: (i) an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of finite-lived intangible assets) of $2.07 billion in 2014, (ii) higher impairment charges in 2013 (primarily driven by the impairment charge for ezogabine/retigabine) and (iii) a net gain related to the divestiture of facial aesthetic fillers and toxins assets in 2014, partially offset by (iv) an increase in selling, general and administrative expenses, (v) an increase in the provision for income taxes and (vi) an increase in non-operating expense, net which included increases in interest expense, loss on extinguishment of debt, and foreign exchange and other, which were partially offset by the net gain recognized in connection with the sale by PS Fund 1, LLC (“PS Fund 1”) of the Allergan Inc. (“Allergan”) shares. |
SG&A in 2015 was impacted primarily by: • higher expenses of $378 million to support the U.S. operations, primarily to support recent product launches in dermatology (including Jublia® and Onexton®) and the contact lens business; • higher expenses of $311 million, related to acquisitions, including the Salix Acquisition and the acquisition of certain assets of Dendreon; • increased share-based compensation expense of $62 million, primarily driven by new awards granted during the period, the impact of the accelerated vesting related to certain performance-based restricted stock unit ("RSU") awards, and the impact from a modification made to certain share-based awards; • a charge in the fourth quarter of 2015 of $27 million for incremental accounts receivable reserves primarily related to (i) a settlement with R&O Pharmacy, LLC ("R&O") regarding outstanding receivable amounts and (ii) certain Philidor customers (see Note 3 titled "SIGNIFICANT ACCOUNTING POLICIES" and Note 21 titled "LEGAL PROCEEDINGS" of notes to consolidated financial statements in Item 15 of this Form 10-K for additional information regarding R&O); and • a write-off of property, plant and equipment in the fourth quarter of 2015 of $23 million in connection with the termination of the arrangements with and relating to Philidor. |
Amortization and Impairments of Finite-Lived Intangible Assets Amortization and impairments of finite-lived intangible assets increased $868 million, or 56%, to $2.42 billion in 2015, primarily due to (i) amortization of 2014 and 2015 acquisitions in 2015 (primarily the Salix Acquisition, and the acquisitions of certain assets of both Marathon and Dendreon) that did not similarly exist for the full year in 2014, including amortization of $284 million related to Xifaxan® 550 mg for the treatment of irritable bowel syndrome with diarrhea in adults ("Xifaxan® IBS-D"), acquired as part of the Salix Acquisition, since its approval date in May 2015, (ii) the write-off of intangible assets in the fourth quarter of 2015 of $79 million in connection with the termination of the arrangements with and relating to Philidor, (iii) an impairment charge in the fourth quarter of 2015 of $27 million related to the write-off of the remaining intangible asset for ezogabine/retigabine (immediate-release formulation) resulting from further analysis of commercialization strategy and projections, and (iv) an impairment charge in the third quarter of 2015 of $26 million related to Zelapar® resulting from declining sales trends, partially offset by (v) a decrease of $25 million in 2015 in amortization of the facial aesthetic fillers and toxins assets which were divested in July 2014. |
Amortization and impairments of finite-lived intangible assets decreased $351 million, or 18%, to $1.55 billion in 2014, primarily due to (i) a decrease of $631 million for ezogabine/retigabine due to the impairment charge of $552 million recognized in the third quarter of 2013 (which also resulted in lower amortization expense in 2014), (ii) a decrease in amortization of the facial aesthetic fillers and toxins assets which were divested in July 2014 of $44 million, (iii) impairment charges of $32 million recognized in 2013 related to the write-down of the carrying values of assets held for sale related to certain suncare and skincare brands sold primarily in Australia, and (iv) a $22 million write-off recognized in 2013 related to the Opana® intangible asset, partially offset by (v) an increase in amortization of the B&L, Solta Medical and PreCision identifiable intangible assets of $243 million, in the aggregate, in 2014, (vi) a $55 million write-off recognized in 2014 related to the Kinerase® intangible asset, and (vii) a $32 million write-off in 2014 related to the Grifulvin® intangible asset. |
This factor was more than offset by: • an increase in non-operating expenses, net of $381 million driven mainly by (i) the gain on investment of $287 million recognized in the fourth quarter of 2014 in connection with the sale by PS Fund 1 of the Allergan shares that did not similarly occur in the fourth quarter of 2015 and (ii) higher interest expense of $208 million, partially offset by (iii) lower foreign exchange losses of $78 million primarily due to lower losses on intercompany transactions and (iv) the loss on debt extinguishment of $36 million recognized in the fourth quarter of 2014 related to the redemption of the 6.75% senior notes due 2017 and 6.875% senior notes due 2018 that did not similarly occur in the fourth quarter of 2015; • an increase in amortization and impairments of finite-lived intangible assets of $352 million primarily due to (i) amortization from acquisitions consummated in 2015 (mainly related to the Salix and Sprout acquisitions), including amortization of $118 million related to Xifaxan® IBS-D (amortization commenced in May 2015 upon approval by the FDA), and (ii) the write-off of intangible assets of $79 million in connection with the termination of the arrangement with and relating to Philidor; • an increase in selling, general and administrative expenses of $218 million primarily due to higher expenses related to acquisitions, including the Salix Acquisition, the Sprout Acquisition and the acquisition of certain assets of Dendreon; • an increase in in-process research and development impairments and other charges of $140 million primarily due to the $100 million upfront payment in connection with the license of brodalumab and the write-off of $28 million related to the Emerade® program in the U.S.; and • an increase in restructuring, integration and other costs of $44 million primarily due to higher expenses related to the Salix Acquisition as well as other small acquisitions. |
Refer to Note 24 titled "PS FUND 1 INVESTMENT" of notes to consolidated financial statements in Item 15 of this Form 10-K for additional information; • an increased investment in working capital of $193 million in 2015, primarily related to (i) the post-acquisition build up in accounts receivable for recent acquisitions (primarily the Salix Acquisition and the acquisition of certain assets of Marathon), where minimal accounts receivable balances were acquired, (ii) higher payments related to interest and product sales provisions (such as managed care rebates, government rebates, and patient subsidies), (iii) slower account receivable collections in Russia, and (iv) the impact of changes related to timing of payments and receipts in the ordinary course of business, partially offset by (v) changes in geographic and product mix, in particular the impact on receivables from lower product sales for the U.S. dermatology business in the month of December and (vi) true-up payments, related to price appreciation credits, received under our distribution service agreements; • payment of $168 million in the second quarter of 2015 for outstanding restricted stock that was accelerated in connection with the Salix Acquisition, which includes $3 million of related payroll taxes (recognized as a post-combination expense within Other expense (income)); and • a payment of approximately $25 million related to the AntiGrippin® litigation (refer to Note 21 titled "LEGAL PROCEEDINGS" of notes to consolidated financial statements in Item 15 of this Form 10-K). |
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects, product pipeline, prospective products or product approvals, product development and distribution plans, future performance or results of current and anticipated products; the expected benefits of our acquisitions and other transactions, such as cost savings, operating synergies and growth potential of the Company; the impact of material weaknesses in our internal control over financial reporting; the impact of delayed securities filings under the agreements governing our outstanding indebtedness; our liquidity and our ability to cover our debt maturities as they become due; the impact of our distribution, fulfillment and other third party arrangements; changes in management; our ability to reduce wholesaler inventory levels; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; general market conditions; and our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity and income taxes. |
Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: • the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to our distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New York and the State of North Carolina Department of Justice, the pending investigation by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, pending investigations by the U.S. Senate Special Committee on Aging and the U.S. House Committee on Oversight and Government Reform, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the document subpoena from the New Jersey State Bureau of Securities and a number of pending purported class action securities litigations in the U.S. and Canada and other claims, investigations or proceedings that may be initiated or that may be asserted; • our ability to manage the transition to the individual identified to succeed our current chief executive officer, the success of such individual in assuming the roles of chairman and chief executive officer and the ability of such individual to implement and achieve the strategies and goals of the Company as they develop; • potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm that may result from the completed review by the Ad Hoc Committee; • the effect of the misstatements identified in our previously issued financial statements for the year ended December 31, 2014, the financial information for the quarter ended December 31, 2014 (included in our Annual Report for the year ended December 31, 2014) and the financial statements for the quarter ended March 31, 2015 (included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015), as well as the financial statements for the six-month period ended June 30, 2015 (included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015) and the nine-month period ended September 30, 2015 (included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015), due to the fact that the financial results for the quarter ended March 31, 2015 are included within the financial statements for these periods; the resultant restatement of the affected financial statements; the material weaknesses in our internal control over financial reporting identified by the Company; and any claims, investigations or proceedings (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity or reputational harm that may arise as a result; • the effectiveness of the remediation measures and actions to be taken to remediate the material weaknesses in our internal control over financial reporting identified by the Company, our deficient control environment and the contributing factors leading to the misstatement of our results and the impact such measures may have on the Company and our businesses; • any default under the terms of our senior notes indentures or Credit Agreement and our ability, if any, to cure or obtain waivers of such default; • any delay in the filing of any subsequent financial statements or other filings (including the expected delay in the filing of the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2016 (the “First Quarter 2016 Form 10-Q”) and any default under the terms of our senior notes indentures or Credit Agreement as a result of such delays; • potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the recent public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor; • the current scrutiny of our business practices including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York, the U.S. Senate Special Committee on Aging, the U.S. House Committee on Oversight and Government Reform and the State of North Carolina Department of Justice) and any pricing controls or price reductions that may be sought or imposed on our products as a result thereof; Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • our substantial debt (and potential future indebtedness) and current and future debt service obligations and their impact on our financial condition, cash flows and results of operations; • our ability to meet the financial and other covenants contained in our current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including the restrictions imposed by the April 2016 amendment to our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we file our First Quarter 2016 Form 10-Q and achieve a specified leverage ratio; • our ability to service and repay our existing or any future debt, including our ability to reduce our outstanding debt levels further during 2016 in accordance with our stated intention; • any further downgrade by rating agencies in our credit ratings (such as the recent downgrades by Moody’s Investors Service and Standard & Poor’s Ratings Services), which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances; • our ability to raise additional funds, as needed, in light of our current and projected levels of operations, general economic conditions (including capital market conditions) and any restrictions or limitations imposed by the financial and other covenants of our debt agreements with respect to incurring additional debt; • the potential divestiture of certain of our assets or businesses and our ability to successfully complete any future divestitures on commercially reasonable terms and on a timely basis, or at all; • the impact of any such future divestitures on our Company, including the reduction in the size or scope of our business or market share, any loss on sale or any adverse tax consequences suffered as a result of such divestitures; • our current shift in focus to minimal business development activity through acquisitions in 2016 and possibly beyond as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by the April 2016 amendment to our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we file our First Quarter 2016 Form 10-Q and achieve a specified leverage ratio; • our ability to retain, motivate and recruit executives and other key employees, including a new corporate controller, and the termination or resignation of executives or key employees, such as the recently announced departure of our current chief executive officer; • our ability to implement effective succession planning for our executives and key employees; • our proposed price reductions on certain of our products, including in connection with our arrangements with Walgreen Co. ("Walgreens") (as further described herein), and any future pricing freezes, reductions, increases or changes we may elect to make, as well as any proposed or future legislative price controls or price regulation, including mandated price reductions, that may impact our products; • the challenges and difficulties associated with managing a large complex business, which has grown rapidly over the last few years; • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • the success of our recent and future fulfillment and other arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, pharmacy benefit managers ("PBMs"), third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws and the ability of the anticipated increased volume across all distribution channels resulting from such arrangements to offset the impact of lower average selling prices associated with these arrangements; • the extent to which our products are reimbursed by government authorities, PBMs and other third party payors; the impact our distribution, pricing and other practices (including as relates to our former relationship with Philidor, any wrongdoing by Philidor and our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products; Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries, including the impact on such matters of the recent proposals published by the Organization for Economic Co-operation and Development ("OECD") respecting base erosion and profit shifting ("BEPS"); • the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets (including the challenges created by new and different regulatory regimes in such countries), such as with our recent acquisition of Amoun Pharmaceutical Company S.A.E. |
in Egypt; • adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the recent instability in Brazil, China, Russia, Ukraine, Argentina and the Middle East); • our ability to reduce wholesaler inventory levels in Russia, Poland and certain other countries, in-line with our targeted levels for such markets; • our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property; • the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights; • once the additional limitations in our Credit Agreement restricting our ability to make acquisitions are no longer applicable and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis; • factors relating to the acquisition and integration of the companies, businesses and products that have been acquired by the Company (and that may in the future be acquired by the Company, once the additional limitations in our Credit Agreement restricting our ability to make acquisitions are no longer applicable and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, and the achievement of the anticipated benefits from such integrations, as well as risks associated with the acquired companies, businesses and products; • factors relating to our ability to achieve all of the estimated synergies from such acquisitions as a result of cost-rationalization and integration initiatives. |
These factors may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions, some of which have not yet been made; • the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof; • the uncertainties associated with the acquisition and launch of new products (such as our recently launched Addyi® product), including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges; • our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays; Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • the disruption of delivery of our products and the routine flow of manufactured goods; • ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA"), and the results thereof; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • interest rate risks associated with our floating rate debt borrowings; • our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our recent arrangements with Walgreens; • our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or withdrawals of products from the market; • the availability of and our ability to obtain and maintain adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products (such as our recently launched Addyi® product), which could lead to material impairment charges; • the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; • compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate, including with respect to recent government inquiries on pricing; • the impact of the upcoming United States elections, including any healthcare reforms arising therefrom, including with respect to pricing controls; • factors relating to our acquisition of Salix, including the impact of substantial additional debt on our financial condition, cash flows and results of operations; our ability to effectively and efficiently integrate the operations of the Company and Salix; our ability to achieve the estimated synergies from this transaction; once integrated, the effects of such business combination on our future financial condition, operating results, strategy and plans; and, our ability to achieve the anticipated benefits of such acquisition, including the anticipated revenue growth resulting from such acquisition (such as the anticipated revenue of the Xifaxan® product, including the recently-approved IBS-D indication); • potential ramifications, including financial penalties, relating to Salix's restatement of its historical financial results; Item 7. |
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 from pro forma earnings in the years ended December 31, 2015, 2014 and 2013 of the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition date of $130 million, $20 million and $370 million, in the aggregate, respectively, and the acquisition-related costs of $35 million, $2 million and $25 million, in the aggregate, respectively, incurred for these acquisitions in the years ended December 31, 2015, 2014 and 2013 and the inclusion of those amounts in pro forma earnings of the respective preceding fiscal years. |
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2015 and 2014: ____________________________________ (1) For the year ended December 31, 2015, a net gain of $23 million was recognized as Acquisition-related contingent consideration in the consolidated statements of (loss) income, primarily reflecting (i) the termination of the arrangements with and relating to Philidor and the resulting fair value adjustments to the sales-based milestones of $47 million in the fourth quarter of 2015 and (ii) the termination of the Emerade® IPR&D program in the U.S. and the resulting fair value adjustments to the regulatory and approval milestones of $16 million in the fourth quarter of 2015 (both of the terminations described above also resulted in asset impairment charges as described in Note 11), partially offset by accretion for the time value of money for the Salix Acquisition and the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL in June 2011 (the "Elidel®/Xerese®/Zovirax® agreement"). |
Subject to certain exceptions and customary baskets set forth in the Credit Agreement, the Company is required to make mandatory prepayments of the loans under the Senior Secured Credit Facilities under certain circumstances, including from (a) 100% of the net cash proceeds of insurance and condemnation proceeds for property or asset losses (subject to reinvestment rights and net proceeds threshold), (b) 50% of the net cash proceeds from the issuance of equity securities subject to decrease based on leverage ratios, (c) 100% of the net cash proceeds from the incurrence of debt (other than permitted debt as defined VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) in the Credit Agreement), (d) 50% of Consolidated Excess Cash Flow (as defined in the Credit Agreement) subject to decrease based on leverage ratios and (e) 100% of net cash proceeds from asset sales outside the ordinary course of business (subject to reinvestment rights, which were restricted by the terms of the amendment to the Company’s Credit Agreement effective April 11, 2016. |
VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF INCOME (All dollar amounts expressed in millions of U.S. dollars, except per share data) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF INCOME (All dollar amounts expressed in millions of U.S. dollars, except per share data) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) There was no net impact of the 2014 revision adjustments on net cash provided by operating activities, net cash provided by investing activities and net cash used in financing activities in the Consolidated Statement of Cash Flows. |
CONSOLIDATED STATEMENT OF CASH FLOWS (All dollar amounts expressed in millions of U.S. dollars) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF CASH FLOWS (All dollar amounts expressed in millions of U.S. dollars) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF INCOME (All dollar amounts expressed in millions of U.S. dollars, except per share data) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED BALANCE SHEET (All dollar amounts expressed in millions of U.S. dollars) (Unaudited) ____________________________________ (1) As described in Note 3, the Company adopted guidance issued by the Financial Accounting Standards Board which requires certain debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. |
CONSOLIDATED STATEMENT OF CASH FLOWS (All dollar amounts expressed in millions of U.S. dollars) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF INCOME (All dollar amounts expressed in millions of U.S. dollars, except per share data) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF CASH FLOWS (All dollar amounts expressed in millions of U.S. dollars) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF INCOME (All dollar amounts expressed in millions of U.S. dollars, except per share data) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) CONSOLIDATED STATEMENT OF CASH FLOWS (All dollar amounts expressed in millions of U.S. dollars) (Unaudited) VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) 26. |
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 Form 10-K for the fiscal year ended December 31, 2015 and its Form 10-Q for the fiscal quarter ended March 31, 2016 (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. |
Some restrictions could include: • limitations on our ability to obtain additional debt financing on favorable terms or at all; • instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of resulting in the acceleration of the maturity of some or all of our outstanding indebtedness (which we may not have the ability to pay); • the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations; • requiring us to issue debt or equity securities or to sell some of our core assets (subject to certain restrictions under our existing indebtedness), possibly on unfavorable terms, to meet payment obligations; • compromising our flexibility to plan for, or react to, competitive challenges in our business and the pharmaceutical and medical device industries; • the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources; and • limitations on our ability to execute business development activities to support our strategies. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as U.S. laws applicable to U.S. companies with foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable worldwide anti-bribery laws; • price and currency exchange controls; • restrictions on the repatriation of funds; • political and economic instability; • compliance with multiple regulatory regimes; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • credit market uncertainty; • differing local practices, customs and cultures, some of which may not align or comply with our company practices or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • manufacturing and supply interruptions; • our responses to price competition; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases; • general economic and industry conditions, including potential fluctuations in foreign currency and interest rates; • changes in seasonality of demand for certain of our products; and • foreign currency exchange rate fluctuations. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Tax Act), (iii) “timber resource property” (as such terms are defined in the Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property. |
Changes in Earnings Attributable to Valeant Pharmaceuticals International, Inc. Net income attributable to Valeant Pharmaceuticals International, Inc. was $913.5 million in 2014, compared with net loss attributable to Valeant Pharmaceuticals International, Inc. of $866.1 million in 2013, reflecting the following factors: (i) an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of finite-lived intangible assets) of $2,113.4 million in 2014, (ii) higher impairment charges in 2013 (primarily driven by the impairment charge for ezogabine/retigabine) and (iii) a net gain related to the divestiture of facial aesthetic fillers and toxins assets in 2014, partially offset by (iv) an increase in selling, general and administrative expenses, (v) an increase in the provision for income taxes and (iv) an increase in non-operating expense, net which included increases in interest expense, loss on extinguishment of debt, and foreign exchange and other which were partially offset by the net gain recognized in connection with the sale by PS Fund 1, LLC (“PS Fund 1”) of the Allergan Inc. (“Allergan”) shares. |
Amortization and Impairments of Finite-Lived Intangible Assets Amortization and impairments of finite-lived intangible assets decreased $351.3 million, or 18%, to $1.6 billion in 2014, primarily due to (i) a decrease of $631.0 million for ezogabine/retigabine due to the impairment charge of $551.6 million recognized in the third quarter of 2013 (which also resulted in lower amortization expense in 2014), (ii) a decrease in amortization of the divested facial aesthetic fillers and toxins assets which were divested in July 2014 of $43.7 million, (iii) impairment charges of $31.5 million recognized in 2013 related to the write-down of the carrying values of assets held for sale related to certain suncare and skincare brands sold primarily in Australia, and (iv) a $22.2 million write-off recognized in 2013 related to the Opana® intangible asset, partially offset by (v) an increase in amortization of the B&L, Solta Medical and PreCision identifiable intangible assets of $242.6 million, in the aggregate, in 2014, (vi) a $55.2 million write-off recognized in 2014 related to the Kinerase® intangible asset, and (vii) a $32.4 million write-off in 2014 related to the Grifulvin® intangible asset. |
Amortization and impairments of finite-lived intangible assets increased $973.1 million, or 105%, to $1.9 billion in 2013, primarily due to (i) a net increase of $525.1 million for ezogabine/retigabine, as the impairment charge of $551.6 million in the third quarter of 2013 was partially offset by lower amortization for ezogabine/retigabine of $26.5 million in the fourth quarter of 2013, (ii) the amortization of $351.9 million, in the aggregate, in 2013, primarily related to the Medicis, B&L, and Obagi identifiable intangible assets, (iii) impairment charges of $31.5 million related to the write-down of the carrying values of assets held for sale related to certain suncare and skincare brands sold primarily in Australia in 2013, (iv) $22.2 million related to the write-off of the carrying value of the Opana® intangible asset in 2013, (v) an increase in the write-offs of $16.9 million, in the aggregate, in 2013, primarily related to the discontinuation of certain products in the Brazilian, Canadian, and Polish markets, and (vi) $10.0 million related to the write-off of certain OTC skincare products in the U.S. in 2013. |
Cash and Cash Equivalents Cash and cash equivalents decreased $277.7 million, or 46%, to $322.6 million as of December 31, 2014, which primarily reflected the following uses of cash: • $1.3 billion in net repayments, in the aggregate, under our senior secured credit facilities in 2014; • $1.3 billion paid, in the aggregate, in connection with the purchases of businesses and intangible assets, mainly in respect of the PreCision and Solta Medical acquisitions in 2014; • $500.0 million paid in connection with the redemption of the 2017 Notes in October 2014; • $445.0 million paid in connection with the redemption of the December 2018 Notes in December 2014; • purchases of property, plant and equipment of $291.6 million; • contingent consideration payments within financing activities of $106.1 million primarily related to the OraPharma and Eisai (Targretin®) acquisitions and the Elidel®/Xerese®/Zovirax® agreement entered into in June 2011; • $55.2 million related to debt financing costs paid primarily due to (i) a call premiums paid in connection with the redemption of the 2017 Notes and the December 2018 Notes and (ii) the refinancing of our Series E tranche B term loan facility in February 2014. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • an increase of $607.8 million, mainly related to the higher proceeds received in 2012 from the sale of marketable securities acquired as part of the Medicis acquisition; and • an increase of $50.9 million, related to lower proceeds from sales of assets, primarily attributable to the cash proceeds of $66.3 million for the sale of the IDP-111 and 5-FU products in the first quarter of 2012, partially offset by the proceeds related to the sale of Buphenyl® in the second quarter of 2013. Financing Activities Net cash used in financing activities was $2.4 billion in 2014, compared with the net cash provided by financing activities of $4.0 billion in 2013, reflecting a decrease of $6.5 billion, primarily due to: • a decrease of $4.7 billion, in the aggregate, related to net proceeds from our senior secured credit facilities primarily due to (i) the borrowings of $3.9 billion in the third quarter of 2013 in connection with the B&L Acquisition and (ii) the repayments of $1.0 billion, in the aggregate, in the third quarter of 2014, partially offset by (iii) the issuance of $225.6 million in incremental term loans in the first quarter of 2014. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • $233.6 million related to the repayment of long-term debt assumed in connection with the Medicis acquisition in December 2012; • a decrease of $83.1 million related to the higher debt financing costs paid (including call premium of $29.8 million paid in connection with the redemption of the 2016 Notes in December 2013), primarily due to the issuance of senior notes and the Series E tranche B term loans in 2013, in the aggregate; • $37.6 million in repayments of short-term borrowings and long-term debt, in the aggregate, assumed in connection with the Natur Produkt acquisition; and • a decrease due to higher contingent consideration payments of $26.1 million, in 2013, primarily due to a payment of $40.0 million and $20.1 million, related to the OraPharma and Gerot Lannach acquisitions, respectively, partially offset by (i) lower contingent consideration payments related to the Elidel®/Xerese®/Zovirax® agreement entered into with Meda in June 2011 and (ii) a contingent consideration payment in the second quarter of 2012 related to the PharmaSwiss S.A. acquisition in March 2011. |
Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: • the challenges and difficulties associated with managing the rapid growth of our Company and a large complex business; • our ability to retain, motivate and recruit executives and other key employees; • the introduction of products that compete against our products that do not have patent or data exclusivity rights; • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis; • factors relating to the acquisition and integration of the companies, businesses and products acquired by the Company, such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, and the achievement of the anticipated benefits from such integrations, as well as risks associated with the acquired companies, businesses and products; • factors relating to our ability to achieve all of the estimated synergies from our acquisitions as a result of cost-rationalization and integration initiatives. |
These factors may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions, some of which have not yet been made; • factors relating to our proposed acquisition of Salix, including our ability to consummate such transaction on a timely basis, if at all; the impact of substantial additional debt on our financial condition and results of operations; our ability to effectively and timely integrate the operations of the Company and Salix; our ability to achieve the estimated synergies from this proposed transaction; and, once integrated, the effects of such business combination on our future financial condition, operating results, strategy and plans; • our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; • our substantial debt and debt service obligations and their impact on our financial condition and results of operations; • our future cash flow, our ability to service and repay our existing debt, our ability to raise additional funds, if needed, and any restrictions that are or may be imposed as a result of our current and future indebtedness, in light of our current and projected levels of operations, acquisition activity and general economic conditions; • any downgrade by rating agencies in our corporate credit ratings, which may impact, among other things, our ability to raise additional debt capital and implement elements of our growth strategy; • interest rate risks associated with our floating rate debt borrowings; Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets (including the challenges created by new and different regulatory regimes in such countries); • adverse global economic conditions and credit market and foreign currency exchange uncertainty in the countries in which we do business (such as the recent instability in Russia, Ukraine and the Middle East); • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • the introduction of generic competitors of our branded products; • our ability to obtain and maintain sufficient intellectual property rights over our products and defend against challenges to such intellectual property; • the outcome of legal proceedings, arbitrations, investigations and regulatory proceedings; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or withdrawals of products from the market; • the availability of and our ability to obtain and maintain adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the U.S. Food and Drug Administration, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the availability and extent to which our products are reimbursed by government authorities and other third party payors, as well as the impact of obtaining or maintaining such reimbursement on the price of our products; • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price of our products in connection therewith; • the impact of price control restrictions on our products, including the risk of mandated price reductions; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products, which could lead to material impairment charges; • the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • negative publicity or reputational harm to our products and business; • the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing; • our ability to obtain components, raw materials or finished products supplied by third parties and other manufacturing and related supply difficulties, interruptions and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; Item 7. |
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; VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) • additional interest expense associated with the financing obtained by the Company in connection with the various acquisitions; and • the exclusion from pro forma earnings in the year ended December 31, 2014, 2013 and 2012 of the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition date of $20.2 million, $369.9 million and $58.1 million, in the aggregate, respectively, and the acquisition-related costs of $2.0 million, $25.3 million and $72.1 million, in the aggregate, respectively, incurred for these acquisitions in the year ended December 31, 2014, 2013 and 2012 and the inclusion of those amounts in pro forma earnings for the corresponding comparative periods. |
Some restrictions could include: • limitations on our ability to obtain additional debt financing on favorable terms or at all; • instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of resulting in the acceleration of the maturity of some or all of our outstanding indebtedness (which we may not have the ability to pay); • the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations; • requiring us to issue debt or equity securities or to sell some of our core assets (subject to certain restrictions under our existing indebtedness), possibly on unfavorable terms, to meet payment obligations; • compromising our flexibility to plan for, or react to, competitive challenges in our business and the pharmaceutical and medical device industries; • the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources; and • limitations on our ability to execute business development activities to support our strategies. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as U.S. laws applicable to U.S. companies with foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act, or FCPA; • price and currency exchange controls; • credit market uncertainty; • political and economic instability; • compliance with multiple regulatory regimes; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • restrictions on the repatriation of funds; • differing local practices, customs and cultures, some of which may not align or comply with our company practices or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • manufacturing and supply interruptions; • our responses to price competition; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases; • general economic and industry conditions, including potential fluctuations in foreign currency and interest rates; and • changes in seasonality of demand for certain of our products. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Tax Act), (iii) “timber resource property” (as such terms are defined in the Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property. |
Changes in Earnings Attributable to Valeant Pharmaceuticals International, Inc. Net loss attributable to Valeant Pharmaceuticals International, Inc. (basic and diluted loss per share attributable to Valeant Pharmaceuticals International, Inc. of $2.70) increased $750.1 million, to $866.1 million in 2013, compared with net loss attributable to Valeant Pharmaceuticals International, Inc. of $116.0 million (basic and diluted loss per share attributable to Valeant Pharmaceuticals International, Inc. of $0.38) in 2012, reflecting the following factors: • an increase of $973.1 million in amortization and impairments of finite-lived intangible assets, as described below under “Results of Operations - Operating Expenses - Amortization and Impairments of Finite-Lived Intangible Assets”; • an increase of $549.1 million in selling, general and administrative expense, as described below under “Results of Operations - Operating Expenses - Selling, General and Administrative Expenses”; • an increase of $362.7 million in interest expense, as described below under “Results of Operations - Non-Operating Income (Expense) - Interest Expense”; • an increase of $175.1 million in other expense, as described below under “Results of Operations - Operating Expenses - Other Expense”; • an increase of $170.4 million in restructuring, integration and other costs, as described below under “Results of Operations - Operating Expenses - Restructuring, Integration and Other Costs”; • an increase of $77.7 million in research and development expenses, as described below under “Results of Operations - Operating Expenses - Research and Development Expenses”; • a decrease of $56.7 million in contribution from (i) alliance and royalty revenue and (ii) service revenue (alliance and royalty revenue and service revenue less cost of alliance and service revenue) primarily due to $45.0 million recognized in 2012 related to the milestone payment received from GSK in connection with the launch of Potiga® that did not similarly occur in 2013; • an increase of $44.9 million in loss on extinguishment of debt, as described below under “Results of Operations - Non-Operating Income (Expense) - Loss on Extinguishment of Debt”; and • a decrease of $29.2 million in foreign exchange and other, as described below under “Results of Operations - Non-Operating Income (Expense) - Foreign Exchange and Other”. |
Net loss attributable to Valeant Pharmaceuticals International, Inc. was $116.0 million (basic and diluted loss per share attributable to Valeant Pharmaceuticals International, Inc. of $0.38) in 2012, compared with net income attributable to Valeant Pharmaceuticals International, Inc. of $159.6 million (basic and diluted earnings per share attributable to Valeant Pharmaceuticals International, Inc. of $0.52 and $0.49, respectively) in 2011, reflecting the following factors: • an increase of $371.1 million in amortization and impairments of finite-lived intangible assets primarily related to (i) the acquired identifiable intangible assets of iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis of $210.5 million, in the aggregate, in 2012, and (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011; • an increase of $246.7 million in restructuring, integration and other costs, as described below under “Results of Operations - Operating Expenses - Restructuring, Integration and Other Costs”; • an increase of $183.6 million in selling, general and administrative expense, as described below under “Results of Operations - Operating Expenses - Selling, General and Administrative Expenses”; • an increase of $147.1 million in interest expense, as described below under “Results of Operations - Non-Operating Income (Expense) - Interest Expense”; • an increase of $80.7 million in in-process research and development impairments and other charges, as described below under “Results of Operations - Operating Expenses - In-Process Research and Development Impairments and Other Charges”; • an increase of $52.8 million in other expense, primarily due to legal settlements and related fees, as described below under “Results of Operations - Operating Expenses - Other Expense”; • an increase of $52.3 million in cost of alliance and service revenues, as described below under “Results of Operations - Operating Expenses - Cost of Alliance and Service Revenues”; • an increase of $45.6 million in acquisition-related costs, as described below under “Results of Operations - Operating Expenses - Acquisition-Related Costs”; • a net realized gain of $21.3 million on the disposal of our equity investment in Cephalon, Inc. (“Cephalon”) realized in 2011 that did not similarly occur in 2012, as described below under “Results of Operations - Non-Operating Income (Expense) - Gain on Investments, Net”; and • a $19.1 million net gain realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss in 2011 that did not similarly occur in 2012, as described below under “Results of Operations - Non-Operating Income (Expense) - Foreign Exchange and Other”. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • in the Developed Markets segment: • the incremental product sales revenue of $2,051.0 million (which includes a negative foreign currency exchange impact of $12.5 million), in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from (i) the 2012 acquisitions of Medicis (mainly driven by Solodyn®, Restylane®, Dysport®, Vanos®, Ziana® and Perlane® product sales), OraPharma (mainly driven by Arestin® product sales), certain assets of J&J North America (mainly driven by Ambi®, Shower to Shower® and Purpose® product sales) and certain assets of QLT (Visudyne® product sales); and (ii) the 2013 acquisitions of B&L (driven by Lotemax® Gel, PreserVision® and SofLens® Daily Disposable Contact Lenses product sales), and Obagi (mainly driven by Nu-Derm® and Obagi-C® product sales); and • an increase in product sales from the existing business (excluding the declines described below) of $163.4 million, or 7%, in 2013, driven by growth of the core dermatology brands, including CeraVe® and Acanya®. |
We also anticipate a continuing decline in sales of Retin-A Micro®, BenzaClin® and Cesamet® due to continued generic erosion, however the rate of decline is expected to decrease in the future, and these brands are expected to represent a declining percentage of total revenues primarily due to anticipated growth in other parts of our business and recent acquisitions; • a decrease in alliance and royalty revenue of $59.8 million, primarily related to the $45.0 million milestone payment received from GSK in connection with the launch of Potiga® recognized in the second quarter of 2012 that did not similarly occur in 2013; • a negative impact from divestitures, discontinuations and supply interruptions of $44.8 million in 2013; • a negative foreign currency exchange impact on the existing business of $19.9 million in 2013; and • a decrease in service revenue of $5.1 million in 2013, primarily due to lower contract manufacturing revenue from the Laval, Quebec facility, which was acquired as part of the acquisition of the Dermik business from Sanofi in December 2011. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total segment profit decreased $218.6 million, or 25%, to $666.2 million in 2013, compared with $884.9 million in 2012, mainly attributable to the effect of the following factors: • in the Developed Markets segment: • an increase in contribution of $1,278.5 million, in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from the product sales of Medicis, B&L, Obagi and OraPharma, including higher expenses for acquisition accounting adjustments related to inventory of $285.6 million, in the aggregate; • an increase in contribution from product sales from the existing business (excluding the favorable impact related to the acquisition accounting adjustments related to inventory in 2012 that did not similarly occur in 2013 and the declines described below) of $155.2 million, driven by growth of the core dermatology brands, including CeraVe® and Acanya®; and • a favorable impact of $54.1 million related to the existing business acquisition accounting adjustments related to inventory in 2012 that did not similarly occur in 2013. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • an increase in contribution from product sales from the existing business (including a favorable impact of $20.5 million related to the acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012 and the declines described below) of $216.2 million, driven by (i) continued growth of the core dermatology brands, including Zovirax®, Elidel®, Acanya® and CeraVe®, and the growth of these seasonal brands has increased the impact of seasonality on our business, particularly during the third quarter of 2012 “back to school” season, (ii) higher sales of Xenazine® which carries a lower margin than the rest of the neurology portfolio, and (ii) a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, such that we retain a greater share of the economic interest in the brand; and • alliance revenue of $45.0 million recognized in the second quarter of 2012, related to the milestone payment received from GSK in connection with the launch of Potiga®. |
Amortization and Impairments of Finite-Lived Intangible Assets Amortization and impairments of finite-lived intangible assets increased $973.1 million, or 105%, to $1,902.0 million in 2013, compared with $928.9 million in 2012, primarily due to (i) a net increase of $525.1 million for ezogabine/retigabine, as the impairment charge of $551.6 million in the third quarter of 2013 was partially offset by lower amortization for ezogabine/retigabine of $26.5 million in the fourth quarter of 2013, (ii) the amortization of the Medicis, B&L, Eisai and Obagi identifiable intangible assets of $351.9 million, in the aggregate, in 2013, (iii) impairment charges of $31.5 million related to the write-down of the carrying values of assets held for sale related to certain suncare and skincare brands sold primarily in Australia, to their estimated fair value less costs to sell in 2013, (iv) $22.2 million related to the write-off of the carrying value of the Opana® intangible asset in 2013, (v) an increase in the write-offs of $16.9 million, in the aggregate, in 2013, primarily related to the discontinuation of certain products in the Brazilian, Canadian, and Polish markets, and (vi) $10.0 million related to the write-off of certain OTC skincare products in the U.S. in 2013. |
Amortization and impairments of finite-lived intangible assets increased $371.1 million, or 67%, to $928.9 million in 2012, compared with $557.8 million in 2011, primarily due to (i) the amortization of the iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis identifiable intangible assets of $210.5 million, in the aggregate, in 2012, (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011, (iii) impairment charges of $31.3 million related to the write-down of the carrying values of intangible assets related to certain suncare and skincare brands sold primarily in Australia, which were classified as assets held for sale as of December 31, 2012, to their estimated fair values less costs to sell, (iv) an $18.7 million impairment charge related to the write-down of the carrying value of the Dermaglow® intangible asset, which was classified as an asset held for sale as of December 31, 2012, to its estimated fair value less costs to sell, and (v) impairment charges of $13.3 million related to the discontinuation of certain products in the Brazilian and Polish markets. |
Cash and Cash Equivalents Cash and cash equivalents decreased $315.8 million, or 34%, to $600.3 million as of December 31, 2013 compared with $916.1 million at December 31, 2012, which primarily reflected the following uses of cash: • $5,323.2 million paid, in the aggregate, in connection with the purchases of businesses and intangible assets, mainly in respect of the B&L, Obagi, and Natur Produkt acquisitions in 2013; • $4,198.0 million repayment of long-term debt assumed in connection with the B&L Acquisition in August 2013; • $915.5 million paid in connection with the redemption of the 2016 Notes in December 2013 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $233.6 million repayment of long-term debt assumed in connection with the Medicis Acquisition in December 2012; • contingent consideration payments within financing activities of $130.1 million primarily related to the Elidel®/Xerese®/Zovirax® agreement entered into in June 2011 and the OraPharma and Gerot Lannach acquisitions; • $128.0 million related to debt issue costs paid (including a call premium of $29.8 million paid in connection with the redemption of the 2016 Notes in December 2013) primarily due to the issuance of senior notes and the Series E tranche B term loans in 2013, in the aggregate (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • purchases of property, plant and equipment of $115.3 million; • $55.6 million related to the repurchase of our common shares; • $37.6 million repayment of short-term borrowings and long-term debt, in the aggregate, assumed in connection with the Natur Produkt acquisition; and • $28.8 million in repayments under our Series D-2 tranche B term loan facility and Series C-2 tranche B term loan facility, in the aggregate, (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”). |
These decreases in cash were partially offset by (i) an increase in liabilities of $24.2 million related to the portion of Medicis acquisition-related costs for the Galderma agreement (as described above under “Results of Operations - Operating Expenses - Acquisition-Related Costs”) that remained unpaid as of December 31, 2012, and (ii) the impact of the changes related to timing of other receipts and payments in the ordinary course of business; • a decrease in contribution of $105.1 million, in the aggregate, from Cardizem® CD, Cesamet®, Ultram® ER, Diastat® and Wellbutrin XL® product sales in 2012; • the receipt of the $40.0 million milestone payment from GSK in connection with the launch of Trobalt® in the second quarter of 2011; • an increase in payments of legal settlements and related fees of $15.3 million mainly related to the settlement of antitrust litigation in the second quarter of 2012; and • a $12.0 million payment related to the termination of a research and development commitment with a third party. |
Those factors were partially offset by: • a decrease of $615.4 million attributable to the proceeds related to the sale of marketable securities assumed in connection with the Medicis acquisition in 2012; and • a decrease of $66.3 million attributable to the cash proceeds related to the sale of the IDP-111 and 5-FU products in the first quarter of 2012. Financing Activities Net cash provided by financing activities increased $970.4 million, or 32%, to $4,027.8 million in 2013, compared with $3,057.4 million in 2012, primarily due to: • an increase related to net proceeds of $4,076.1 million from the issuance of senior notes in 2013 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • an increase of $3,085.3 million of net borrowings under our Series E tranche B term loan facility in 2013 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • the net proceeds of $2,307.4 million primarily related to the issuance of common stock in June 2013, which were utilized to fund the B&L Acquisition; • an increase of $606.3 million related to cash settlement of convertible debt in 2012 that did not similarly occur in 2013; • an increase of $441.8 million in net borrowings under our Series A-1, Series A-2 and Series A-3 of tranche A term loan facilities in 2013, in the aggregate; • an increase of $225.1 million related to lower repurchases of common shares in 2013; and • an increase of $220.0 million related to lower repayments under our revolving credit facility in 2013 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”). |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • a decrease related to net proceeds of $2,217.2 million from the issuance of senior notes in 2012; • $915.5 million paid in connection with the redemption of the 2016 Notes in December 2013 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $233.6 million related to the repayment of long-term debt assumed in connection with the Medicis Acquisition in December 2012; • a decrease of $94.9 million related to the higher debt issue costs paid (including call premium of $29.8 million paid in connection with the redemption of the 2016 Notes in December 2013), primarily due to the issuance of senior notes and the Series E tranche B term loans in 2013, in the aggregate (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $37.6 million in repayments of short-term borrowings and long-term debt, in the aggregate, assumed in connection with the Natur Produkt acquisition; and • a decrease due to higher contingent consideration payments of $26.1 million, in 2013, primarily due to a payment of $40.0 million and $20.1 million, related to the OraPharma and Gerot Lannach acquisitions, respectively, partially offset by (i) lower contingent consideration payments related to the Elidel®/Xerese®/Zovirax® agreement entered into with Meda in June 2011 and (ii) a contingent consideration payment in the second quarter of 2012 related to the PharmaSwiss acquisition in March 2011. |
Net cash provided by financing activities increased $1,109.2 million, or 57%, to $3,057.4 million in 2012, compared with $1,948.2 million in 2011, primarily due to: • an increase related to net proceeds of $2,217.2 million from the issuance of senior notes in the fourth quarter of 2012; • an increase of $1,275.2 million and $974.0 million of net borrowings under our Series D-2 and Series C-2 of tranche B term loan facilities, respectively; • an increase of $975.0 million related to the repayment of our previous term loan A facility in 2011; • an increase of $609.5 million related to lower repurchases of the 5.375% Convertible Notes (exclusive of the payment of accreted interest reflected as an operating activity) in 2012; • an increase of $358.5 million related to lower repurchases of common shares in 2012; • an increase of $66.9 million related to the settlement of the written call options in 2011 that did not similarly occur in 2012; • an increase of $52.5 million, in the aggregate, related to the acquisitions of Sanitas’ and Afexa’s noncontrolling interest in 2011 that did not similarly occur in 2012; and • an increase of $28.6 million related to lower employee withholding taxes paid on the exercise of employee share-based awards in 2012. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • our ability to identify, acquire, close and integrate acquisition targets successfully and on a timely basis; • factors relating to the integration of the companies, businesses and products acquired by the Company (including the integration relating to our recent acquisitions of Solta Medical, B&L, Obagi, and Medicis, such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, and the achievement of the anticipated benefits from such integrations; • factors relating to our ability to achieve all of the estimated synergies from our acquisitions, including from our recent acquisition of B&L (which we anticipate will be greater than $850 million), as a result of cost-rationalization and integration initiatives. |
These factors may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions, some of which have not yet been made; • our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; • our substantial debt and debt service obligations and their impact on our financial condition and results of operations; • our future cash flow, our ability to service and repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected levels of operations, acquisition activity and general economic conditions; • interest rate risks associated with our floating debt borrowings; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets (including the challenges created by new and different regulatory regimes in those markets); • adverse global economic conditions and credit market and foreign currency exchange uncertainty in the countries in which we do business; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • our ability to retain, motivate and recruit executives and other key employees; • our ability to obtain and maintain sufficient intellectual property rights over our products and defend against challenge to such intellectual property; • the outcome of legal proceedings, investigations and regulatory proceedings; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits and/or withdrawals of products from the market; • the availability of and our ability to obtain and maintain adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, Health Canada and other regulatory approvals, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the availability and extent to which our products are reimbursed by government authorities and other third party payors, as well as the impact of obtaining or maintaining such reimbursement on the price of our products; Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price of our products in connection therewith; • the impact of price control restrictions on our products, including the risk of mandated price reductions; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products, which could lead to material impairment charges; • the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • negative publicity or reputational harm to our products and business; • the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing; • our ability to obtain components, raw materials or finished products supplied by third parties and other manufacturing and related supply difficulties, interruptions and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed by third parties, over which we have no or limited control; • compliance with, or the failure to comply with, health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and pricing practices, worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate; • interruptions, breakdowns or breaches in our information technology systems; and • other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing. |
FAIR VALUE MEASUREMENTS 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 December 31, 2013 and 2012: VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data) 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. |
This indebtedness may restrict the manner in which we conduct business and limit our ability to implement elements of our growth strategy, including with respect to: • limitations on our ability to obtain additional debt financing on favorable terms or at all; • instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of resulting in the acceleration of the maturity of some or all of our outstanding indebtedness; • the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes; • requiring us to issue debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; • compromising our flexibility to plan for, or react to, competitive challenges in our business; • the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources; and • limitations on our ability to execute business development activities to support our strategies. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as U.S. laws applicable to U.S. companies with foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act, or FCPA; • price and currency exchange controls; • credit market uncertainty; • political and economic instability; • compliance with multiple regulatory regimes; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • restrictions on the repatriation of funds; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • manufacturing and supply interruptions; • our responses to price competition; • expenditures as a result of legal actions, including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases; • increases in insurance rates for existing products and the cost of insurance for new products; • general economic and industry conditions; and • changes in seasonality of demand for certain of our products. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Tax Act), (iii) “timber resource property” (as such terms are defined in the Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property. |
Those factors were partially offset by: • a negative impact from divestitures and discontinuations of $81.8 million in 2012, including a decrease of $42.8 million in 2012, related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012; • decrease in product sales of Cardizem® CD, Ultram® ER, Diastat® and Wellbutrin XL® in the U.S. Neurology and Other segment of $80.8 million, or 28%, in the aggregate, to $206.2 million in 2012, compared with $287.0 million in 2011, due to generic competition; • a negative foreign currency exchange impact on the existing business of $67.2 million in 2012; • alliance revenue of $43.0 million in 2011, primarily related to the $36.0 million out-license of the Cloderm® product rights that did not similarly occur in 2012; • alliance revenue of $40.0 million recognized in the second quarter of 2011 related to the milestone payment received from GSK in connection with the launch of Trobalt®; and • decrease in product sales of Cesamet® in the Canada and Australia segment of $35.0 million, or 54%, to $29.4 million in 2012, compared with $64.4 million in 2011, due to generic competition. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net loss was $116.0 million (basic and diluted loss per share of $0.38) in 2012, compared with net income of $159.6 million (basic and diluted earnings per share (“EPS”) of $0.52 and $0.49, respectively) in 2011, reflecting the following factors: • an increase of $371.1 million in amortization expense primarily related to (i) the acquired identifiable intangible assets of iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis of $210.5 million, in the aggregate, in 2012, and (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011; • an increase of $246.7 million in restructuring, integration and other costs, as described below under “Results of Operations - Operating Expenses - Restructuring, Integration and Other Costs”; • an increase of $183.6 million in selling, general and administrative expense, as described below under “Results of Operations - Operating Expenses - Selling, General and Administrative Expenses”; • an increase of $140.4 million in interest expense, as described below under “Results of Operations - Non-Operating Income (Expense) - Interest Expense”; • an increase of $80.7 million in in-process research and development impairments and other charges, as described below under “Results of Operations - Operating Expenses - In-Process Research and Development Impairments and Other Charges”; • an increase of $73.9 million in cost of alliance and service revenues, as described below under “Results of Operations - Operating Expenses - Cost of Alliance and Service Revenues”; • an increase of $45.6 million in acquisition-related costs, as described below under “Results of Operations - Operating Expenses - Acquisition-Related Costs”; • an increase of $44.9 million in legal settlements, as described below under “Results of Operations - Operating Expenses - Legal Settlements”; • a net realized gain of $21.3 million on the disposal of our equity investment in Cephalon, Inc. (“Cephalon”) realized in 2011 that did not similarly occur in 2012, as described below under “Results of Operations - Non-Operating Income (Expense) - Gain (Loss) on Investments, Net”; and • a $19.1 million net gain realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss in 2011 that did not similarly occur in 2012, as described below under “Results of Operations - Non-Operating Income (Expense) - Foreign Exchange and Other”. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) relative to all other tax jurisdictions in which we do business, resulting in an overall net book tax recovery for the worldwide income tax provision; • an increase in alliance and royalty revenue of $137.4 million, mainly related to the incremental royalty (IDP-111) revenue from Valeant of $64.3 million, alliance revenue of $40.0 million in the second quarter of 2011 related to the milestone payment from GSK in connection with the launch of Trobalt® and the alliance revenue of $36.0 million recognized in the first quarter of 2011 on the out-license of the Cloderm® product rights in March 2011; • decreases of $43.2 million in restructuring charges and integration costs, as described below under “Results of Operations - Operating Expenses - Restructuring, Integration and Other Costs”; • decreases of $40.8 million in legal settlements, as described below under “Results of Operations - Operating Expenses - Legal Settlements”; • a $21.3 million net realized gain on the disposal of our equity investment in Cephalon, which was realized in the second quarter of 2011 (as described below under “Results of Operations - Non-Operating Income (Expense) - Gain (loss) on Investments, Net”); and • a $19.1 million net gain realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss in 2011, as described below under “Results of Operations - Non-Operating Income (Expense) - Foreign Exchange and Other”. |
Those factors were partially offset by: • increases of $338.1 million in amortization expense, primarily related to the acquired identifiable intangible assets of Valeant, Elidel®/Xerese®, PharmaSwiss, Zovirax®, and Sanitas of $331.8 million, in the aggregate, the impairment charges of $7.9 million and $19.8 million related to the write-down of the carrying values of the IDP-111 and 5-FU intangible assets, respectively, to their estimated fair values, less costs to sell, as well as an impairment of intangible assets of $12.8 million related to certain OTC products sold in Brazil; • an increase of $295.9 million in selling, general and administrative expense, as described below under “Results of Operations - Operating Expenses - Selling, general and administrative”; • increases of $248.7 million in interest expense, reflecting $243.4 million related to the legacy Valeant debt assumed as of the Merger Date (partially reduced by the repayment of the Term Loan A Facility in the first quarter of 2011) and the post-Merger issuances of senior notes in the fourth quarter of 2010 and first quarter of 2011, $25.3 million related to the borrowings under our senior secured term loan facility in the third quarter of 2011 and the borrowings under our senior secured credit facilities in the fourth quarter of 2011, partially offset by a decrease of $19.2 million in interest expense related to the repurchases of 5.375% Convertible Notes (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); and • increases of $20.0 million in in-process research and development impairments and other charges. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total revenues increased $1,282.2 million, or 109%, to $2,463.5 million in 2011, compared with $1,181.2 million in 2010, mainly attributable to the effect of the following factors: • in the U.S. Dermatology segment: • the incremental product sales revenue of $194.6 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from Valeant, Elidel® and Xerese®, Dermik and Ortho Dermatologics product sales; • an increase in alliance and royalty revenue of $101.2 million, primarily related to the incremental royalty (IDP-111) revenue from Valeant of $64.3 million and the alliance revenue of $36.0 million in the first quarter of 2011 related to the out-license of the Cloderm® product rights; • an increase in product sales from the existing business of $48.9 million, or 24%, primarily driven by a growth of the core dermatology brands, including Zovirax®, CeraVe®, and Acanya®; and • incremental service revenue of $15.8 million in 2011, primarily from the Valeant acquisition. |
NM - Not meaningful Total segment profit increased $161.6 million, or 22%, to $882.3 million in 2012, compared with $720.7 million in 2011, mainly attributable to the effect of the following factors: • in the U.S. Dermatology segment: • an increase in contribution of $391.2 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from the product sales of Dermik, Ortho Dermatologics, OraPharma, Medicis and University Medical, including the impact of acquisition accounting adjustments related to inventory of $41.3 million, in the aggregate; and • an increase in contribution from product sales from the existing business of $160.6 million (including a favorable impact of $7.8 million related to the Merger-related acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012), driven by (i) continued growth of the core dermatology brands, including Zovirax®, Elidel®, Acanya® and CeraVe®, and the growth of these seasonal brands has increased the impact of seasonality on our business, particularly during the third quarter “back to school” season and (ii) a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, such that we retain a greater share of the economic interest in the brand. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • an increase in contribution of $154.4 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from the product sales of Valeant, Elidel® and Xerese®, Dermik and Ortho Dermatologics, including the impact of acquisition accounting adjustments related to inventory of $9.5 million, in the aggregate; • an increase in alliance revenue contribution of $70.4 million primarily related to the revenue from Valeant and the alliance revenue related to the out-license of the Cloderm® product rights in the first quarter of 2011; • an increase in contribution from product sales from the existing business of $60.8 million driven by a growth of the core dermatology brands, including Zovirax®, CeraVe®, and Acanya®; • a favorable impact of $48.7 million in 2011 due to the effect of a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights, such that we retain a greater share of the economic interest in the brand; and • an increase in service revenue contribution of $7.5 million in 2011, primarily from the Valeant acquisition. |
Amortization of Intangible Assets Amortization expense increased $371.1 million, or 67%, to $928.9 million in 2012, compared with $557.8 million in 2011, primarily due to (i) the amortization of the iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis identifiable intangible assets of $210.5 million, in the aggregate, in 2012, (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011, (iii) impairment charges of $31.3 million related to the write-down of the carrying values of intangible assets related to certain suncare and skincare brands sold primarily in Australia, which are classified as assets held for sale as of December 31, 2012, to their estimated fair values less costs to sell, (iv) an $18.7 million impairment charge related to the write-down of the carrying value of the Dermaglow® intangible asset, which is classified as an asset held for sale as of December 31, 2012, to its estimated fair value less costs to sell, and (v) impairment charges of $13.3 million related to the discontinuation of certain products in the Brazilian and Polish markets. |
Refer to note 7 to the 2012 Financial Statements for additional information regarding assets classified as held for sale and the related impairment charges; • an increase of $61.0 million in interest expense, mainly related to the issuances of senior notes in the fourth quarter of 2012 and the borrowings under our senior secured credit facilities (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • an increase of $56.2 million in selling, general and administrative expenses primarily due to increased expenses in our U.S. Dermatology segment ($34.5 million), Canada and Australia segment ($11.5 million) and Emerging Markets segment ($11.4 million), primarily driven by the acquisitions of new businesses within these segments; • an increase of $32.5 million in acquisition-related costs primarily driven by costs associated with the Medicis acquisition; • a $16.4 million gain realized on a foreign currency forward contract entered into in connection with the iNova acquisition in the fourth quarter of 2011 that did not similarly occur in the fourth quarter of 2012; and • a $14.1 million increase in loss on extinguishment of debt mainly related to the refinancing of our term loan B facility on October 2, 2012. |
Cash and Cash Equivalents Cash and cash equivalents increased $752.0 million to $916.1 million as of December 31, 2012 compared with $164.1 million at December 31, 2011, which primarily reflected the following sources of cash: • $2,217.2 million of net proceeds on the issuance of senior notes in the fourth quarter of 2012 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $1,275.2 million of net borrowings under our senior secured term loan B facility (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $974.0 million of net borrowings under our incremental term loan B facility (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $656.6 million in operating cash flows, which includes the receipt of the $45.0 million milestone payment from GSK in connection with the launch of Potiga™ in the second quarter of 2012; • the proceeds of $615.4 million on the sale of marketable securities assumed in connection with the Medicis acquisition; and • $66.3 million of cash proceeds related to the sale of the IDP-111 and 5-FU products in the first quarter of 2012. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • $544.2 million repayment of long-term debt assumed in connection with the Medicis acquisition in December 2012; • $280.7 million related to the repurchase of our common shares (as described below under “Financial Condition, Liquidity and Capital Resources - 2011 Securities Repurchase Program”); • $220.0 million repayment under our revolving credit facility (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • $111.3 million repayment under our senior secured term loan A facility (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • purchases of property, plant and equipment of $107.6 million; • contingent consideration payments within financing activities of $103.9 million primarily related to the Elidel®/Xerese® license agreement entered into in June 2011 and the PharmaSwiss acquisition; • $62.1 million related to the settlement of the 5.375% Convertible Notes in the third quarter of 2012 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); and • $37.9 million repayment of long-term debt assumed in connection with the OraPharma acquisition in June 2012. |
These decreases in cash were partially offset by (i) an increase in liabilities of $24.2 million related to the portion of Medicis acquisition-related costs for the Galderma agreement (as described above under “Results of Operations - Operating Expenses - Acquisition-Related Costs”) that remained unpaid as of December 31, 2012, and (ii) the impact of the changes related to timing of other receipts and payments in the ordinary course of business; • a decrease in contribution of $105.1 million, in the aggregate, from Cardizem® CD, Cesamet®, Ultram® ER, Diastat® and Wellbutrin XL® product sales in 2012; • the receipt of the $40.0 million milestone payment from GSK in connection with the launch of Trobalt® in the second quarter of 2011; • an increase in payments of legal settlements and related costs of $15.3 million mainly related to the settlement of antitrust litigation in the second quarter of 2012; and • a $12.0 million payment related to the termination of a research and development commitment with a third party. |
Financing Activities Net cash provided by financing activities increased $1,109.2 million, or 57%, to $3,057.4 million in 2012, compared with $1,948.2 million in 2011, primarily due to: • an increase related to net proceeds of $2,217.2 million from the issuance of senior notes in the fourth quarter of 2012 (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • an increase of $1,275.2 million of net borrowings under our senior secured term loan B facility (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • an increase of $974.0 million of net borrowings under our incremental term loan B facility (as described below under “Financial Condition, Liquidity and Capital Resources - Financial Assets (Liabilities)”); • an increase of $975.0 million related to the repayment of our previous term loan A facility in 2011; • an increase of $609.5 million related to lower repurchases of the 5.375% Convertible Notes (exclusive of the payment of accreted interest reflected as an operating activity) in 2012; • an increase of $358.5 million related to lower repurchases of common shares in 2012; • an increase of $66.9 million related to the settlement of the written call options in 2011 that did not similarly occur in 2012; Item 7. |
Those factors were partially offset by: • a decrease of $2,287.6 million related to net borrowings in the fourth quarter of 2011 under our senior secured term loan A facility, including a $111.3 million repayment under our senior secured term loan A facility in 2012; • a decrease related to net proceeds of $2,139.7 million from the issuance of senior notes in the first quarter of 2011; • $544.2 million repayment of long-term debt assumed in connection with the Medicis acquisition; • a decrease of $440.0 million in net borrowings under our revolving credit facility in 2012; • a decrease due to higher contingent consideration payments of $72.1 million primarily related to the Elidel®/Xerese® license agreement entered into in June 2011 and the PharmaSwiss acquisition; • a decrease of $62.1 million related to the settlement of the 5.375% Convertible Notes in the third quarter of 2012; • $37.9 million repayment of long-term debt assumed in connection with the OraPharma acquisition; and • a decrease of $32.7 million in proceeds from stock option exercises, including tax benefits, in 2012. |
Those factors were partially offset by: • a decrease related to net proceeds of $992.4 million from the issuance of the 2018 Notes in 2010; • a decrease of $975.0 million related to the repayment of the Term Loan A Facility in the first quarter of 2011; • a decrease of $359.2 million related to the repurchase of a portion of the 5.375% Convertible Notes (exclusive of the payment of accreted interest reflected as an operating activity) in 2011; • a decrease of $499.6 million related to the purchase of common shares from ValueAct in 2011; • a decrease of $79.5 million related to the repurchase of our common shares in 2011; • $54.9 million, $34.2 million and $9.5 million paid on the redemption of a portion of the 2018 Notes, the 2016 Notes and the 2020 Notes, respectively; • a decrease of $45.2 million related to higher employee withholding taxes paid on the exercise of employee share-based awards; • a decrease of $36.1 million related to higher payments of debt issuance costs; • a decrease of $29.2 million related to higher payments on call option settlements; • payments of $28.5 million related to the acquisition of Sanitas’s noncontrolling interest in 2011; • payments of $31.8 million primarily related to Elidel®/Xerese® contingent consideration; and • payments of $24.0 million related to the acquisition of Afexa’s noncontrolling interest in the fourth quarter of 2011. |
Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • the introduction of generic competitors of our brand products; • the introduction of products that compete against our products that do not have patent or data exclusivity rights, which products represent a significant portion of our revenues; • the challenges and difficulties associated with managing the rapid growth of our Company and a large, complex business; • our ability to identify, acquire, close and integrate acquisition targets successfully and on a timely basis; • our ability to secure and maintain third-party research, development, manufacturing, marketing or distribution arrangements; • factors relating to the integration of the companies, businesses and products acquired by the Company (including the integration relating to our recent acquisition of Medicis), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations, and the achievement of the anticipated benefits from such integrations; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; • our substantial debt and debt service obligations and their impact on our financial condition and results of operations; • our future cash flow, our ability to service and repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected levels of operations, acquisition activity and general economic conditions; • interest rate risks associated with our floating debt borrowings; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets; Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • adverse global economic conditions and credit market and foreign currency exchange uncertainty in Central and Eastern European and other countries in which we do business; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • the outcome of legal proceedings, investigations and regulatory proceedings; • the risk that our products could cause, or be alleged to cause, personal injury, leading to potential lawsuits and/or withdrawals of products from the market; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, Health Canada and European, Asian, Brazilian and Australian regulatory approvals, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing; • the availability and extent to which our products are reimbursed by government authorities and other third party payors, as well as the impact of obtaining or maintaining such reimbursement on the price of our products; • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price of our products in connection therewith; • the impact of price control restrictions on our products, including the risk of mandated price reductions; • our ability to retain, motivate and recruit executives and other key employees; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products, which could lead to material impairment charges; • the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • our ability to obtain components, raw materials or finished products supplied by third parties and other manufacturing and supply difficulties and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • declines in the pricing and sales volume of certain of our products that are distributed by third parties, over which we have no or limited control; • the seasonality of sales of certain of our products; • compliance with, or the failure to comply with, health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and pricing practices, worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act and other legislative and regulatory healthcare reforms in the countries in which we operate; and • other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing. |
The unaudited pro forma information reflects primarily adjustments consistent with the unaudited pro forma information related to the following unaudited pro forma adjustments related to these acquisitions: • elimination of Medicis’, J&J ROW’s, J&J North America’s, QLT’s, OraPharma’s, University Medical’s, Atlantis’, Gerot Lannach’s, Probiotica’s, PharmaSwiss’, Sanitas’, Ortho Dermatologics’, iNova’s and Afexa’s historical intangible asset amortization expense; • additional amortization expense related to the provisional 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 various acquisitions; • the exclusion from pro forma earnings in the year ended December 31, 2012 of the acquisition accounting adjustments on Medicis’, J&J ROW’s, J&J North America’s, QLT’s, iNova’s, Ortho Dermatologics’, Afexa’s, Probiotica’s, OraPharma’s, University Medical’s, and Atlantis’ inventories that were sold subsequent to the acquisition date of $58.1 million, in the aggregate, and the exclusion of $72.1 million of acquisition-related costs, in the aggregate, incurred primarily for the Medicis, J&J ROW, J&J North America, QLT, OraPharma, University Medical, Atlantis, Gerot Lannach, and Probiotica acquisitions in the year ended December 31, 2012, and the inclusion of those amounts in pro forma earnings for the corresponding comparative periods. |
FAIR VALUE MEASUREMENTS VALEANT PHARMACEUTICALS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data) 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 December 31, 2012 and 2011: 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. |
This indebtedness may restrict the manner in which we conduct business and limit our ability to implement elements of our growth strategy, including with respect to: •limitations on our ability to obtain additional debt financing; •instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of resulting in the acceleration of the maturity of some or all of our outstanding indebtedness; •the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes; •requiring us to issue debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; •compromising our flexibility to plan for, or react to, competitive challenges in our business; •the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources; and •limitations on our ability to execute business development activities to support our strategies. |
As long as the common shares are then listed on a "designated stock exchange", which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm's length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) "Canadian resource property" (as such term is defined in the Tax Act), (iii) "timber resource property" (as such terms are defined in the Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property. |
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