|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Valeant Pharmaceuticals International, Inc. 10-K 2007 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number 1-11397
Registrant’s telephone number, including area code:
(949) 461-6000
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the Registrant’s voting stock
held by non-affiliates of the Registrant on June 30, 2006,
the last business day of the Registrant’s most recently
completed second fiscal quarter based on the closing price of
the common stock on the New York Stock Exchange on such date,
was approximately $1,571,412,800.
The number of outstanding shares of the Registrant’s common
stock as of February 23, 2007 was 94,659,944.
Certain information contained in Valeant Pharmaceuticals
International’s definitive Proxy Statement for the 2007
annual meeting of stockholders is incorporated by reference into
Part III hereof.
Table of Contents
In addition to current and historical information, this Report
contains forward-looking statements. These statements relate to
our future operations, future ribavirin royalties, prospects,
potential products, developments and business strategies. Words
such as “expects,” “anticipates,”
“intends,” “plans”, “should,”
“could,” “would,” “may,”
“will,” “believes,” “estimates,”
“potential,” or “continue” or similar
language identify forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties. Our actual results may differ materially from
those contemplated by the forward-looking statements. Factors
that might cause or contribute to these differences include, but
are not limited to, those discussed in the sections of this
report entitled “Risk Factors” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and sections in other
documents filed with the SEC under similar captions. You should
consider these in evaluating our prospects and future financial
performance. These forward-looking statements are made as of the
date of this report. We disclaim any obligation to update or
alter these forward-looking statements in this report or the
other documents in which they are found, whether as a result of
new information, future events or otherwise, or any obligation
to explain the reasons why actual results may differ.
Aclotin, Bedoyecta, Bisocard, Cesamet, Dalmane/Dalmadorm,
Dermatix, Diastat AcuDial, Efudex/Efudix, Espacil, Espaven,
Infergen, Kinerase, Librax, Mestinon, Migranal, Nyal,
Oxsoralen/Oxsoralen-Ultra, Solcoseryl, Tasmar, Virazole and
Zelapar are trademarks or registered trademarks of Valeant
Pharmaceuticals International or its related companies or are
used under license. This annual report also contains trademarks
or tradenames of other companies and those trademarks and
tradenames are the property of their respective owners.
PART I
We are a global, specialty pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products. We focus our greatest resources and attention
principally in the therapeutic areas of neurology, dermatology,
and infectious disease. Our marketing and promotion efforts
focus on our Promoted Products, which consist of products
marketed globally, regionally, or locally with annual sales in
excess of $5,000,000. Our products are currently sold in more
than 100 markets around the world, with our primary focus on the
United States, Mexico, Poland, Canada, Germany, Spain, Italy,
the United Kingdom and France.
Our value driver is a specialty pharmaceutical business with a
global platform. We believe that our global reach and marketing
agility differentiate us among specialty pharmaceutical
companies, and provide us with the ability to leverage compounds
clinical development and commercialize them in major markets
around the world. In addition, we receive royalties from the
sale of ribavirin by Schering-Plough and Roche. Such royalties
are expected to decline as a result of market competition, and
the loss of patents and data exclusivity in European markets and
Japan.
We develop, manufacture and distribute a broad range of
prescription and non-prescription pharmaceuticals. Although we
focus most of our efforts on neurology, infectious disease and
dermatology, our prescription pharmaceutical products also
treat, among other things, neuromuscular disorders, cancer,
cardiovascular disease, diabetes and psychiatric disorders. Our
products are sold globally, through three pharmaceutical
segments comprising: North America, International (composed of
the Latin America, Asia, and Australasia regions), and EMEA
(Europe, Middle East, and Africa). See Note 16 of notes to
consolidated financial statements for financial information
concerning each of our business segments for the last three
years.
Our internet address is www.valeant.com. We post
links on our website to the following filings as soon as
reasonably practicable after they are electronically filed with
or furnished to the Securities and Exchange Commission
(“SEC”): annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendment to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. All such filings are available through our website free of
charge. Our filings may also be read and copied at the
SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the
Table of Contents
operation of the Public Reference Room may be obtained by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC. The address of
that site is www.sec.gov.
Our current product portfolio comprises approximately 370
branded products, with approximately 2,200 stock keeping units.
We market our products globally through a marketing and sales
force consisting of approximately 1,500 persons. We focus our
sales, marketing and promotion efforts on our promoted products
within our product portfolio. We have identified these promoted
products as offering the best potential return on investment.
The majority of our promoted products are in neurology,
infectious disease and dermatology. Promoted products in other
therapeutic areas have characteristics and regional or local
market positions that also offer significant growth and returns
on marketing efforts.
Our future growth is expected to be driven primarily by growth
of our existing promoted products, the commercialization of new
products and business development. Our promoted products
accounted for 58% of our product sales for the year ended
December 31, 2006. Sales of our promoted products increased
$101,959,000 (27%) in the year ended December 31, 2006
compared to 2005. This increase includes $42,716,000 from sales
of Infergen, a product we acquired on December 30, 2005 and
started to sell as of January 3, 2006. Excluding Infergen,
sales of promoted products increased $59,243,000 or 16% in the
year ended December 31, 2006 over 2005.
Table of Contents
The following table summarizes sales by major product for the
each of the last three years (dollar amounts in thousands). It
includes any product with annualized sales of greater than
$10,000,000 and currently promoted products with annualized
sales of greater than $5,000,000. It is categorized by
therapeutic class.
NM – Not meaningful.
Table of Contents
Total sales of our neurology products accounted for 28% of our
product sales for the year ended December 31, 2006.
Products in this therapeutic category include:
Table of Contents
Total sales of our dermatology products accounted for 21% of our
product sales for the year ended December 31, 2006.
Products in this therapeutic category include:
Total sales of our infectious disease products accounted for 10%
of our product sales for the year ended December 31, 2006.
Products in this therapeutic category are Infergen and Virazole.
Total sales of products in other therapeutic classes constituted
41% of our product sales from continuing operations for the year
ended December 31, 2006 and encompass a broad range of
ancillary products which are sold through our existing
distribution channels. The promoted products in this category
are as follows:
Table of Contents
We selectively license or acquire products, product candidates,
technologies and businesses that complement our existing
business and provide for effective life-cycle management of key
products. We believe that our drug development expertise enables
us to recognize licensing opportunities and to capitalize on
research initially conducted and funded by others. Additionally,
we believe that our sales and marketing organization provides us
with the potential to effectively market acquired products to
help recognize superior returns on our investment in such
products.
On March 1, 2005, we acquired Xcel Pharmaceuticals, Inc.
(“Xcel”), a specialty pharmaceutical company focused
on the treatment of disorders of the central nervous system, for
$280,000,000 in cash, plus expenses of $5,435,000. Under the
terms of the purchase agreement, we paid an additional
$7,470,000 as a post-closing working capital adjustment. The
Xcel acquisition expanded our existing neurology product
portfolio with four products that are sold within the United
States, and retigabine, a late-stage clinical product candidate
that is an adjunctive treatment for partial-onset seizures in
patients with epilepsy. Xcel had synergies with our then
existing neurology products and the acquisition added retigabine
to our pipeline of product candidates.
On December 30, 2005, we acquired the U.S. and Canadian
rights to Infergen from InterMune. Infergen is indicated for the
treatment of hepatitis C when patients have not responded
to other treatments (primarily the combination of pegylated
interferon and ribavirin) or have relapsed after such treatment.
In connection with this transaction we acquired patent rights
and rights to a clinical trial underway to expand applications
of Infergen. We also employed InterMune’s marketing and
research staffs who were dedicated to the Infergen product and
projects. We paid InterMune $120,000,000 in cash at the closing.
We have also agreed to pay InterMune up to an additional
$22,585,000, $20,000,000 of which is dependent on reaching
certain milestones. We paid InterMune $2,585,000 as a
non-contingent payment in January 2007. Additionally, as part of
the acquisition transaction we assumed a contract for the
transfer of the manufacturing process for Infergen from one
third party supplier to another. Under the contract we are
obligated to pay the new third party supplier up to $11,700,000
upon the attainment of separate milestones tied to the
manufacturing process transfer. In 2006 we charged $5,200,000 to
cost of sales for payments to this supplier for the achievement
of milestones and we anticipate paying an additional $5,200,000
in 2007. Amgen originally developed Infergen and licensed the
rights to InterMune.
On October 4, 2006, we signed a distribution agreement with
Intendis GmbH for rights to certain dermatology products in the
United Kingdom. This agreement includes the distribution rights
to
Finacea®,
a new topical treatment for rosacea.
Table of Contents
In 2006, we also acquired the rights to Zelapar in Canada and
Mexico. We had acquired the rights to Zelapar in the United
States as part of the Amarin acquisition in 2004 and launched
the product in the United States in 2006. In 2006, we also
acquired from Novartis the rights to Melleril in Argentina,
having acquired the rights to this product in Brazil in 2005.
See Note 3 of notes to consolidated financial statements
for further discussion of these acquisitions.
Our royalties are derived from sales of ribavirin, a nucleoside
analog that we discovered. Ribavirin royalties are paid by both
Schering-Plough and Roche. In 1995, Schering-Plough licensed
from us all oral forms of ribavirin for the treatment of chronic
hepatitis C. In 2002, the FDA granted Schering-Plough
marketing approval for
Rebetol®
capsules (Schering-Plough’s brand name for ribavirin) as a
separately marketed product for use in combination with
Peg-Intron (pegylated interferon alfa) for the treatment of
chronic hepatitis C in patients with compensated liver
disease who are at least 18 years of age. We licensed
ribavirin to Roche in 2003.
Ribavirin royalty revenues were $81,242,000, $91,646,000, and
$76,427,000 for the years ended December 31, 2006, 2005 and
2004, respectively, and accounted for 9%, 11%, and 11% of our
total revenues in 2006, 2005, and 2004, respectively. Royalty
revenues in 2006, 2005, and 2004 were substantially lower than
those in 2003 and prior years. This decrease had been expected
and relates to the introduction of generic versions of ribavirin
in the United States in 2004. With respect to Schering-Plough,
in some markets royalty rates increase in tiers based on
increased sales levels. Upon the entry of generics into the
United States in April 2004, pursuant to the terms of its
contract with Valeant, Roche ceased paying royalties on sales in
the United States. Schering-Plough has also launched a generic
version of ribavirin. Under the license and supply agreement,
Schering-Plough is obligated to pay us royalties for sales of
its generic ribavirin.
In 2006 ribavirin royalty revenues decreased $10,404,000 or 11%
due to (i) competitive dynamics between Roche and
Schering-Plough in Europe, as Roche’s version of ribavirin,
Copegus, gained market share over Schering-Plough’s version
of ribavirin, Rebetol, (ii) reduced sales in Japan from a
peak in 2005 driven by the launch of combination therapy there,
and (iii) further gains in market share by generic
competitors in the United States. In 2005 ribavirin royalty
revenues increased $15,219,000 or 20% over the amount in 2004.
This increase was attributable to an increase in sales of
ribavirin in Japan following marketing approval from the
Ministry of Health, Labor and Welfare of Japan for
Schering-Plough’s Rebetol in combination with Peg-Intron
for the treatment of hepatitis C. In 2007, Roche received
similar approval in Japan for Copegus in combination with their
pegylated interferon alfa.
We expect ribavirin royalties to continue to decline in 2007 as
a result of market competition between Roche and Schering-Plough
in Japan. The royalty will decline significantly in 2009 and
2010 with the loss of exclusivity in European markets and Japan.
In March 2001, the European Commission of the European Union
granted Schering-Plough centralized marketing authorization for
Peg-Intron and Rebetol for the treatment of both relapsed and
treatment-naïve adult patients with histologically proven
hepatitis C. European Union approval resulted in unified
labeling that was immediately valid in all 15 European Union
member states.
On January 6, 2003, we reached a settlement with
Schering-Plough and Roche on pending patent and other disputes
over Roche’s combination antiviral product containing
Roche’s version of ribavirin, known as Copegus. Under the
agreement, Roche may continue to register and commercialize
Copegus globally. The financial terms of this settlement
agreement include a license of ribavirin to Roche. The license
authorizes Roche to make, or have made, and to sell Copegus.
Roche pays royalty fees to us on its sales of Copegus for use in
combination with interferon alfa or pegylated interferon alfa.
Approval of a generic form of oral ribavirin by the FDA in the
United States was announced in April 2004, which has resulted in
a decrease in royalty revenues from the U.S. market. With
respect to Schering-Plough, effective royalty rates increase in
tiers based on increased sales levels in markets outside the
European Union including the United States and Japan. As a
result of reduced sales, the likelihood of achieving the maximum
effective royalty rate in the United States is diminished.
Schering-Plough announced its launch of a generic version
Table of Contents
of ribavirin. Under the license and supply agreement,
Schering-Plough is obligated to pay us royalties for sales of
their generic ribavirin. Under our agreement with Roche, upon
the entry of generics into the United States, Roche ceased
paying royalties on sales in the United States.
Schering-Plough also markets ribavirin for treatment in
combination with interferon in many other countries based on the
United States and European Union regulatory approvals.
The key elements of our strategy, as refined by the
restructuring program announced on April 3, 2006, include
the following:
Targeted Growth Opportunities. We focus our
business on key markets, across three therapeutic areas and on
products we have or may acquire where we can leverage our local
market resources and particular brand recognition. We believe
that our targeted core therapeutic areas are positioned for
further growth and that it is possible for a mid-sized company
to attain a leadership position within these categories. In
addition, we intend to continue to pursue life-cycle management
strategies for our regional and local brands.
Product Acquisitions. We plan to selectively
license or acquire product candidates, technologies and
businesses from third parties which complement our existing
business and provide for effective life-cycle management of key
products. We believe that our drug development and
commercialization expertise will allow us to recognize licensing
opportunities and to capitalize on research initially conducted
and funded by others.
Efficient Manufacturing and Supply Chain
Organization. The objective of the restructuring
program as it relates to manufacturing is to further rationalize
our manufacturing operations and further reduce our excess
capacity. Under our global manufacturing strategy, we seek to
minimize our costs of goods sold by increasing capacity
utilization in our manufacturing facilities or by outsourcing
and by other actions to improve efficiencies. We have undertaken
major process improvement initiatives and the deployment of lean
six sigma process improvements, affecting all phases of our
operations, from raw material and supply logistics, to
manufacturing, warehousing and distribution. The restructuring
program includes the sale of manufacturing plants in Humacao,
Puerto Rico and in Basel, Switzerland. We have entered into a
letter of intent to sell these two manufacturing facilities and
believe we will sell them in the first half of 2007. We have
transferred them to “held for sale” classification in
accordance with FAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, in December 2006.
Clinical Development Activities. We are
focusing development efforts and expenditures on two late stage
development projects: taribavirin, a potential treatment for
hepatitis C, and retigabine, a potential treatment for
partial onset seizures in patients with epilepsy. The
restructuring program is designed to rationalize our investments
in research and development efforts in line with our financial
resources. As previously announced, we intend to sell rights to,
out-license, or secure partners to share the costs of our major
clinical projects and discovery programs. On January 9,
2007, we licensed the development and commercialization rights
to the hepatitis B compound pradefovir to Schering-Plough. On
December 21, 2006, we sold our HIV and cancer development
programs and certain discovery and preclinical assets to Ardea
Biosciences, Inc. (formerly IntraBiotics Pharmaceuticals)
(“Ardea”), with an option for us to reacquire rights
to commercialize the HIV program outside of the United States
and Canada upon Ardea’s completion of Phase 2b trials.
We continue to pursue partnering opportunities for taribavirin
and retigabine to share the costs of development, and look to
license in additional compounds in clinical development to
diversify our opportunities and the inherent risks associated
with product development.
The restructuring program is also intended to result in reduced
selling, general and administrative expenses primarily through
consolidation of our management functions into fewer
administrative groups to achieve greater economies of scale.
Management and administrative responsibilities for our regional
operations in Asia, Africa and Australia, (“AAA”),
which were formerly managed as a separate business unit, have
been combined with those of
Table of Contents
other regions. As a result we now have three reportable
pharmaceutical segments, which comprise our pharmaceutical
operations in:
We moved into a new leased headquarters building in Aliso Viejo,
California in December 2006. We have reached agreement for the
sale of our former headquarters building in Costa Mesa,
California, where our former research laboratories were located,
for cash consideration of $38,000,000. The closing, which is
subject to certain customary conditions, is scheduled for March
2007. We classified this facility as “held for sale”
in September 2006 in accordance with SFAS 144,
“Accounting for the Impairment or Disposal of Long-lived
Assets”.
In conjunction with the restructuring program, we decided to
sell certain assets related to our discovery operations and
focus our research and development resources on pre-clinical and
clinical development of identified molecules. With our
restructured research and development organization, we seek to
develop and commercialize innovative products for the treatment
of medical needs which are significantly under-served,
principally in the areas of infectious disease and neurology. We
are developing certain product candidates, including two
clinical stage programs: taribavirin and retigabine. In
addition, we have been engaged in development activities in
support of Infergen and Zelapar.
We licensed the development and commercialization rights to the
hepatitis B compound pradefovir to Schering-Plough on
January 9, 2007. On December 21, 2006, we sold our HIV
and cancer development programs and certain discovery and
preclinical assets to Ardea Biosciences, Inc. (formerly
IntraBiotics Pharmaceuticals) (“Ardea”), with an
option for us to reacquire rights to commercialize the HIV
program outside of the United States and Canada upon
Ardea’s completion of Phase 2b trials.
Our research and development expenses for the years ended
December 31, 2006, 2005 and 2004 were $109,618,000,
$114,100,000, and $92,858,000. The reduction in research and
development expenses in 2006 compared with 2005 is principally
due to the completion of certain clinical trials for taribavirin
and pradefovir. Clinical development expenses are expected to
decline further as a result of the restructuring described above.
As of December 31, 2006, there were 125 employees involved
in our research and development efforts.
Products
Under Development
Taribavirin: Taribavirin (formerly referred to
as Viramidine) is a nucleoside (guanosine) analog that is
converted into ribavirin by adenosine deaminase in the liver and
intestine. We are developing taribavirin in oral form for the
treatment of hepatitis C.
Preclinical studies indicated that taribavirin, a
liver-targeting analog of ribavirin, has antiviral and
immunological activities (properties) similar to ribavirin. In
an animal model of acute hepatitis, taribavirin showed biologic
activity similar to ribavirin. The liver-targeting properties of
taribavirin were also confirmed in two animal models. Short-term
toxicology studies showed that taribavirin may be safer than
ribavirin at the same dosage levels. This data suggested that
taribavirin, as a liver-targeting analog of ribavirin, could
potentially be as effective and have a lower incidence of anemia
than ribavirin.
In 2006, we reported the results of two pivotal Phase 3
trials for taribavirin. The VISER (Viramidine Safety and
Efficacy Versus Ribavirin) trials included two co-primary
endpoints: one for safety (superiority to ribavirin in incidence
of anemia) and one for efficacy (non-inferiority to ribavirin in
sustained viral response, SVR). The results of the VISER trials
met the safety endpoint but did not meet the efficacy endpoint.
Table of Contents
The studies demonstrated that
38-40 percent
of patients treated with taribavirin achieved SVR and that the
drug continued to demonstrate a safety advantage over ribavirin,
but that it was not comparable to ribavirin in efficacy at the
doses studied. We believe that the results of the studies were
significantly impacted by the dosing methodology, which employed
a fixed dose of taribavirin for all patients and a variable dose
of ribavirin based on a patient’s weight. Our analysis of
the study results leads us to believe that the dosage of
taribavirin, like ribavirin, likely needs to be based on a
patient’s weight to achieve efficacy comparable or superior
to that of ribavirin. Additionally we think that higher doses of
taribavirin than those studied in the VISER program may be
necessary to achieve our efficacy objectives.
Based on our analysis, we initiated a Phase 2b study to
evaluate the efficacy of taribavirin at 20, 25 and
30 mg/kg
in combination with pegylated interferon. A ribavirin control
arm also is included in the study. The primary endpoint for the
study will be the week 12 analysis though a preliminary review
will also be conducted at week 4.
The Phase 2b protocol has been agreed with the FDA and we
expect to initiate the study in the first quarter of 2007. If
the results of the
12-week
interim analysis are positive, we plan to select a dose and
initiate a large Phase 3 study. If we initiate a
Phase 3 study, we will consider cost and risk sharing
opportunities for this larger development program.
The timeline and path to regulatory approval remains uncertain
at this time. The completion of another Phase 3 trial would
add significantly to the drug’s development cost and the
time it takes to complete development, whether or not we are
able to secure a development partner, thereby delaying the
commercial launch of taribavirin and possibly weakening its
position in relation to competing treatments. Assuming we
proceed with the Phase 3 study and assuming ultimate
approval by the FDA, we expect to launch taribavirin in 2010.
Our external research and development expenses for taribavirin
were $16,133,000 for the year ended December 31, 2006,
compared with $36,474,000 for 2005.
Retigabine: We are developing retigabine as
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine is believed to have a unique, dual-acting
mechanism and has undergone several Phase 2 clinical
trials. The Phase 2 trials included more than
600 patients in several dose-ranging studies compared to
placebo. We successfully completed an
End-of-Phase 2
meeting concerning retigabine with the FDA in November 2005. The
results of the key Phase 2 study indicate that the compound
is potentially efficacious with a demonstrated reduction in
monthly seizure rates of 23% to 35% as adjunctive therapy in
patients with partial seizures. Response rates in the two higher
doses were statistically significant compared to placebo
(p<0.001).
Following a Special Protocol Assessment by the FDA, we initiated
two Phase 3 trials of retigabine in 2005. One Phase 3
trial (RESTORE1; RESTORE stands for Retigabine Efficacy and
Safety Trial for partial Onset Epilepsy) is being conducted at
approximately 50 sites, mainly in the Americas (U.S.,
Central/South America); the second Phase 3 trial (RESTORE2)
is being conducted at 60 sites, mainly in Europe. The first
patient in the RESTORE1 trial was enrolled in September 2005.
Enrollment of the first patient in the RESTORE2 trial occurred
in December 2005. The enrollment period in epilepsy studies can
be lengthy, frequently requiring 12 to 18 months to
complete. Both RESTORE1 and RESTORE2 are approximately
two-thirds enrolled. Supportive Phase 1 trials for
retigabine in healthy volunteers started in 2006.
Assuming successful completion of the Phase 3 trials in
2008 and approval by the FDA, we expect to launch retigabine in
2009. We also plan to evaluate a sustained release formulation
of the drug and intend to investigate a new indication for use
in treating neuropathic pain. We are evaluating opportunities to
share the investment and risk in the development of retigabine.
For the 12 months ended December 31, 2006, external
research and development expenses for retigabine were
$27,391,000, compared with $8,864,000 for 2005.
Pradefovir: Pradefovir is a compound that we
licensed from Metabasis Therapeutics, Inc., or Metabasis, in
October 2001. We had been engaged in the development of this
compound into an oral
once-a-day
monotherapy for patients with chronic hepatitis B infection. The
active molecule in this compound exhibits anti-hepatitis B
activity against both the wild type and lamivudine
drug-resistant hepatitis B. We completed Phase 1 and
Phase 2 clinical trials of pradefovir.
Table of Contents
On December 13, 2006, we announced the signing of
definitive agreements for the assignment and license of
development and commercial rights to pradefovir to
Schering-Plough. The transaction closed on January 9, 2007.
Under the terms of the agreements, Schering-Plough made an
upfront payment of $19,200,000 to Valeant and $1,800,000 to
Metabasis and will pay up to an additional $90,000,000 in
aggregate fees to Valeant and Metabasis upon the achievement of
certain development and regulatory milestones. Approximately
$65,000,000 of the additional fees would be paid to Valeant and
$25,000,000 to Metabasis. The amount to be paid to Metabasis
includes the remaining $16,000,000 in milestone payments that
could have been realized by Metabasis under the previous
agreement between Metabasis and Valeant. Schering-Plough also
will pay royalties to Valeant and Metabasis in the event
pradefovir is commercialized.
For the 12 months ended December 31, 2006, external
research and development expenses for pradefovir were
$3,981,000, compared with $8,103,000 for 2005.
Infergen: On December 30, 2005, we
completed the acquisition of the United States and Canadian
rights to the hepatitis C drug Infergen (interferon
alfacon-1) from InterMune. Infergen, or consensus interferon, is
a bio-optimized, selective and highly potent type 1 interferon
alpha originally developed by Amgen and launched in the United
States in 1997. It is indicated as monotherapy for the treatment
of adult patients suffering from chronic hepatitis C viral
infections with compensated liver disease who have not responded
to other treatments or have relapsed after such treatment.
Infergen is the only interferon with data in the label regarding
use in patients following relapse or non-response to certain
previous treatments.
In connection with this transaction, we acquired patent rights
and rights to a clinical trial underway to expand the
applications of Infergen. In the DIRECT trial (IHRC-001) which
started in the second quarter of 2004, 514 patients were
enrolled. Of these 514 patients, 343 were assigned to the
two treatment arms whereas 171 were assigned to the no-treatment
group. In the later case, when these patients reached
week 24, they were allowed to enter IRHC-002, the same
trial as IRHC-001 except it omits the no-treatment arm. As of
December 31, 2006, 22 patients remained in IRHC-001.
We reported
24-week and
48-week data
from the trial at a scientific meeting in October 2006. The
percent of patients who were virus negative at
end-of-treatment
(treatment week 48) for the Infergen 9 mcg and 15 mcg
groups were 16 percent and 19 percent, respectively
(TMA Assay). Response rates at
end-of-treatment
using the bDNA assay were 22 percent and 25 percent
for the Infergen 9 mcg and 15 mcg groups, respectively.
The second DIRECT trial (IHRC-002) has enrolled
144 patients of the possible 171 and is still ongoing. As
of December 31, 2006, 32 patients remained in this
trial. Both of the DIRECT trials are reviewed on a regular basis
by an independent Data Monitoring Committee to monitor the
safety of each trial. Post-treatment
follow-up
for the DIRECT trials are expected to be completed (i.e., last
patient visit) in the first and third quarters of 2007,
respectively. We expect to report and publish the results from
these studies sometime in late 2007.
In the first quarter of 2007, we are initiating a Phase 4
study to evaluate the use of Infergen 15 mcg /day plus ribavirin
(1.0-1.2 g/day) in patients who did not have an optimal response
at 12 weeks of treatment with pegylated interferon and
ribavirin. The multi-center, randomized U.S. study will
enroll patients who received initial treatment with pegylated
interferon and ribavirin and achieved a >2 log 10 decline in
HCV RNA at week 12 but still have detectable virus. The patients
will be immediately randomized to receive Infergen 15 mcg/day
plus ribavirin
(1.0-1.2
g/day) for 36 or 48 weeks or continue on their pegylated
interferon and ribavirin regimen for an additional 36 weeks
of therapy. All treatment groups will have a
24-week
follow up period to measure sustained virologic response.
For the year ended December 31, 2006, external research and
development expenses for Infergen were $4,176,000; we did not
incur research and development expenses for Infergen in 2005.
Zelapar: Zelapar was approved by the FDA on
June 14, 2006 as an adjunct treatment in the management of
patients with Parkinson’s disease being treated with
levodopa/carbidopa. Zelapar is the first Parkinson’s
disease treatment to use the patented
Zydis®
fast-dissolving technology, which allows the tablets to dissolve
within seconds in the mouth and deliver more active drug at a
lower dose. We launched Zelapar in the U.S. market in July
2006.
Table of Contents
Cesamet: Cesamet, a synthetic cannabinoid, was
approved by the FDA in 2006 for the treatment of cancer
chemotherapy-induced nausea and vomiting (CINV) in patients who
have failed to respond adequately to conventional antiemetic
treatments. We also market Cesamet in Canada for the treatment
of CINV. In recent years, there has been increasing scientific
and clinical evidence regarding the efficacy of cannabinoids in
different types of pain, including chronic neuropathic pain. On
January 19, 2007, Valeant submitted an Investigational New
Drug Application (IND) to the FDA to evaluate Cesamet in cancer
chemotherapy-induced neuropathic pain (CINP). Certain
chemotherapy regimens result in neuropathic pain, with more than
90% of patients being affected following certain types of
chemotherapy. There are no approved therapies for CINP. Valeant
intends to start the development program described in this IND
in 2007.
We rely on a combination of regulatory and patent rights to
protect the value of our investment in the development of our
products.
A patent is the grant of a property right which allows its
holder to exclude others from, among other things, selling the
subject invention in, or importing such invention into, the
jurisdiction that granted the patent. In both the United States
and the European Union, patents expire 20 years from the
date of application.
In the United States, for five years from the date of the first
United States regulatory FDA approval of a new drug compound,
only the pioneer drug company can use the data obtained at the
pioneer’s expense. No generic drug company may submit an
application for approval of a generic drug relying on the data
used by the pioneer for approval during this five-year period.
A similar data exclusivity scheme exists in the European Union,
whereby only the pioneer drug company can use data obtained at
the pioneer’s expense for up to eight years from the date
of the first approval of a drug by the European Agency for the
Evaluation of Medicinal Products (“EMEA”). Under both
the United States and the European Union data exclusivity
programs, products without patent protection can be marketed by
others so long as they repeat the clinical trials necessary to
show safety and efficacy.
Generic ribavirin was launched in the United States in the first
half of 2004.
Various parties are opposing our ribavirin patents in actions
before the European Patent Office (“EPO”), and we are
responding to these oppositions. One patent has been revoked by
the Opposition Division of the EPO, and we have filed an appeal
within the EPO. The revoked patent benefited from patent
extensions in the major European countries that provide market
protection until 2010. A second European patent is also the
subject of an opposition proceeding in the EPO. Oral proceedings
in this second opposition are scheduled to take place in June
2007.
Should the opponents prevail against both of our ribavirin
patents, the ribavirin component of the combination therapies
marketed by Schering-Plough and Roche would lose patent
protection in Europe. Although data exclusivity applies to these
products until 2010, if no ribavirin patents remain in force in
Europe, we will no longer receive royalties from Roche in Europe.
We own a United States patent (which will expire in
2018) directed to a method of treating a viral infection
using a genus of compounds that includes taribavirin. We also
own a United States patent (which will expire in 2020) that
specifically claims the use of taribavirin to treat
hepatitis C infection. If taribavirin receives regulatory
approval, these patents may be eligible for patent term
extensions. To the extent permitted in foreign jurisdictions, we
are pursuing the foreign patent rights that correspond to our
United States patents.
We own a United States composition of matter patent (which will
expire in 2013) directed to retigabine without regard to
crystalline form. We also own two United States patents (both of
which will expire in 2018) that are directed to specific
crystalline forms of retigabine. In addition, we own a number of
United States patents and
Table of Contents
pending applications, with expiration dates ranging from 2016 to
2023, directed to the use of retigabine to treat a variety of
disease indications. We also own several patents and pending
applications in foreign countries with expiration dates ranging
from 2012 to 2024.
Upon regulatory approval, we expect to obtain five years of data
exclusivity in the United States and eight years in Europe for
taribavirin and retigabine. We have various issued patents or
pending applications in foreign countries. These patents or
patent applications, if issued, have expiration dates ranging
from 2012 to 2023.
We are subject to licensing and other regulatory control by the
FDA, other federal and state agencies, the EMEA and other
comparable foreign governmental agencies.
FDA approval must be obtained in the United States, EMEA
approval must be obtained for countries that are part of the
European Union and approval must be obtained from comparable
agencies in other countries prior to marketing or manufacturing
new pharmaceutical products for use by humans.
Obtaining FDA approval for new products and manufacturing
processes can take a number of years and involve the expenditure
of substantial resources. To obtain FDA approval for the
commercial sale of a therapeutic agent, the potential product
must undergo testing programs on animals, the data from which is
used to file an IND with the FDA. In addition, there are three
phases of human testing: Phase 1 consists of safety tests
for human clinical experiments, generally in normal, healthy
people; Phase 2 programs expand safety tests and are
conducted in people who are sick with the particular disease
condition that the drug is designed to treat; and Phase 3
programs are greatly expanded clinical trials to determine the
effectiveness of the drug at a particular dosage level in the
affected patient population. The data from these tests is
combined with data regarding chemistry, manufacturing and animal
toxicology and is then submitted in the form of a New Drug
Application or NDA to the FDA. The preparation of an NDA
requires the expenditure of substantial funds and the commitment
of substantial resources. The review by the FDA can take up to
several years. If the FDA determines that the drug is safe and
effective, the NDA is approved. A similar process exists in the
European Union and in other countries. See
Item 1A — Risk Factors for risks associated with
government regulation of our business.
Manufacturers of drug products are required to comply with
manufacturing regulations, including current good manufacturing
regulations enforced by the FDA and similar regulations enforced
by regulatory agencies outside the United States. In addition,
we are subject to price control restrictions on our
pharmaceutical products in many countries in which we operate.
We are subject to national, state, and local environmental laws
and regulations, including those governing the handling and
disposal of hazardous wastes, wastewater, solid waste and other
environmental matters. Our development and manufacturing
activities involve the controlled use of hazardous materials.
Although we believe that our safety procedures for handling and
disposing of these materials comply with applicable regulations,
we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of an
accident, we could be held liable for resulting damages.
We focus on the following major geographic
markets: the United States, Mexico, Poland, Canada,
Germany, Spain, Italy, the United Kingdom, and France. During
the year ended December 31, 2006, we derived approximately
79% of our specialty pharmaceutical sales from these markets. In
the United States, Europe and Latin America, principally in
Mexico, we currently promote our pharmaceutical products to
physicians, hospitals, pharmacies and wholesalers through our
own sales force. These products are typically distributed to
drug stores and hospitals through wholesalers. In Canada, we
have our own sales force and promote and sell directly to
physicians, hospitals, wholesalers and large drug store chains.
In many smaller markets we market our products through
distributors or contracted sales forces.
Table of Contents
As part of our marketing program for pharmaceuticals, we use
direct mailings, advertise in trade and medical periodicals,
exhibit products at medical conventions, sponsor medical
education symposia and sell through distributors in countries
where we do not have our own sales staff.
Our competitors include specialty and large pharmaceutical
companies, biotechnology companies, academic and other research
and development institutions, and generic manufacturers, both in
the United States and abroad. In addition, our cosmeceutical
Kinerase products also face competition from manufacturers of
non-prescription cosmetic products. Our competitors are pursuing
the development of pharmaceuticals that target the same diseases
and conditions that we are targeting in neurology, infectious
disease and dermatology.
For instance, with respect to infectious disease, some
competitors are engaged in research on the development of a
vaccine to prevent hepatitis C and others are developing
therapies that do not incorporate the use of ribavirin or our
successor in development, taribavirin, to treat hepatitis C.
Products being developed by our competitors to treat
hepatitis C include, but are not limited to:
Products being developed by our competitors to treat epilepsy
include, but are not limited to:
The success of any of our competitors’ products or products
in development could hurt sales of ribavirin and Infergen and
our expected revenues for taribavirin or retigabine, if approved.
We sell a broad range of products, and competitive factors vary
by product line and geographic area in which the products are
sold. Factors that may affect the competitiveness of our
products in each geographic market include, but are not limited
to, the effectiveness, pricing, availability and promotional
efforts with respect to our products as compared to those of our
competitors as well as whether we have exclusivity protections
for our molecules.
We also face increased competition from manufacturers of generic
pharmaceutical products when patents covering certain of our
currently marketed products expire or are successfully
challenged. We currently have two significant products, Efudex
and Cesamet, which do not currently have generic competition but
neither of which are protected by patent or regulatory
exclusivity.
As a part of our plan to improve operational performance, we
adopted a global manufacturing strategy to reduce the number of
manufacturing sites in our global manufacturing and supply chain
network from 15 sites in 2003 to six sites by the end of 2006.
As of December 31, 2006, we had disposed of nine sites
targeted as non-strategic and we have a letter of intent to sell
two others. We now expect to have only four manufacturing sites
by the end of 2007. For information about manufacturing
restructuring, see Note 2 of notes to consolidated
financial statements. All of our manufacturing facilities that
require certification from the FDA or foreign agencies have
obtained such approval.
Table of Contents
We also subcontract the manufacturing of certain of our
products, including products manufactured under the rights
acquired from other pharmaceutical companies. Generally,
acquired products continue to be produced for a specific period
of time by the selling company. During that time, we integrate
the products into our own manufacturing facilities or initiate
toll manufacturing agreements with third parties.
In 2007 we estimate that approximately 53% of our products and
approximately 49% of our product sales, will be produced by
third party manufacturers under toll manufacturing arrangements.
The principal raw materials used by us for our various products
are purchased in the open market. Most of these materials are
available from several sources. We have not experienced any
significant shortages in supplies of such raw materials.
As of December 31, 2006, we had 3,443
employees. These employees include 1,329 in
production, 1,568 in sales and marketing, 125 in research and
development, and 421 in general and administrative positions.
Collective bargaining exists for some employees in a number of
markets; the majority of our employees in Spain are covered by
collective bargaining or similar agreements. Substantially all
the employees in Europe are covered by national labor laws which
establish the rights of employees, including the amount of wages
and benefits paid and, in certain cases, severance and similar
benefits. We currently consider our relations with our employees
to be good and have not experienced any work stoppages,
slowdowns or other serious labor problems that have materially
impeded our business operations.
We have had product liability insurance to cover damages
resulting from the use of our products since March 2005. Prior
to 2005, we obtained product liability insurance coverage only
for certain products. We have in place clinical trial insurance
in the major markets where we conduct clinical trials.
Approximately 71% and 75% of our revenues from continuing
operations, which includes royalties, for the years ended
December 31, 2006 and 2005, respectively, were generated
from operations or otherwise earned outside the United States.
All of our foreign operations are subject to risks inherent in
conducting business abroad, including price and currency
exchange controls, fluctuations in the relative values of
currencies, political instability and restrictive governmental
actions including possible nationalization or expropriation.
Changes in the relative values of currencies may materially
affect our results of operations. The effect of these risks
remains difficult to predict.
You should consider carefully the following risk factors,
together with all of the other information included or
incorporated in this Report. Each of these risk factors, either
alone or taken together, could adversely affect our business,
operating results and financial condition, as well as adversely
affect the value of an investment in our securities. There may
be additional risks that we do not presently know of or that we
currently believe are immaterial which could also impair our
business and financial position.
Our future growth will depend, in large part, upon our ability
to develop or obtain and commercialize new products and new
formulations of, or indications for, current products. We are
engaged in an active development program involving compounds
owned by us or licensed from others which we may commercially
develop in the future. We are in clinical trials for
taribavirin, retigabine and other compounds. The process of
successfully commercializing products is time consuming,
expensive and unpredictable. There can be no assurance that we
will be able to develop or acquire new products, successfully
complete clinical trials, obtain regulatory approvals to use
Table of Contents
these products for proposed or new clinical indications,
manufacture our potential products in compliance with regulatory
requirements or in commercial volumes, or gain market acceptance
for such products. In addition, changes in regulatory policy for
product approval during the period of product development and
regulatory agency review of each submitted new application may
cause delays or rejections. It may be necessary for us to enter
into other licensing arrangements, similar to our arrangements
with Schering-Plough and Roche, with other pharmaceutical
companies in order to market effectively any new products or new
indications for existing products. There can be no assurance
that we will be successful in entering into such licensing
arrangements on terms favorable to us or at all.
There can be no assurance that the clinical trials of any of our
product candidates, including taribavirin and retigabine will be
successful, that we will be granted approval to market any of
our product candidates for any of the indications we are seeking
or that any of our product candidates will result in a
commercially successful product.
While ribavirin royalty revenues earned by us under our
ribavirin license agreements with Schering-Plough and Roche have
declined, they still represent an important source of revenues
to us. Schering-Plough markets ribavirin for use in combination
with its interferon product under the trade name
“Rebetol” as a therapy for the treatment of
hepatitis C and Roche markets ribavirin for use in
combination with its interferon product under the name
“Copegus.” Under the terms of their license
agreements, Schering-Plough and Roche each have sole discretion
to determine the pricing of ribavirin and the amount and timing
of resources devoted to their respective marketing of ribavirin.
Our research and development activities have historically been
funded, in part, by the royalties received from Schering-Plough
and Roche. Competition from generic pharmaceutical companies in
the U.S. market has had a material negative impact on our
royalty revenue by significantly reducing royalties payable to
us by Schering-Plough and eliminating royalties payable to us by
Roche in the U.S. market.
Various parties are opposing our ribavirin patents in actions
before the European Patent Office, and we are responding to
these oppositions. If we should lose patent protection in
Europe, Roche will no longer be required to pay us royalties for
European sales. While data exclusivity for the combination
therapies marketed by Schering-Plough and Roche is scheduled to
continue in the major markets of the European Union until 2009
for Schering-Plough and 2012 for Roche, regulatory approvals and
schemes may change
and/or
studies regarding ribavirin in combination with interferon may
be replicated, allowing earlier introduction of generics into
such markets should the patent opposition be successful.
Our success depends in part on our ability to obtain and
maintain meaningful exclusivity protection for our products and
product candidates in key markets throughout the world via
patent protection
and/or data
exclusivity protection. The patent positions of pharmaceutical,
biopharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. We
will be able to protect our products from generic substitution
by third parties only to the extent that our technologies are
covered by valid and enforceable patents, effectively maintained
as trade secrets or protected by data exclusivity. However, our
currently pending or future patent applications may not issue as
patents. Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties from producing
generic substitutes for our products. Lastly, data exclusivity
schemes vary from country to country and may be limited or
eliminated as governments seek to reduce pharmaceutical costs by
increasing the speed and ease of approval of generic products.
In order to protect or enforce patent
and/or data
exclusivity rights, we may initiate patent litigation against
third parties, and we may be similarly sued by others. We may
also become subject to interference proceedings conducted in the
patent and trademark offices of various countries to determine
the priority of inventions. The defense and
Table of Contents
prosecution, if necessary, of intellectual property and data
exclusivity actions are costly and divert technical and
management personnel from their normal responsibilities. We may
not prevail in any of these suits. An adverse determination of
any litigation or defense proceeding, resulting in a finding of
non-infringement or invalidity of our patents, or a lack of
protection via data exclusivity, may allow the entry of generic
substitutes for our products.
Furthermore, because of the substantial amount of discovery
required in connection with such litigation, there is a risk
that some of our confidential information could be compromised
by disclosure during such litigation. In addition, during the
course of this kind of litigation, there could be public
announcements of the results of hearings, motions or other
interim proceedings or developments in the litigation. If
securities analysts or investors perceive these results to be
negative, it could have a substantial negative effect on the
trading price of our securities.
The existence of a patent will not necessarily protect us from
competition. Competitors may successfully challenge our patents,
produce similar drugs that do not infringe our patents or
produce drugs in countries that do not respect our patents. No
patent can protect its holder from a claim of infringement of
another patent. Therefore, our patent position cannot and does
not provide an assurance that the manufacture, sale or use of
products patented by us would not infringe a patent right of
another.
While we know of no actual or threatened claim of infringement
that would be material to us, there can be no assurance that
such a claim will not be asserted. If such a claim is asserted,
there can be no assurance that the resolution of the claim would
permit us to continue producing the relevant product on
commercially reasonable terms.
Some of the products we sell have no meaningful exclusivity
protection via patent or data exclusivity rights. These products
represent a significant amount of our revenues. Without
exclusivity protection, competitors face fewer barriers in
introducing competing products. The introduction of competing
products could adversely affect our results of operations and
financial condition.
We focus our development activities on areas in which we have
particular strengths, such as the antiviral and neurology areas.
The outcome of any development program is highly uncertain.
Products in clinical trials may fail to yield a commercial
product, or a product may be approved by the FDA yet not be a
commercial success. Success in preclinical and early stage
clinical trials may not necessarily translate into success in
large-scale clinical trials.
In addition, we will need to obtain and maintain regulatory
approval in order to market taribavirin and retigabine. Even if
they appear promising in large-scale Phase 3 clinical
trials, regulatory approval may not be achieved. The results of
clinical trials are susceptible to varying interpretations that
may delay, limit or prevent approval or result in the need for
post-marketing studies. In addition, changes in regulatory
policy for product approval during the period of product
development and FDA review of a new application may cause delays
or rejection. Even if we receive regulatory approval, this
approval may include limitations on the indications for which we
can market a product, thereby reducing the size of the market
that we would be able to address or our product may not be
chosen by physicians for use by their patients. There is no
guarantee that we will be able to satisfy the needed regulatory
requirements, and we may not be able to generate significant
revenue, if any, from taribavirin and retigabine.
The levels at which government authorities, private health
insurers, HMOs and other organizations reimburse the cost of
drugs and treatments related to those drugs will impact the
successful commercialization of our drug candidates. We cannot
be sure that reimbursement in the United States or elsewhere
will be available for any drugs we may develop or, if already
available, will not be decreased in the future. Also, we cannot
be sure that reimbursement amounts will not reduce the demand
for, or the price of, our drugs. If reimbursement is not
available
Table of Contents
or is available only on a limited basis, we may not be able to
obtain a satisfactory financial return on the manufacture and
commercialization of existing and future drugs. Third-party
payors may not establish and maintain price levels sufficient
for us to realize an appropriate return on our investment in
product development or our continued manufacture and sale of
existing drug products.
Jurisdictions outside of the United States may enact price
control restrictions or increase the price control restrictions
that currently exist. A significant portion of the sales of our
products are in Europe, a market in which price increases are
controlled, and in some instances, reductions are imposed. Our
future sales and gross profit could be materially adversely
affected if we are unable to obtain appropriate price increases,
or if our products are subject to price reductions.
In September 2006, our board of directors appointed a Special
Committee, which consisted solely of independent directors, to
conduct a review of our historical stock option granting
practices and related accounting during the period from 1982
through July 2006. The Special Committee identified a number of
occasions on which the exercise prices for stock options granted
to certain of our directors, officers and employees were set
using closing prices of our common stock with dates different
than the actual approval dates, resulting in additional
compensation charges. To correct these and other accounting
errors, we have amended our annual report on
Form 10-K
for the year ended December 31, 2005 and our quarterly
reports on
Form 10-Q
for the quarters ended March 31, 2006 and June 30,
2006 to restate the consolidated financial statements contained
in those reports.
Our historical stock option granting practices and the
restatement of our prior financial statements have exposed us to
greater risks associated with litigation and regulatory
proceedings. We are a named defendant in two shareholder
derivative lawsuits pending in the state court in Orange County,
California, which assert claims related to our historic stock
option practices. In addition, the SEC has opened an informal
inquiry into our historical stock option grant practices. We
cannot assure you that this current litigation, the SEC inquiry
or any future litigation or regulatory action will result in the
same conclusions reached by the Special Committee. The conduct
and resolution of these matters will be time consuming,
expensive and distracting from the conduct of our business.
Furthermore, if we are subject to adverse findings in any of
these matters, we could be required to pay damages or penalties
or have other remedies imposed upon us which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
The
pending SEC inquiry could adversely affect our business and the
trading price of our securities.
In July 2006, we were contacted by the SEC, with respect to an
informal inquiry regarding events and circumstances surrounding
trading in our common stock and the public release of data from
our first pivotal Phase 3 trial for taribavirin. In
addition, the SEC later requested data regarding our stock
option grants since January 1, 2000 and information about
our pursuit in the Delaware Chancery Court of the return of
certain bonuses paid to Milan Panic, the former chairman and
chief executive officer, and others. In September 2006, our
board of directors established the Special Committee to review
our historical stock option practices and related accounting.
The Special Committee concluded its investigation in January
2007. We have briefed the SEC with the results of the Special
Committee’s investigation. We have cooperated fully and
will continue to cooperate with the SEC on its informal inquiry.
We cannot predict the outcome of the inquiry. In the event that
the inquiry leads to SEC action against any current or former
officer or director, our business (including our ability to
complete financing transactions) and the trading price of our
securities may be adversely impacted. In addition, if the SEC
inquiry continues for a prolonged period of time, it may have an
adverse impact on our business or the trading price of our
securities regardless of the ultimate outcome of the
investigation. In addition, the SEC inquiry has resulted in the
incurrence of significant legal expenses and the diversion of
management’s attention from our business, and this may
continue, or increase, until the inquiry is concluded.
Table of Contents
The biotechnology and pharmaceutical industries are intensely
competitive and subject to rapid and significant technological
change. Our existing products and many of the drugs that we are
attempting to develop or discover compete with or will be
competing with new and existing therapies. Many companies in the
United States and abroad are pursuing the development of
pharmaceuticals that target the same diseases and conditions
that we are targeting. If, for example, other therapies that do
not incorporate the use of our products prove to be more
clinically or cost effective treatments, then our revenues could
be adversely affected. For example, there are institutions
engaged in the research and development of a vaccine to prevent
hepatitis C. The availability of such a vaccine could have
an adverse effect on our existing revenues from sales of
products treating hepatitis C and could materially and
adversely affect our expected revenue from products under
development.
Many of our competitors, particularly large pharmaceutical
companies, have substantially greater financial, technical and
human resources than we do. Many of our competitors spend
significantly more on research and development related
activities than we do. Others may succeed in developing products
that are more effective than those currently marketed or
proposed for development by us. Progress by other researchers in
areas similar to those being explored by us may result in
further competitive challenges. In addition, academic
institutions, government agencies, and other public and private
organizations conducting research may seek patent protection
with respect to potentially competitive products. They may also
establish exclusive collaborative or licensing relationships
with our competitors.
FDA approval must be obtained in the United States and approval
must be obtained from comparable agencies in other countries
prior to marketing or manufacturing new pharmaceutical products
for use by humans. Obtaining FDA approval for new products and
manufacturing processes can take a number of years and involves
the expenditure of substantial resources. Numerous requirements
must be satisfied, including preliminary testing programs on
animals and subsequent clinical testing programs on humans, to
establish product safety and efficacy. No assurance can be given
that we will obtain approval in the United States, or any other
country, of any application we may submit for the commercial
sale of a new or existing drug or compound. Nor can any
assurance be given that if such approval is secured, the
approved labeling will not have significant labeling
limitations, or that those drugs or compounds will be
commercially successful.
Furthermore, changes in existing regulations or adoption of new
regulations could prevent or delay us from obtaining future
regulatory approvals or jeopardize existing approvals, which
could significantly increase our costs associated with obtaining
approvals and negatively impact our market position.
We manufacture and have contracted with third parties to
manufacture some of our drug products, including products under
the rights acquired from other pharmaceutical companies.
Manufacturers are required to adhere to current good
manufacturing (“cGMP”) regulations enforced by the FDA
or similar regulations required by regulatory agencies in other
countries. Compliance with the FDA’s cGMP requirements
applies to both drug products seeking regulatory approval and to
approved drug products. Our manufacturing facilities and those
of our contract manufacturers must be inspected and found to be
in full compliance with cGMP standards before approval for
marketing. We and contract manufacturers of our approved
products are subject to ongoing regulation by the FDA, including
compliance with cGMP requirements, and to similar regulatory
requirements enforced by regulatory agencies in other countries.
Our dependence upon others to manufacture our products may
adversely affect our profit margins and our ability to develop
and obtain approval for our products on a timely and competitive
basis, if at all. Our failure or that of our contract
manufacturers to comply with cGMP regulations or similar
regulations outside of the United States can result in
enforcement action by the FDA or its foreign counterparts,
including, among other things, warning
Table of Contents
letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal
of the government to renew marketing applications and criminal
prosecution. In addition, delays or difficulties with our
contract manufacturers in producing, packaging, or distributing
our products could adversely affect the sales of our current
products or introduction of other products.
Schering-Plough manufactures and sells ribavirin under license
from us. In May 2002, Schering-Plough signed a consent decree of
permanent injunction with the FDA, agreeing to measures to
assure that the drug products manufactured at their Puerto Rico
plant are made in compliance with FDA’s current good
manufacturing practice regulations. While Schering-Plough has
advised us that the deficiencies were not specifically
applicable to the production of ribavirin, the consent decree
covers the facility producing ribavirin. Schering-Plough’s
ability to manufacture and ship ribavirin could be affected by
temporary interruption of some production lines to install
system upgrades and further enhance compliance, and other
technical production and equipment qualification issues. If the
FDA is not satisfied with Schering-Plough’s compliance
under the consent decree, the FDA could take further regulatory
actions against Schering-Plough, including the seizure of
products, an injunction against further manufacture, a product
recall or other actions that could interrupt production of
ribavirin. Interruption of ribavirin production for a sustained
period of time could materially reduce our royalty revenue.
In addition to regulatory compliance risks, our contract
manufacturers in the United States and in other countries are
subject to a wide range of business risks, such as seizure of
assets by governmental authorities, natural disasters, and
domestic and international economic conditions. Were any of our
contract manufacturers not able to manufacture our products
because of regulatory, business or any other reasons, the
manufacture of our products would be interrupted. This could
have a negative impact on our sales, financial condition and
competitive position.
The process by which pharmaceutical products are approved is
lengthy and highly regulated. We have developed expertise in
managing this process in the many markets around the world. Our
multi-year clinical trials programs are planned and executed to
conform to these regulations, and once begun, can be difficult
and expensive to change should the regulations regarding
approval of pharmaceutical products significantly change.
In addition, we depend on patent law and data exclusivity to
keep generic products from reaching the market in our
evaluations of the development of our products. In assessing
whether we will invest in any development program, or license a
product from a third party, we assess the likelihood of patent
and/or data
exclusivity under the laws and regulations then in effect. If
those schemes significantly change in a large market, or across
many smaller markets, our ability to protect our investment may
be adversely affected.
Appropriate tax planning requires that we consider the current
and prevailing national and local tax laws and regulations, as
well as international tax treaties and arrangements that we
enter into with various government authorities. Changes in
national/local tax regulations, or changes in political
situations may limit or eliminate the effects of our tax
planning and could result in unanticipated tax expenses.
We conduct a significant portion of our business outside the
United States. Including ribavirin royalties, approximately 71%
and 75% of our revenue was generated outside the United States
during the year ended December 31, 2006 and 2005,
respectively. We sell our pharmaceutical products in more than
100 countries around the world and employ approximately 2,600
individuals in countries other than the United States. The
international scope of our operations may lead to volatile
financial results and difficulties in managing our operations
because of, but not limited to, the following:
Table of Contents
We have funded our operations, including our research and
development activities, with existing cash reserves, cash flows
from operations and cash from sales of unsecured debt and equity
securities. Our existing debt agreements permit us to borrow at
least $150,000,000 on a secured basis from banks.
While we believe that we can obtain at least $150,000,000 in
secured financings to finance our operations, we can give no
assurances that such financings will be obtained or available on
terms acceptable to us. Further, if we obtain such financing, we
cannot be sure that the amount will be sufficient to meet all
our cash requirements, including the marketing of new products
and paying quarterly dividends, which have been suspended since
October 2006. There are significant contractual limitations on
our ability to pay future dividends under the terms of the
indenture governing our 7% senior notes due 2011. Incurring
additional debt may also subject us to covenants, in addition to
those in our existing debt agreements, that may restrict how we
operate our business.
A substantial portion of our cash balances and reserves result
from the operations of, and are held by, our subsidiaries
outside of the United States. The income in these countries has
been taxed in the various countries where it was earned, but it
has not been subject to tax in the United States. Income tax
expense has been calculated on the basis that foreign earnings
will be indefinitely invested in
non-U.S. assets
If we find it necessary to utilize the cash reserves of our
foreign subsidiaries to finance our research and development and
other activities in the United States, our income generated in
foreign countries will become subject to taxation in the United
States. Given the net operating loss carryforwards that we have
available to offset income in the United States, it is unlikely
in the near term that we would incur significant cash
obligations to pay tax on repatriated foreign earnings. However,
repatriating our cash resources from foreign jurisdictions would
likely increase income tax expense in our financial statements
which would significantly reduce our earnings. It would also use
our net operating loss carryforwards, which would increase
future cash obligations to pay taxes on U.S. income.
Much of our operating cash flow is earned outside of the United
States.
We are involved in several legal proceedings, including those
described in Note 15 of notes to the consolidated financial
statements. Defending against claims and any unfavorable legal
decisions, settlements or orders could have a material adverse
effect on us.
The nature of our business exposes us to potential liability
risks inherent in the testing, manufacturing and marketing of
pharmaceutical products. Using our drug candidates in clinical
trials also exposes us to product
Table of Contents
liability claims. These risks will expand with respect to drugs,
if any, that receive regulatory approval for commercial sale.
Even if a drug were approved for commercial use by an
appropriate governmental agency, there can be no assurance that
users will not claim that effects other than those intended may
result from our products. While to date no material adverse
claim for personal injury resulting from allegedly defective
products has been successfully maintained against us, a
substantial claim, if successful, could have a material negative
impact on us.
In the event that anyone alleges that any of our products are
harmful, we may experience reduced consumer demand for our
products or our products may be recalled from the market. In
addition, we may be forced to defend lawsuits and, if
unsuccessful, to pay a substantial amount in damages.
We currently maintain clinical trial insurance in the major
markets in which we conduct clinical trials. There is no
assurance, however, that such insurance will be sufficient to
cover all claims.
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved in our favor and could
have an adverse effect on our reported effective tax rate and
after-tax cash flows.
The Internal Revenue Service has completed an examination of our
tax returns for the years 1997 through 2001 and has proposed
adjustments to our tax liabilities for those years plus
associated interest and penalties. While we have written a
formal protest in response to the proposed adjustments, we have
also recorded an additional tax provision of $27,368,000 should
we not prevail in our position. The provision consists of
$62,317,000 as the estimated additional taxes, interest and
penalties associated with the period 1997 to 2001. This amount
is offset by $34,949,000 in deferred tax benefits that would be
realized if the tax assessment is upheld. While we have
substantial net operating loss and other carryforwards available
to offset our U.S. tax liabilities, the additional tax
provision we recorded results from annual utilization
limitations on those carryforwards that would result if the
Internal Revenue Service adjustments are upheld.
In 1999, we restructured our operations by contributing the
stock of several
non-United
States subsidiaries to a wholly-owned Dutch company. At the time
of the restructuring, the Company intended to avail itself of
the non-recognition provisions of the Internal Revenue Code to
avoid generating taxable income on the intercompany transfer.
One of the requirements under the non-recognition provisions was
to file Gain Recognition Agreements with our timely filed 1999
United States Corporate Income Tax Return. We discovered and
voluntarily informed the IRS that the Gain Recognition
Agreements had been inadvertently omitted from the 1999 tax
return. The IRS has denied our request to rule that reasonable
cause existed for the failure to provide the agreements, the
result of which is additional taxable income in that year of
approximately $120,000,000. We are pursuing resolution through
the formal appeals process. The impact of the IRS position on
this issue is considered in the adjustments noted above.
In November 2000, we entered into an agreement that provides
Schering-Plough with an option to acquire the rights to up to
three of our products intended to treat hepatitis C that
they designate prior to our entering into Phase 2 clinical
trials and a right for first/last refusal to license various
compounds we may develop and elect to license to others.
Taribavirin was not subject to the option of Schering-Plough,
but it would be subject to their right of first/last refusal if
we elected to license it to a third party. In addition, the
agreement provides for certain other disclosures about our
research and development activities. The interest of potential
collaborators in obtaining rights to our compounds or the terms
of any agreements we ultimately enter into for these rights may
be negatively impacted by our agreement with Schering-Plough. A
commercialization partner other than Schering-Plough may be
preferable in a given disease area or geographic region or due
to that potential partner’s strength or for other reasons.
Table of Contents
We intend to pursue a strategy of targeted expansion through the
acquisition of compatible businesses and product lines and the
formation of strategic alliances, joint ventures and other
business combinations. There can be no assurance that we will
successfully complete or finance any future acquisition or
investment or that any acquisitions that we do complete will be
completed at prices or on terms that prove to be advantageous to
us. Failure in integrating the operations of companies that we
have acquired or may acquire in the future may have a material
adverse impact on our operating results, financial condition and
future growth.
We sell products in many countries that are susceptible to
significant foreign currency risk. In some of these markets we
sell products for U.S. Dollars. While this eliminates our
direct currency risk in such markets, it increases our risk that
we could lose market share to competitors because if a local
currency is devalued significantly, it becomes more expensive
for customers in that market to purchase our products in
U.S. Dollars.
Our stockholder rights plan, provisions of our certificate of
incorporation, bylaws and the Delaware General Corporation Law
provide our board of directors with the ability to deter hostile
takeovers or delay, deter or prevent a change in control of the
company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current
market prices.
We are authorized to issue, without stockholder approval,
approximately 10,000,000 shares of preferred stock,
200,000,000 shares of common stock and securities
convertible into either shares of common stock or preferred
stock. The board of directors can also use issuances of
preferred or common stock to deter a hostile takeover or change
in control of the Company.
We are subject to a consent order with the SEC, which
permanently enjoins us from violating securities laws and
regulations. The consent order also precludes protection for
forward-looking statements under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 with
respect to forward-looking statements we made prior to
November 28, 2005. The existence of the permanent
injunction under the consent order, and the lack of protection
under the safe harbor with respect to forward-looking statements
we made prior to November 28, 2005 may limit our ability to
defend against future allegations.
Pharmaceutical and biotechnology companies have faced lawsuits
and investigations pertaining to violations of health care
“fraud and abuse” laws, such as the federal false
claims act, the federal anti-kickback statute, and other state
and federal laws and regulations. If any such actions are
instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of
significant fines or other sanctions.
In April 2006, we announced a strategic restructuring designed
to focus our resources on programs and products that have the
greatest opportunity for success. Accordingly, we elected to
rationalize certain of our assets, including our discovery
program and certain manufacturing facilities. We have sold and
out licensed pradefovir and certain discovery programs, and any
future compensation relating thereto is contingent upon the
transferee’s
Table of Contents
successful development of the applicable product
and/or
program. Such success is subject to the risks inherent in
developing and obtaining approval for pharmaceutical products.
Accordingly, it is possible that we may not receive any
financial benefit from the sale or out license of these assets.
In addition, if we are unable to realize the expected
operational efficiencies from our restructuring plan, our
operating results and financial condition would be adversely
affected.
None.
Our major facilities are in the following locations:
In our opinion, facilities occupied by us are more than adequate
for present requirements, and our current equipment is
considered to be in good condition and suitable for the
operations involved.
See Note 15 of notes to consolidated financial statements.
None.
Table of Contents
Our common stock is traded on the New York Stock Exchange
(Symbol: VRX). As of February 23, 2007 there were 4,989
holders of record of our common stock.
The following table sets forth, for the periods indicated the
high and low sales prices of our common stock on the New York
Stock Exchange — Composite Transactions reporting
system.
The following graph compares the cumulative total return on our
common stock with the cumulative return on the Standard and
Poor’s Mid Cap 400 Index (“S&P Mid Cap 400
Index”) and a 10-Stock Custom Composite Index (the
“New Custom Composite Index”) for the five years ended
December 31, 2006. The New Custom Composite consists of
Allergan, Inc., Biovail Corporation, Cephalon, Inc., Forest
Laboratories, Inc., Gilead Sciences, Inc., King Pharmaceuticals,
Inc., Medicis Pharmaceutical Corporation, Mylan Laboratories
Inc., Shire Pharmaceuticals Group plc and Watson
Pharmaceuticals, Inc. The second graph compares the cumulative
total return of our common stock with its previously used
10-Stock Composite Index (the “Old Custom Composite
Index”) which consisted of AAIPharma, Inc., Allergan, Inc.,
Biovail Corporation, Forest Laboratories, Inc., Gilead Sciences,
Inc., King Pharmaceuticals, Inc., Medicis Pharmaceutical
Corporation, Mylan Laboratories Inc., Shire Pharmaceuticals
Group plc and Watson Pharmaceuticals, Inc. AAIPharma, Inc. was
been removed from the composite index and replaced with
Cephalon, Inc. AAIPharma, Inc. was delisted from the Nasdaq
Stock Market in April 2005 and is no longer a publicly traded
company. Factors used in deciding to include Cephalon, Inc. in
the New Custom Composite Index include similarity of market
capitalization, international presence and existence of branded
products. Cephalon, Inc. is also a Nasdaq-listed component of
the S&P Mid Cap 400 index.
Table of Contents
We paid cash dividends of $0.0775 per share for the first
three quarters during the year ended December 31, 2006 and
for each of the quarters during the year ended December 31,
2005. We announced in October 2006 that we would not pay a
dividend for the fourth quarter of 2006.
Our board of directors will continue to review our dividend
policy. The amount and timing of any future dividends will
depend upon our financial condition and profitability, the need
to retain earnings for use in the development of our business,
contractual restrictions and other factors. There are
significant contractual limitations on our ability to pay future
dividends under the terms of the indenture governing our
7% senior notes due 2011.
Table of Contents
The following table sets forth financial data for each of the
five years ended December 31, 2006. The selected historical
financial data as of December 31, 2006 and 2005 and for the
years ended December 31, 2006, 2005, 2004 and 2003,
respectively, has been derived from the audited restated
consolidated financial statements. The data as of
December 31, 2003 and 2002, respectively, and for the year
ended December 31, 2002 has been derived from unaudited
restated financial statements, which are not included in this
Form 10-K.
Table of Contents
29
Table of Contents
Table of Contents
We are a global specialty pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products, primarily in the areas of neurology, infectious
disease, and dermatology. Our marketing and promotion efforts
focus on our Promoted Products. Our products are currently sold
in more than 100 markets around the world, with our primary
focus on the United States, Canada, Mexico, the United Kingdom,
France, Italy, Poland, Germany, and Spain.
Our primary value driver is a specialty pharmaceutical business
with a global platform. We believe that our global reach and
marketing agility differentiate us among specialty
pharmaceutical companies, and provide us with the ability to
leverage compounds in the clinical stage and commercialize them
in major markets around the world. In addition, we receive
royalties from the sale of ribavirin by Schering-Plough and
Roche, although such royalties are expected to decline as a
result of market competition and the loss of exclusivity in
European markets and Japan.
Product sales from our specialty pharmaceuticals segment
accounted for 91% of our total revenues from continuing
operations for the year ended December 31, 2006, compared
to 89% for 2005. Product sales increased $93,756,000 (13%) for
the year ended December 31, 2006 compared with 2005.
Infergen, the product we acquired from InterMune, Inc. on
December 30, 2005, contributed $42,716,000 to the increase.
Excluding Infergen, specialty pharmaceutical sales grew 7% in
2006. On a net basis, excluding Infergen, volume sales of our
products was flat year over year with volume growth in our
Promoted Products being offset by declines in volume on our
non-promoted products. Specialty pharmaceutical product sales in
2006 include an approximate 1% favorable impact from foreign
exchange rate fluctuations.
Our current product portfolio comprises approximately 370
branded products, with approximately 2,200 stock keeping units.
We market our products globally through a marketing and sales
force consisting of approximately 1,568 employees. We focus our
sales, marketing and promotion efforts on the Promoted Products
within our product portfolio. We have identified these Promoted
Products as offering the best potential return on investment.
The majority of our Promoted Products are in our three targeted
therapeutic areas. Promoted Products in other therapeutic areas
have characteristics and regional or local market positions that
also offer significant growth and returns on marketing
investments.
Our future growth is expected to be driven primarily by the
commercialization of new products, growth of our existing
products, and business development. Our Promoted Products
accounted for 58% and 51% of our specialty pharmaceutical
product sales for the years ended December 31, 2006 and
2005, respectively. Sales of our Promoted Products increased
$101,959,000 (27%) in the year ended December 31, 2006
compared to 2005. This increase includes $42,716,000 from
Infergen, a product we did not sell in 2005. Excluding Infergen,
sales of Promoted Products increased $59,243,000 or 16% in the
year ended December 31, 2006 compared to 2005. Our
increased sales of Promoted Products were partially offset by
declines in non-promoted products.
We have experienced generic challenges and other competition to
our products, as well as pricing challenges through government
imposed price controls and reductions, and expect these
challenges to continue in 2007 and beyond.
Ribavirin royalty revenues decreased $10,404,000 (11%) in 2006
over 2005 due to (i) competitive dynamics between Roche and
Schering-Plough in Europe, as Roche’s version of ribavirin,
Copegus, gained market share over Schering-Plough’s version
of ribavirin, Rebetol, (ii) reduced sales in Japan from a
peak in 2005 driven by the launch of combination therapy there,
and (iii) further gains in market share by generic
competitors in the United States. We expect ribavirin royalties
to continue to decline in 2007 as a result of market competition
between Roche and Schering-Plough in Japan. The royalty will
reduce significantly in 2009 and 2010 with the loss of
exclusivity in European markets and Japan.
Table of Contents
We are developing certain product candidates, including two
clinical stage programs, taribavirin and retigabine, which
target large market opportunities. Taribavirin is a pro-drug of
ribavirin, for the treatment of chronic hepatitis C in
treatment-naive patients in conjunction with a pegylated
interferon. Retigibine was added to our pipeline with the
acquisition of Xcel in March 2005. Retigabine is being developed
as an adjunctive treatment for partial-onset seizures in
patients with epilepsy. Clinical development expenses in 2007
will be impacted by the results of a Phase 2(b) study on
taribavirin, results of implementing strategies to acquire
Phase 1 and Phase 2 compounds to augment our existing
development portfolio and whether we ultimately determine and
are successful at sharing the cost of development and associated
risk of our existing development portfolio.
Worldwide, approximately 170 million individuals are
infected with HCV. In the United States alone,
3-4 million
individuals are infected. Current therapies consist of
(pegylated) interferon alpha and ribavirin with a sustained
virological response ranging as high as 54% to 56%.
There are more than 50 million people worldwide who have
epilepsy, with approximately 6 million people afflicted
with the disease in the United States, the European Union, and
Japan. Approximately half of all epilepsy patients become
seizure free with their first medication. Another 20% to 30%
become seizure free when other therapies are tried or added to
the first medication. The remaining 20% to 30% of patients who
do not respond to multiple AED’s are considered to have
refractory epilepsy, thus representing the greatest unmet need
in epilepsy treatment.
We made the following acquisitions in 2006 and 2005:
In 2006 we acquired rights to new product lines in Poland and
the UK. In Poland we acquired the rights of a number of branded
generic products for nominal cash consideration. In the UK we
acquired exclusive rights to distribute certain dermatological
skin care products from Intendis AG, including Finacea,
Skinoren, Scheriproct, and Ultrabase. We also purchased
additional rights to Melleril in Latin America and additional
rights to Zelapar in Canada and Mexico. Aggregate consideration
for these transactions was $4,568,000 in 2006.
On March 1, 2005, we acquired Xcel, a specialty
pharmaceutical company focused on the treatment of disorders of
the central nervous system, for $280,000,000 in cash, plus
expenses of approximately $5,000,000. Xcel’s portfolio
consists of four products that are sold within the United
States, and retigabine, a late-stage clinical product candidate
that is an adjunctive treatment for partial-onset seizures for
patients with epilepsy, which is being developed for
commercialization in all major markets. We have filed a claim
for indemnification from the former Xcel stockholders with
respect to certain breaches of representation and warranties
made by Xcel under the Xcel purchase agreement and certain
third-party claims. As of December 31, 2006, approximately
$5,230,000 of the Xcel purchase price remained in an escrow fund
to pay indemnification claims.
In the third quarter of 2005 we acquired product rights to
Melleril in Brazil and Acurenal in Poland for cash consideration
of $7,900,000.
On December 30, 2005, we acquired the U.S. and Canadian
rights to Infergen from InterMune. Infergen is indicated for the
treatment of hepatitis C when patients have not responded
to other treatments (primarily the combination of pegylated
interferon and ribavirin) or have relapsed after such treatment.
In connection with this transaction we acquired patent rights
and rights to a clinical trial underway to expand applications
of Infergen. We also employed InterMune’s marketing and
research staffs who were dedicated to the Infergen product and
projects. We paid InterMune $120,000,000 in cash at the closing.
We have also agreed to pay InterMune up to an additional
$22,585,000, $20,000,000 of which is dependent on reaching
certain milestones.
Table of Contents
We paid InterMune $2,585,000 as a non-contingent payment in
January 2007. Additionally, as part of the acquisition
transaction we assumed a contract for the transfer of the
manufacturing process for Infergen from one third party supplier
to another. Under the contract we are obligated to pay the new
third party supplier up to $11,700,000 upon the attainment of
separate milestones tied to the manufacturing process transfer.
In 2006 we charged $5,200,000 to cost of sales for payments to
this supplier for the achievement of milestones and we
anticipate paying an additional $5,200,000 in 2007. Amgen
originally developed Infergen and licensed the rights to
InterMune.
See Note 3 of notes to consolidated financial statements
for a discussion of these acquisitions.
Results
of Operations
We have three specialty pharmaceutical segments comprising our
pharmaceuticals operations in North America, International
(Latin America, Asia and Australasia) and Europe, Middle East,
and Africa (EMEA). In addition, we have a research and
development division. Certain financial information for our
business segments is set forth below (in thousands). This
discussion of our results of operations should be read in
conjunction with the consolidated financial statements included
elsewhere in this document. For additional financial information
by business segment, see Note 16 of notes to consolidated
financial statements included elsewhere in this document.
Table of Contents
Specialty Pharmaceutical Revenues: Total
specialty pharmaceutical product sales increased $93,756,000 for
the year ended December 31, 2006 over 2005. Significant
factors that contributed to this increase included the
acquisition of Infergen on December 30, 2005, the full year
of sales from Xcel products compared with ten months
34
Table of Contents
of sales of these products in 2005, certain product launches,
general price increases and success in the growth of our
Promoted Products.
Approximately 58% of our total pharmaceutical revenues resulted
from sales of Promoted Products in 2006. We define Promoted
Products as being those that we promote with annual sales of
greater than $5,000,000. Worldwide sales of Promoted Products
totaled $476,211,000 in 2006, an increase of $101,959,000 or 27%
over 2005. Infergen sales in 2006 were $42,716,000. Sales of
other Promoted Products in 2006 increased $59,243,000 or 16%
over 2005 sales levels. The increased sales in Promoted Products
were partially offset by declines in sales of non-promoted
products.
In our North America pharmaceuticals segment, revenues for the
year ended December 31, 2006 increased $74,768,000 over
2005. This increase reflects the acquisition of Infergen, the
full year of Xcel products compared with ten months in 2005, the
launch of Cesamet and Zelapar in the United States, the growth
in Cesamet sales in Canada, and the $14,337,000 increase in
Efudex sales, which totaled $66,695,000 in 2006. Efudex sales
increases resulted from a combination of factors, including
changes in wholesaler buying patterns, price increases taken
earlier in the year, and the launch at the end of the year of
our generic version of the product. The increase also reflects
higher sales of Promoted Products which totaled $257,497,000 in
2006, an increase of $72,977,000 (40%) over 2005 sales levels.
These increases were partially offset by volume decreases of
non-promoted products. The increase in North American
pharmaceutical sales for the year ended December 31, 2006,
excluding Infergen, was due to 5% percent increase in volume, an
8% increase in price, and a 1% percent positive contribution
from the appreciation of the Canadian Dollar.
In our International pharmaceuticals segment, revenues for the
year ended December 31, 2006 increased $21,334,000.
Revenues from Bedoyecta, which is our highest revenue product in
Mexico, were $50,366,000 in 2006, an increase of $3,482,000 (7%)
over 2005 reflecting a successful
direct-to-consumer
marketing campaign. Sales of Promoted Products in the region
totaled $129,636,000 in 2006, an increase of $14,585,000 (13%)
over 2005. The increases in revenues were partially offset by
volume decreases of non-promoted products. On a net basis, the
increase in sales in the International segment were primarily
impacted by price increases and reduced discounts to
wholesalers. International sales in 2006 resulted from an
aggregate 11% price increase, a 1% reduction in volume, and a
negligible currency impact.
In our EMEA pharmaceuticals segment, revenues for the year ended
December 31, 2006 were $277,862,000, a decrease of
$2,346,000. The increase in the value of currencies in the
region relative to the U.S. Dollar contributed $4,596,000
to revenues in the region in 2006. Sales of Promoted Products in
2006 were $154,136,000 compared to $152,024,000 in 2005 an
increase of $2,112,000 (1%). The increases in revenues from
higher promoted product sales and stronger European currencies
were offset by reductions in sales of non-promoted products.
Sales in several European countries were also negatively
affected by pricing policies imposed by governmental
authorities. EMEA sales in 2006 were impacted by a 2% positive
contribution from currency fluctuations, a 3% reduction in
volume, and a negligible change in aggregate prices.
Ribavirin Royalties: Ribavirin royalties from
Schering-Plough and Roche for the year ended December 31,
2006 were $81,242,000 compared to $91,646,000 for 2005, a
decrease of $10,404,000 (11%). 2006 ribavirin royalty revenues
decreased due to (i) competitive dynamics between Roche and
Schering-Plough in Europe, as Roche’s version of ribavirin,
Copegus, gained market share over Schering-Plough’s version
of ribavirin, Rebetol, (ii) reduced sales in Japan from a
peak in 2005 driven by the launch of combination therapy there,
and (iii) further gains in market share by generic
competitors in the United States.
Gross Profit Margin: The decline in gross
profit margin in 2006 from 70% to 69% is largely due to changes
in the product mix resulting from recent acquisitions, higher
inventory obsolescence charges in 2006, and a $5,200,000
technology transfer milestone payment paid to the future
manufacturer of Infergen. Gross profit calculations exclude
amortization which is discussed below. Consolidated cost of
goods sold in 2006 included a
Table of Contents
provision of $1,255,000 related to employee stock options and
purchase programs following the implementation of
SFAS 123(R). Gross profits by segment are as follows
(dollar amounts in thousands):
Selling Expenses: Selling expenses were
$264,834,000 for the year ended December 31, 2006 compared
to $232,316,000 for 2005, an increase of $32,518,000 (14%). As a
percent of product sales, selling expenses were 32% for the
years ended December 31, 2006 and 2005. Included in selling
expenses for the year ended December 31, 2005 were
severance charges of $3,000,000 related to the sales force
restructuring in Europe. The increase in selling expenses
includes the additional sales force associated with the
acquisition of Infergen. This increase reflects our increased
promotional efforts primarily in North America and Latin America
and includes costs related to new product launches and line
extensions. Selling expenses in 2006 includes a provision of
$3,580,000 related to employee stock options and purchase
programs following the implementation of SFAS 123(R).
General and Administrative Expenses: General
and administrative expenses were $117,172,000 for the year ended
December 31, 2006 compared to $108,252,000 for 2005, an
increase of $8,920,000 (8%). As a percent of product sales,
general and administrative expenses were 14% for the year ended
December 31, 2006 compared to 15% for 2005. General and
administrative expenses in 2006 includes a provision of
$13,699,000 related to employee stock options and purchase
programs following the implementation of SFAS 123(R).
Research and Development: Research and
development expenses were $109,618,000 for the year ended
December 31, 2006 compared $114,100,000 for 2005, a
reduction of $4,482,000 (4%). The decrease in research and
development expenses was primarily attributable to the
completion of the VISER Phase 3 clinical trials for
taribavirin, the completion of phase 2 clinical trials for
pradefovir, and the strategic restructuring announced
April 3, 2006. Research and development expenses in 2006
included a $7,000,000 milestone payment related to the
development of retigabine. It is expected that clinical
development expenses will decline in 2007 as a result of the
restructuring initiatives. Research and development expenses in
2006 includes a provision of $2,504,000 related to employee
stock options and purchase programs following the implementation
of SFAS 123(R).
Amortization: Amortization expense was
$71,876,000 for the year ended December 31, 2006 compared
to $68,832,000 for 2005, an increase of $3,044,000 (4%). The
increase was primarily due to amortization of intangibles
acquired with the acquisition of Infergen, offset in part by a
decrease in the amortization of a royalty intangible which was
acquired in the Ribapharm acquisition and is being amortized on
an accelerated basis. Additionally, in 2006, we recorded asset
impairment charges on certain products sold in Spain in the
amount of $1,075,000. In 2005, we recorded asset impairment
charges on certain products sold in the UK, Germany and Spain in
the amount of $7,400,000.
Gain on Litigation Settlement: Litigation
settlements contributed significantly to operating profit in
2006. The recoveries in 2006 included the settlement with the
Republic of Serbia relating to the ownership and operations of a
joint venture we formerly participated in known as Galenika of
$34,000,000 of which $28,000,000 was received in 2006, and the
settlement of litigation with the former Chief Executive
Officer, Milan Panic relating to Ribapharm bonuses, for which we
received $20,000,000 and recorded a gain from litigation of
$17,550,000 in 2006.
Table of Contents
Restructuring Charges and Asset
Impairments: In 2006 we incurred $138,181,000 in
restructuring charges relating to severance charges, contract
cancellations, and asset impairments. In 2005 we made the
decision to dispose of a manufacturing plant in China which
resulted in an asset impairment charge of $2,300,000. In 2005 we
also recorded net gains of approximately $1,800,000 resulting
from the sale of the manufacturing plants in the U.S., Argentina
and Mexico.
In April 2006, we announced a restructuring program to reduce
costs and accelerate earnings growth.
The program is primarily focused on our research and development
and manufacturing operations. The objective of the restructuring
program as it relates to research and development activities is
to focus our efforts and expenditures on two late stage
development projects: Taribavirin, a potential treatment for
hepatitis C, and retigabine, a potential treatment for
partial onset seizures in patients with epilepsy. As previously
announced, we intend to sell rights to, out-license, or secure
partners to share the costs of our major clinical projects and
discovery programs. On January 9, 2007, we licensed the
development and commercialization rights to the hepatitis B
compound pradefovir to Schering-Plough. On December 21,
2006, we sold our HIV and cancer development programs and
certain discovery and preclinical assets to Ardea Biosciences,
Inc. (formerly IntraBiotics Pharmaceuticals)
(“Ardea”), with an option for us to reacquire rights
to commercialize the HIV program outside of the United States
and Canada upon Ardea’s completion of Phase 2b trials.
We continue to pursue partnering opportunities for taribavirin
and retigabine to share the costs of development, and look to
license in additional compounds in clinical development to
diversify our opportunities and the inherent risks associated
with product development.
The objective of the restructuring program as it relates to
manufacturing is to further rationalize our manufacturing
operations and further reduce our excess capacity. Under our
global manufacturing strategy, we also seek to minimize our
costs of goods sold by increasing capacity utilization in our
manufacturing facilities or by outsourcing and by other actions
to improve efficiencies. We have undertaken major process
improvement initiatives and the deployment of lean six sigma
process improvements, affecting all phases of our operations,
from raw material and supply logistics, to manufacturing,
warehousing and distribution. The restructuring program includes
the sale of manufacturing plants in Humacao, Puerto Rico and in
Basel, Switzerland. We have entered into a letter of intent to
sell these two manufacturing facilities and believe we will sell
them in the first half of 2007. We have transferred them to
“held for sale” classification in accordance with
FAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in December 2006. Recent negotiations for
the sale of these facilities have been used to estimate the fair
value of the facilities.
The restructuring program will also result in savings in our
selling, general and administrative expenses primarily through
consolidation of our management functions into fewer
administrative groups to achieve greater economies of scale.
Management and administrative responsibilities for our regional
operations in Asia, Africa and Australia, (“AAA”),
which were formerly managed as a separate business unit, have
been combined with those of other regions. As a result we now
have three reportable pharmaceutical segments, which comprise
our pharmaceutical operations in:
We moved into a new leased headquarters building in Aliso Viejo,
California, in December 2006. We have reached agreement for the
sale of our former headquarters building in Costa Mesa,
California, where our former research laboratories were located,
for $38,000,000. We classified this facility as “held for
sale” in September 2006 in accordance with SFAS 144,
“Accounting for the Impairment or Disposal of Long-lived
Assets”.
We anticipate that the total restructuring program will result
in restructuring and asset impairment charges that will range
between $140,000,000 and $145,000,000. In 2006 we incurred an
expense of $138,181,000 relating to a
Table of Contents
restructuring program. Restructuring and asset impairment
charges are recorded as a component of costs and expenses in the
consolidated statement of income.
Severance charges recorded in the year ended December 31,
2006 relate to employees whose positions were eliminated in the
restructuring. When completed, we anticipate that approximately
750 employees in total will be impacted by the restructuring,
the majority of whom work in the two manufacturing facilities
being sold. We intend to dispose of these manufacturing plants
by selling to a buyer who will continue to operate the plant,
including the assumption of certain employee obligations. We
have signed a letter of intent for the sale of these two
facilities, with the sale expected to close in the first half of
2007. It is intended that the buyer will continue to operate the
plant, including the assumption of certain employee obligations.
In 2006 severance benefits were accrued for 259 employees within
the restructuring program. Severance payments to 67 employees
are accounted for under SFAS 112, Employers’
Accounting for Post-employment Benefits with the remaining
192 being accounted for under SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities.
Abandoned software and other capital assets included an expense
of $20,453,000, relating to an Enterprise Resource Planning
(ERP) project which was discontinued in March 2006. It also
includes $632,000 of cash-related charges.
Non-cash asset impairment charges include $37,223,000 related to
our manufacturing plant in Humacao, Puerto Rico, $45,624,000
related to a manufacturing plant in Birsfelden, Switzerland,
$5,946,000 related to equipment used in our discovery operations
and $8,551,000 related to the building in Costa Mesa which
previously served as our corporate headquarters and principal
research facility.
Cash-related charges in the above table relate to severance
payments and other costs which have been either paid with cash
expenditures or have been accrued and will be paid with cash in
future quarters. A summary of accruals and expenditures of
restructuring costs which will be paid in cash for 2006 follows:
In the first, second, third and fourth quarters of 2006 we
incurred expenses of $26,466,000, $53,082,000, 17,139,000 and
$41,494,000 respectively relating to the restructuring program.
The restructuring and asset impairment charges for the year
ended December 31, 2006 represent charges of $37,223,000,
$50,201,000, $242,000, $5,485,000 and $45,030,000 in the North
America, EMEA, International, R&D and Corporate reporting
segments, respectively.
Table of Contents
The benefits achieved as a result of the restructuring program
are estimated at $30,000,000 for 2006. For 2007 the benefits are
expected to exceed $50,000,000.
Acquired In-Process Research and Development
(IPR&D): We did not incur IPR&D charges
in 2006. In 2005, we expensed $173,599,000 as IPR&D in
connection with the acquisition of Xcel ($126,399,000) and with
the Infergen business acquired from InterMune ($47,200,000). The
amounts expensed as IPR&D represent our estimate of fair
value of purchased in-process technology for projects that, as
of the acquisition dates, had not yet reached technological
feasibility and had no alternative future use.
We estimated the fair value of the IPR&D in connection with
the acquisition of Xcel based on the use of a discounted cash
flow model (including an estimate of future sales at an average
gross margin of 80%). For each project, the estimated after-tax
cash flows (using a tax rate of 35%) were probability weighted
to take account of the stage of completion and risks surrounding
the successful development and commercialization. The assumed
tax rate is our estimate of the effective statutory tax rate for
an acquisition of similar types of assets. The cash flows were
discounted to a present value using a discount rate of 18%,
which represents our risk adjusted after tax weighted average
cost of capital for each product. We estimated we would incur
future research and development costs of approximately
$50,000,000 to complete the retigabine IPR&D project.
The estimated fair value of the IPR&D related to the
Infergen business acquired from InterMune was based on the use
of a discounted cash flow model (based on an estimate of future
sales and an average gross margin of 80%). For each project, the
estimated after-tax cash flows (using a tax rate of 41%) were
then probability weighted to take account of the stage of
completion and the risks surrounding the successful development
and commercialization. The assumed tax rate is our estimate of
the effective statutory tax rate for an acquisition of similar
types of assets. These cash flows were then discounted to a
present value using a discount rate of 15% which represents our
estimated risk adjusted after tax weighted average cost of
capital. We estimated we would incur future research and
development costs of approximately $25,000,000 to complete the
Infergen IPR&D project.
Other Income, Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was income of $1,152,000 for the year
ended December 31, 2006 compared with a loss of $6,358,000
in 2005. In both 2006 and 2005 the amounts represent primarily
the effects of translation gains and losses in Europe and Latin
America. Translation and exchange gains are primarily related to
U.S. Dollar denominated assets and liabilities at our
foreign currency denominated subsidiaries.
Interest Expense and Income: Interest expense
increased $3,400,000 during the year ended December 31,
2006 compared to 2005, due to higher interest rates associated
with our variable rate debt. Interest income decreased $559,000
during the year ended December 31, 2006 compared to 2005
due primarily to lower cash balances.
Income Taxes: Despite reporting losses from
continuing operations, we recorded tax expense of $34,219,000 in
2006 and $55,151,000 in 2005. This occurred primarily because,
due to the valuation allowances, no tax benefits are recorded
for the U.S. operating losses. In 2006, the effective rate
was also affected by the pre-tax losses resulting from
restructuring in Puerto Rico of $37,223,000 for which no tax
benefit was recorded. The valuation allowance also has the
effect of deferring certain amounts that would normally impact
the effective tax rate. In addition, the 2005 Xcel IPR&D
charge of $126,400,000 was not deductible for tax purposes
resulting in higher effective tax rates for the year. Tax
expense in 2005 was also impacted by a charge of $27,400,000
resulting from an Internal Revenue Service examination of our
U.S. tax returns for the years 1997 to 2001 and taxes
imposed on the repatriation of foreign earnings of $4,500,000.
In 2006, 2005 and 2004 we recorded valuation allowances against
the deferred tax assets associated with the U.S. tax
benefits we will receive as income tax loss carryforwards are
offset against U.S. taxable income in future years. The
reserve was recorded since we cannot be certain that sufficient
U.S. taxable income will be generated to utilize the tax
benefits of the loss and credit carryforwards before they
expire. As of December 31, 2006 the valuation allowance
against deferred tax assets totaled $161,713,000.
Income (Loss) from Discontinued
Operations: Income from discontinued operations
was $7,494,000 in 2006 compared to a loss of $2,366,000 for the
year ended December 31, 2005. The income in 2006 primarily
relates to the partial release of an environmental reserve for a
former Biomedicals site. The losses in 2005 primarily relate to
our former raw materials businesses and manufacturing operations
in Central Europe.
Table of Contents
Year
Ended December 31, 2005 Compared to 2004
Specialty Pharmaceutical Revenues: Total
specialty pharmaceutical product sales increased $124,416,000
for the year ended December 31, 2005 over 2004. The largest
portion of this increase ($73,400,000) resulted from the
addition of new products to our portfolio as a result of the
Xcel acquisition.
Approximately 51% of our total pharmaceutical revenues resulted
from sales of Promoted Products in 2005. We define Promoted
Products as being those that we promote with annual sales of
greater than $5,000,000. Worldwide sales of Promoted Products
totaled $374,252,000 in 2005, an increase of $124,968,000, or
50% over 2004. Approximately $60,600,000 of this increase in
promoted product sales consisted of two new products acquired in
the Xcel transaction. Sales of other Promoted Products in 2005
increased $64,368,000, or 26% over 2004 sales levels. The
increased sales in Promoted Products and those resulting from
the acquisition of Xcel were partially offset by declines in
sales of non-promoted products.
In our North America pharmaceuticals segment, revenues for the
year ended December 31, 2005 increased $87,812,000 over
2004. The increase reflects the inclusion of sales of products
acquired from Xcel in March 2005 ($73,400,000). The increase
also reflects higher sales of Promoted Products other than those
acquired in the Xcel transaction which totaled $119,500,000 in
2005, an increase of $23,500,000 (25%) over 2004 sales levels.
These increases were partially offset by lower sales of
non-promoted products. The increase in sales in North America
resulted from a 50% increase in volume, a 9% increase in price,
and a 1% benefit from the appreciation of the Canadian Dollar.
In our International pharmaceuticals segment, revenues for the
year ended December 31, 2005 increased $27,142,000. The
increase was primarily due to a reduction in discounts offered
to distributors in the region aggregating $23,900,000. Revenues
from Bedoyecta, which is our highest revenue product in Mexico,
were $46,884,000 in 2005, an increase of $16,230,000 (53%) over
2004 reflecting a successful
direct-to-consumer
marketing campaign. Sales of other Promoted Products in the
region totaled $34,300,000 in 2005, an increase of $4,400,000
(15%) over those in 2004. The increases in revenues were
partially offset by volume decreases in sales of non-promoted
products. The increase in sales in the International
pharmaceutical sector resulted from a 12% increase in price, a
5% positive contribution from currency, which offset a 3%
reduction in volume.
In our EMEA pharmaceuticals segment, revenues for the year ended
December 31, 2005 were $280,208,000, an increase of
$9,462,000. The increase in the value of currencies in the
region relative to the U.S. Dollar contributed $7,600,000
to the increase in revenues in the region in 2005. Sales of
Promoted Products in 2005 were $116,341,000 compared to
$101,244,000 in 2004, an increase of $15,097,000 (15%). The
increases in revenues from higher promoted product sales and
stronger European currencies were offset by reductions in sales
of non-promoted products. Sales in many parts of Europe were
negatively affected by pricing policies imposed by governmental
authorities. The increase in sales in EMEA resulted from a 3%
benefit from currency, a 2% increase in price, offsetting a 1%
reduction in volume.
Ribavirin Royalties: Ribavirin royalties from
Schering-Plough and Roche for the year ended December 31,
2005 were $91,646,000 compared to $76,427,000 for 2004, an
increase of $15,219,000 (20%). This increase primarily resulted
from increased sales in Japan where the Ministry of Health,
Labor and Welfare approved the marketing of ribavirin in
combination with Peg-Intron for the treatment of
hepatitis C.
The 2005 and 2004 royalty amounts are significantly less than
amounts received in 2003 and prior years. The decrease in
ribavirin royalties reflect the effects of the launch of generic
ribavirin in the United States and competition between
Schering-Plough and Roche. Approval of a generic form of oral
ribavirin by the FDA in the United States was announced in April
2004. Competition from generic pharmaceutical companies has had,
and continues to have, a material negative impact on our royalty
revenue. With respect to Schering-Plough, in some markets
royalty rates increase in tiers based on increased sales levels.
Upon the entry of generics into the United States in April
2004, pursuant to the terms of their contract, Roche ceased
paying royalties on sales in the United States. Schering-Plough
has also launched a generic version of ribavirin. Under the
license and supply agreement, Schering-Plough is obligated to
pay us royalties for sales of their generic ribavirin.
Selling Expenses: Selling expenses were
$232,316,000 for the year ended December 31, 2005 compared
to $196,642,000 for 2004, an increase of $35,674,000 (18%). As a
percent of product sales, selling expenses were 32%
Table of Contents
for the years ended December 31, 2005 and 2004. Included in
selling expenses for the year ended December 31, 2005 and
2004 were severance charges of $3,000,000 and $3,600,000,
respectively, related to a sales force restructuring in Europe.
The increase in selling expenses also reflects our increased
promotional efforts primarily in North America and Latin America
and includes costs related to new product launches and unified
promotional materials and campaigns for our global products.
General and Administrative Expenses: General
and administrative expenses were $108,252,000 for the year ended
December 31, 2005 compared to $99,443,000 for 2004, an
increase of $8,809,000 (9%). As a percent of product sales,
general and administrative expenses were 15% for the year ended
December 31, 2005 compared to 16% for 2004.
Research and Development: Research and
development expenses were $114,100,000 for the year ended
December 31, 2005 compared $92,858,000 for 2004, an
increase of $21,242,000 (23%). The increase in research and
development expenses was primarily attributable to the
progression of clinical trials for taribavirin, retigabine and
pradefovir and costs associated with the completion of safety
studies for Zelapar. We completed enrollment of two Phase 3
studies for taribavirin and a Phase 2 study for pradefovir.
We also advanced the clinical trials for retigabine acquired in
March 2005 with the initiation of two Phase 3 trials.
Amortization: Amortization expense was
$68,832,000 for the year ended December 31, 2005 compared
to $59,303,000 for 2004, an increase of $9,529,000 (16%). The
increase was primarily due to amortization of intangibles
acquired with the acquisition of Xcel, offset in part by a
decrease in the amortization of a royalty intangible which was
acquired in the Ribapharm acquisition and is being amortized on
an accelerated basis. Additionally, in 2005, we recorded asset
impairment charges on certain products sold in the UK, Germany
and Spain in the amount of $7,400,000. In 2004, we recorded
asset impairment charges of $4,800,000 primarily related to
products sold in Italy for which the patent life was reduced by
a decree by the Italian government.
Restructuring Charges and Asset
Impairments: In 2004 we incurred an expense of
$19,344,000 related to the manufacturing rationalization plan.
Our manufacturing sites were tested for impairment resulting in
an asset impairment of asset value on three of the sites.
Accordingly, we wrote these sites down to their fair value and
recorded asset impairment charges of $18,102,000 and severance
charges of $1,242,000 in the year ended December 31, 2004.
In 2005 we modified the Manufacturing Restructuring Plan to
include the disposition of the manufacturing site in China and
recorded an asset impairment reserve of $3,602,000 for this
facility and one in Poland. Also in 2005, we sold a plant in the
United States, two plants in Argentina and one plant in Mexico
and recorded a net gain of $2,349,000 on these sales.
Acquired In-Process Research and Development
(IPR&D): In 2005, we expensed $173,599,000 as
IPR&D in connection with the acquisition of Xcel
($126,399,000) and with the Infergen business acquired from
InterMune ($47,200,000). In 2004, we incurred an expense of
$11,770,000 associated with IPR&D related to the acquisition
of Amarin that occurred in February 2004. The amounts expensed
as IPR&D represent our estimate of fair value of purchased
in-process technology for projects that, as of the acquisition
dates, had not yet reached technological feasibility and had no
alternative future use.
We estimated the fair value of the IPR&D in connection with
the acquisition of Xcel based on the use of a discounted cash
flow model (including an estimate of future sales at an average
gross margin of 80%). For each project, the estimated after-tax
cash flows (using a tax rate of 35%) were probability weighted
to take account of the stage of completion and risks surrounding
the successful development and commercialization. The assumed
tax rate is our estimate of the effective statutory tax rate for
an acquisition of similar types of assets. The cash flows were
discounted to a present value using a discount rate of 18%,
which represents our risk adjusted after tax weighted average
cost of capital for each product. We estimated we would incur
future research and development costs of approximately
$50,000,000 to complete the retigabine IPR&D project.
The estimated fair value of the IPR&D related to the
Infergen business acquired from InterMune was based on the use
of a discounted cash flow model (based on an estimate of future
sales and an average gross margin of 80%). For each project, the
estimated after-tax cash flows (using a tax rate of 41%) were
then probability weighted to take account of the stage of
completion and the risks surrounding the successful development
and commercialization. The assumed tax rate is our estimate of
the effective statutory tax rate for an acquisition of similar
types of assets.
Table of Contents
These cash flows were then discounted to a present value using a
discount rate of 15% which represents our estimated risk
adjusted after tax weighted average cost of capital. We
estimated we would incur future research and development costs
of approximately $25,000,000 to complete the Infergen IPR&D
project.
Other Income, Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was a loss of $6,358,000 for the year
ended December 31, 2005 compared to a net gain of $141,000
in 2004. In both 2005 and 2004 the amounts represent primarily
the effects of translation gains and losses in Europe and Latin
America. Translation and exchange gains are primarily related to
U.S. Dollar denominated assets and liabilities at our
foreign currency denominated subsidiaries.
Loss on Early Extinguishment of Debt: The loss
on early extinguishment of debt in 2004, $19,892,000 related to
the repurchase of $326,000,000 aggregate principal amount of our
61/2% Convertible
Subordinated Notes due 2008. We did not have a similar
transaction in 2005.
Interest Expense, net: Interest expense, net
decreased $9,676,000 during the year ended December 31,
2005 compared to 2004. The decrease was due to repurchases of
our
61/2% Convertible
Subordinated Notes due 2008 in July 2004, which eliminated the
associated interest expense.
Income Taxes: Despite reporting losses from
continuing operations, we recorded tax expense of $55,151,000 in
2005 and $68,640,000 in 2004. This occurs primarily because, due
to valuation allowances, no tax benefits are recorded for the
U.S. operating losses. The valuation allowance also has the
effect of deferring certain amounts that would normally impact
the effective tax rate. In addition, the 2005 Xcel IPR&D
charge of $126,399,000 is not deductible for tax purposes
resulting in higher effective tax rates for the year. Tax
expense in 2005 was also impacted by a charge of $27,400,000
resulting from an Internal Revenue Service examination of our
U.S. tax returns for the years 1997 to 2001 and taxes
imposed on the repatriation of foreign earnings of $4,500,000.
In 2005 and 2004 we recorded valuation allowances against the
deferred tax assets associated with the U.S. tax benefits
we will receive as income tax loss carryforwards are offset
against U.S. taxable income in future years. The reserve
was recorded since we cannot be certain that sufficient
U.S. taxable income will be generated to utilize the tax
benefits of the loss and credit carryforwards before they
expire. As of December 31, 2005 the valuation allowance
against deferred tax assets totaled $148,100,000.
The 2004 tax provision was also negatively impacted by
restructuring and asset impairment charges relating to
facilities in certain foreign jurisdictions. We recorded minimal
tax benefits in connection with these charges due to
uncertainties about our ability to realize the benefits as
reductions of our foreign tax liabilities. Some of these tax
benefits were, however, recorded in 2005 as the likelihood of
realizing the benefits increased.
Income (Loss) from Discontinued
Operations: The loss from discontinued operations
was $2,366,000 in 2005 compared to $33,544,000 for the year
ended December 31, 2004. The losses in 2005 primarily
relate to our former raw materials businesses and manufacturing
operations in Central Europe. In 2004 the loss also includes
environmental charges of $16,000,000 related to a former
operating site of our Biomedicals division, for which we
retained the liability when we sold this business.
Cash and marketable securities totaled $335,745,000 at
December 31, 2006 compared to $235,066,000 at
December 31, 2005. Working capital was $480,663,000
(excluding assets held for sale) at December 31, 2006
compared to $344,245,000 at December 31, 2005. The increase
in working capital of $125,159,000 was primarily attributable to
cash generated from operations, litigation settlements and the
exercise of stock options.
During the year ended December 31, 2006, cash provided by
operating activities totaled $125,061,000 compared to
$64,458,000 for 2005. The improvement was mainly attributable to
recoveries in 2006 resulting from the settlement with the
Republic of Serbia relating to the ownership and operations of a
joint venture we formerly participated in known as Galenika of
$34,000,000 of which $28,000,000 was received in 2006 and the
settlement of litigation with the former Chief Executive
Officer, Milan Panic relating to Ribapharm bonuses, for which we
received $20,000,000 in 2006.
Table of Contents
Cash used in investing activities was $32,153,000 for the year
ended December 31, 2006. This compares to cash used in
investing activities of $218,350,000 for the year ended
December 31, 2005. In 2006, $4,568,000 was used for the
purchase of product rights. Additionally, cash was used for
capital expenditures of $42,142,000. Cash generated from net
sales of marketable securities totaled $1,413,000 and sales of
assets generated $10,022,000. In 2005 cash used in investing
activities consisted of net proceeds from sales of marketable
securities of $228,007,000 and proceeds from asset sales of
$7,252,000, which was offset by the use of $413,621,000 in the
acquisitions of Xcel and Infergen, the purchase of product
rights in Brazil and Poland, and the purchase of the minority
interest in our Polish operations. Additionally, cash used for
capital expenditures was $45,525,000.
Cash flows used in financing activities were $6,810,000 in 2006
and primarily consisted of dividends paid of $21,552,000 and
payments on long-term debt and notes payable of $6,662,000. This
was partially offset by proceeds from stock option exercises and
employee stock purchases of $17,389,000 and proceeds from
capitalized lease financing and long-term debt of $4,015,000.
Cash flows provided by financing activities were $164,544,000 in
2005 and primarily consisted of the proceeds of a common stock
offering in connection with the Xcel acquisition, which raised
net proceeds of approximately $192,822,000, offset by dividend
payments of $27,966,000.
In January 2004, we entered into an interest rate swap agreement
with respect to $150,000,000 principal amount of our
7.0% Senior Notes due 2011. The interest rate on the swap
is variable at six-month LIBOR plus 2.41%. The effect of this
transaction was to initially lower our effective interest rate
by exchanging fixed rate payments for floating rate payments. On
a prospective basis, the effective rate will float and correlate
to the variable interest earned on our cash held. At
December 31, 2006 the effective rate on the $150,000,000 of
debt under the swap agreement was 7.78%. We have collateral
requirements on the interest rate swap agreement. The amount of
collateral varies monthly depending on the fair value of the
underlying swap contracts. As of December 31, 2006, we have
collateral of $8,600,000 included in marketable securities and
other assets related to this instrument.
We believe that our existing cash and cash equivalents and funds
generated from operations will be sufficient to meet our
operating requirements at least through December 31, 2007,
and to provide cash needed to fund capital expenditures and our
clinical development program. We may seek additional debt
financing or issue additional equity securities to finance
future acquisitions or for other purposes. We fund our cash
requirements primarily from cash provided by our operating
activities. Our sources of liquidity are our cash and cash
equivalent balances and our cash flow from operations.
We paid quarterly cash dividends in all four quarters of 2005
and in the first three quarters of 2006. We did not pay a
quarterly dividend in the final quarter of 2006. There are
significant contractual limitations on our ability to pay future
dividends under the terms of the indenture governing our 7%
senior notes due 2011.
The following table summarizes our contractual obligations as of
December 31, 2006, and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods:
Table of Contents
We have no material commitments for purchases of property, plant
and equipment and we expect that for 2007, such expenditures
will approximate $20,000,000 to $30,000,000.
As part of the acquisition of Infergen from InterMune in
December 2005, we agreed to pay InterMune up to an additional
$22,585,000, $20,000,000 of which is dependent on reaching
certain milestones. We paid InterMune $2,585,000 as a
non-contingent payment in January 2007. Additionally, as part of
the acquisition transaction we assumed a contract for the
transfer of the manufacturing process for Infergen from one
third party supplier to another. Under the contract we are
obligated to pay the new third party supplier up to $11,700,000
upon the attainment of separate milestones tied to the
manufacturing process transfer. In 2006 we charged $5,200,000 to
cost of sales for payments to this supplier for the achievement
of milestones and we anticipate paying an additional $5,200,000
in 2007.
We do not use special purpose entities or other off-balance
sheet financing techniques except for operating leases disclosed
in our table contained in the “Contractual
Obligations” section above. Our 3% and 4% Notes
include conversion features that are considered as off-balance
sheet arrangements under SEC requirements.
We expect our research and development expenses to decrease in
2007 in comparison to 2006 as a result of the sale of certain
discovery and pre-clinical assets undertaken as part of our
restructuring program. A large percentage of our research and
development expenses will support the continuing product
development programs for the late-stage development projects of
taribavirin and retigabine. We expect that for 2007, we will
spend approximately $70,000,000 on external research and
development costs related to our external product development
programs.
Taribavirin: Taribavirin (formerly referred to
as Viramidine) is a nucleoside (guanosine) analog that is
converted into ribavirin by adenosine deaminase in the liver and
intestine. We are developing taribavirin in oral form for the
treatment of hepatitis C.
Preclinical studies indicated that taribavirin, a
liver-targeting analog of ribavirin, has antiviral and
immunological activities (properties) similar to ribavirin. In
an animal model of acute hepatitis, taribavirin showed biologic
activity similar to ribavirin. The liver-targeting properties of
taribavirin were also confirmed in two animal models. Short-term
toxicology studies showed that taribavirin may be safer than
ribavirin at the same dosage levels. This data suggested that
taribavirin, as a liver-targeting analog of ribavirin, could
potentially be as effective and have a lower incidence of anemia
than ribavirin.
In 2006, we reported the results of two pivotal Phase 3
trials for taribavirin. The VISER (Viramidine Safety and
Efficacy Versus Ribavirin) trials included two co-primary
endpoints: one for safety (superiority to ribavirin in incidence
of anemia) and one for efficacy (non-inferiority to ribavirin in
sustained viral response, SVR). The results of the VISER trials
met the safety endpoint but did not meet the efficacy endpoint.
The studies demonstrated that
38-40 percent
of patients treated with taribavirin achieved SVR and that the
drug has a clear safety advantage over ribavirin, but that it
was not comparable to ribavirin in efficacy at the doses
studied. We believe that the results of the studies were
significantly impacted by the dosing methodology which employed
a fixed dose of taribavirin for all patients and a variable dose
of ribavirin based on a patient’s weight. Our analysis of
the study results leads us to believe that the dosage of
taribavirin, like ribavirin, likely needs to be based on a
patient’s weight to achieve efficacy equal or superior to
that of ribavirin. Additionally we think that higher doses of
taribavirin than those studied in the VISER program may be
necessary to achieve our efficacy objectives.
Based on our analysis, we initiated a Phase 2b study to
evaluate the efficacy of taribavirin at 20, 25 and
30 mg/kg
in combination with pegylated interferon. A ribavirin control
arm also is included in the study. The primary endpoint for the
study will be the week 12 analysis though a preliminary review
will also be conducted at week 4. If the results of the
12-week
analysis are positive, we plan to select a dose and initiate a
large Phase 3 study.
Table of Contents
If we initiate a Phase 3 study, we may seek a partner to
share the investment and risk of this larger development program.
The timeline and path to regulatory approval remains uncertain
at this time. The completion of another Phase 3 trial would
add significantly to the drug’s development cost and the
time it takes to complete development, whether or not we are
able to secure a development partner, thereby delaying the
commercial launch of taribavirin and possibly weakening its
position in relation to competing treatments. Our external
research and development expenses for taribavirin were
$16,133,000 for the year ended December 31, 2006, compared
with $36,474,000 for 2005.
Retigabine: We are developing retigabine as
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine is believed to have a unique, dual-acting
mechanism and has undergone several Phase 2 clinical
trials. The Phase 2 trials included more than
600 patients in several dose-ranging studies compared to
placebo. We successfully completed an
End-of-Phase 2
meeting concerning retigabine with the FDA in November 2005. The
results of the key Phase 2 study indicate that the compound
is potentially efficacious with a demonstrated reduction in
monthly seizure rates of 23% to 35% as adjunctive therapy in
patients with partial seizures. Response rates in the two higher
doses were statistically significant compared to placebo
(p<0.001).
Following a Special Protocol Assessment by the FDA two
Phase 3 trials of retigabine were initiated in 2005. One
Phase 3 trial (RESTORE1; RESTORE stands for Retigabine
Efficacy and Safety Trial for partial Onset Epilepsy) is being
conducted at approximately 50 sites, mainly in the Americas
(U.S., Central/South America); the second Phase 3 trial
(RESTORE2) is being conducted at 60 sites, mainly in Europe. The
first patient in the RESTORE1 trial was enrolled in September
2005. Enrollment of the first patient in the RESTORE2 trial
occurred in December 2005. Both RESTORE1 and RESTORE2 are
approximately two-thirds enrolled. The enrollment period in
epilepsy studies can be lengthy, frequently requiring twelve to
eighteen months to complete.
A number of standard supportive Phase 1 trials necessary
for successful registration of retigabine will start in 2007.
Additionally in 2007 we intend to initiate development of a
sustained release formulation of retigabine and open an IND so
that we can conduct a study evaluating the potential of
retigabine to treat patients with neuropathic pain.
Assuming successful completion of the Phase 3 trials and
approval by the FDA, we expect to launch retigabine in 2009. We
plan to seek a partner to share the investment and risk in the
development of retigabine. For the twelve months ended
December 31, 2006, external research and development
expenses for retigabine were $27,391,000, compared with
$8,864,000 for 2005.
Pradefovir: Pradefovir is a compound that we
licensed from Metabasis Therapeutics, Inc., or Metabasis, in
October 2001. We had been engaged in the development of this
compound into an oral
once-a-day
monotherapy for patients with chronic hepatitis B infection. The
active molecule in this compound exhibits anti-hepatitis B
activity against both the wild type and lamivudine
drug-resistant hepatitis B. We have completed Phase 1 and
Phase 2 clinical trials of pradefovir.
On December 13, 2006, we announced the signing of
definitive agreements for the assignment and license of
development and commercial rights to pradefovir to
Schering-Plough. The transaction closed on January 9, 2007.
Under the terms of the agreements, Schering-Plough made an
upfront cash payment of $19,200,000 to Valeant and $1,800,000 to
Metabasis and will pay up to an additional $90,000,000 in
aggregate cash fees to Valeant and Metabasis upon the
achievement of certain development and regulatory milestones.
Approximately $65,000,000 of the additional fees would be paid
to Valeant and $25,000,000 to Metabasis. The amount to be paid
to Metabasis includes the remaining $16,000,000 in milestone
payments that could have been realized by Metabasis under the
previous agreement between Metabasis and Valeant.
Schering-Plough also will pay royalties to Valeant and Metabasis
in the event pradefovir is commercialized.
For the twelve months ended December 31, 2006, external
research and development expenses for pradefovir were
$3,981,000, compared with $8,103,000 for 2005.
Table of Contents
Infergen: On December 30, 2005, we
completed the acquisition of the United States and Canadian
rights to the hepatitis C drug Infergen (interferon
alfacon-1) from InterMune. Infergen, or consensus interferon, is
a bio-optimized, selective and highly potent type 1 interferon
alpha originally developed by Amgen and launched in the United
States in 1997. It is indicated as monotherapy for the treatment
of adult patients suffering from chronic hepatitis C viral
infections with compensated liver disease who have not responded
to other treatments or have relapsed after such treatment.
Infergen is the only interferon with data in the label regarding
use in patients following relapse or non-response to certain
previous treatments.
In connection with this transaction, we acquired patent rights
and rights to a clinical trial underway to expand the labeled
indications of Infergen. In the DIRECT trial (IHRC-001) which
started in the second quarter of 2004, 514 patients were
enrolled. Of these 514 patients, 343 were assigned to the
two treatment arms whereas 171 were assigned to the no-treatment
group. In the later case, when these patients reached
week 24, they were allowed to enter IRHC-002, the same
trial design as IRHC-001 except it omits the no-treatment arm.
As of December 31, 2006, 22 patients remained in
IRHC-001. We reported
24-week and
48-week data
from the trial at a scientific meeting in October 2006. The
percent of patients who were virus negative at
end-of-treatment
(treatment week 48) for the Infergen 9 mcg and 15 mcg
groups were 16 percent and 19 percent, respectively
(TMA Assay). Response rates at
end-of-treatment
using the bDNA assay were 22 percent and 25 percent
for the Infergen 9 mcg and 15 mcg groups, respectively.
The second DIRECT trial (IHRC-002) has enrolled
144 patients of the possible 171 and is still ongoing. As
of December 31, 2006, 32 patients remained in this
trial. Both of the DIRECT trials are reviewed on a regular basis
by an independent Data Monitoring Committee to monitor the
safety of each trial. Post-treatment
follow-up
for the DIRECT trials are expected to be completed (i.e., last
patient visit) in the first and third quarters of 2007,
respectively. We expect to report and publish the results from
these studies sometime in late 2007.
In the first quarter of 2007, we plan to initiate a Phase 4
study to evaluate the use of Infergen 15 mcg/day plus ribavirin
(1.0-1.2 g/day) in patients who did not have an optimal response
at 12 weeks of treatment with pegylated interferon and
ribavirin. The multi-center, randomized U.S. study will
enroll patients who received initial treatment with pegylated
interferon and ribavirin and achieve a >2log 10 decline in
HCV RNA at week 12 but still have detectable virus
(“partial responders”). The patients will be
immediately randomized to receive Infergen 15
mcg/day plus
ribavirin (1.0-1.2 g/day) for 36 or 48 weeks or continue on
their pegylated interferon and ribavirin regimen for an
additional 36 weeks of therapy. All treatment groups will
have a
24-week
follow up period to measure sustained virologic response.
For the year ended December 31, 2006, external research and
development expenses for Infergen were $4,176,000; we did not
incur research and development expenses for Infergen in 2005.
Zelapar: Zelapar was approved by the FDA on
June 14, 2006 as an adjunct treatment in the management of
patients with Parkinson’s disease being treated with
levodopa/carbidopa. Zelapar is the first Parkinson’s
disease treatment to use the patented
Zydis®
fast-dissolving technology, which allows the tablets to dissolve
within seconds in the mouth and deliver more active drug at a
lower dose. We launched Zelapar in the U.S. market in July
2006.
Cesamet: Cesamet (nabilone), a synthetic
cannabinoid, was approved by the FDA on May 15, 2006 for
the treatment of cancer chemotherapy-induced nausea and vomiting
(CINV) in patients who have failed to respond adequately to
conventional antiemetic treatments. We also market the product
in Canada for CINV. In recent years, there has been increasing
scientific and clinical evidence regarding the efficacy of
cannabinoids in different types of pain, including chronic
neuropathic pain. Certain chemotherapy regimens result in
neuropathic pain, with more than 90% of patients being affected.
We submitted an Investigational New Drug Application to the FDA
in January 2007, to evaluate Cesamet in the treatment of chronic
neuropathic pain associated with cancer chemotherapy. We will
start this development program in 2007.
Approximately 70% and 75% of our revenues from continuing
operations, which includes royalties, for the years ended
December 31, 2006 and 2005, respectively, were generated
from operations or otherwise earned outside
Table of Contents
the United States. All of our foreign operations are subject to
risks inherent in conducting business abroad. See Item 1A.
Risk Factors.
We experience the effects of inflation through increases in the
costs of labor, services and raw materials. We are subject to
price control restriction on our pharmaceutical products in the
majority of countries in which we operate. While we attempt to
raise selling prices in anticipation of inflation, we operate in
some markets which have price controls that may limit our
ability to raise prices in a timely fashion. Future sales and
gross profit will be impacted if we are unable to obtain price
increases commensurate with the levels of inflation.
In December 2004, the FASB issued a revision of Statement of
Financial Accounting Standards (or “FAS”)
No. 123, “Accounting for Stock-Based
Compensation.” The revision is referred to as
“FAS 123R — Share-Based Payment”
(“FAS 123R”), which supersedes APB Opinion
No. 25, “Accounting for Stock Issued to
Employees,” (“APB 25”) and requires
companies to recognize compensation expense, using a fair-value
based method, for costs related to share-based payments
including stock options and stock issued under our employee
stock plans. We adopted FAS 123R using the modified
prospective basis effective January 1, 2006. Our adoption
of FAS 123R resulted in compensation expense of $21,038,000
for 2006. However, our estimate of future stock-based
compensation expense is affected by our stock price, the number
of stock-based awards our board of directors may grant, as well
as a number of complex and subjective valuation assumptions and
the related tax effect. These valuation assumptions include, but
are not limited to, the volatility of our stock price and
employee stock option exercise behaviors.
Future stock compensation expense for restricted stock and stock
option incentive awards outstanding at December 31, 2006 is
as follows:
SFAS No. 155. In February 2006, the
FASB issued SFAS No. 155, “Accounting for Certain
Hybrid Financial Instruments, amendment of FASB Statements
No. 133 and 140” (SFAS No. 155).
SFAS No. 155 gives entities the option of applying
fair value accounting to certain hybrid financial instruments in
their entirety if they contain embedded derivatives that would
otherwise require bifurcation under SFAS No. 133.
SFAS No. 155 became effective for Valeant as of
January 1, 2007. The adoption of this standard did not have
a material impact on our financial statements.
FIN 48. In June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109” (“FIN 48”), which clarifies
the accounting for uncertainty in income taxes recognized in
accordance with SFAS No. 109, “Accounting for
Income Taxes.” FIN 48 applies to all income tax
positions taken on previously filed tax returns or expected to
be taken on a future tax return. FIN 48 prescribes a
benefit recognition model with a two-step approach, a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being ultimately
realized upon ultimate settlement. If it is not more likely than
not that the benefit will be sustained on its technical merits,
no benefit will be recorded. Uncertain tax positions that relate
only to timing of when an item is included on a tax return are
considered to have met the recognition threshold for purposes of
applying FIN 48. Therefore, if it can be established that
the only uncertainty is when an item is taken on a tax return,
such positions have satisfied the recognition step for purposes
of FIN 48 and uncertainty related to timing should be
assessed as part of measurement. FIN 48 also requires that
the amount of interest expense and income to be recognized
related to uncertain tax positions be computed by applying the
applicable statutory rate of interest to the difference between
the tax position recognized in accordance with FIN 48 and
the amount previously taken or expected to be taken in a tax
return.
Table of Contents
FIN 48 became effective for Valeant as of January 1,
2007. The change in net assets as a result of applying this
pronouncement will be a change in accounting principle with the
cumulative effect of the change required to be treated as an
adjustment to the opening balance of retained earnings. Valeant
has not fully completed the process of evaluating the impact of
adopting FIN 48.
EITF
06-3. In
June 2006, the FASB ratified the Emerging Issues Task
Force’s Issue
No. 06-3,
“How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)” (EITF
06-3). EITF
06-3
provides guidance on disclosing the accounting policy for the
income statement presentation of any tax assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on
either a gross (included in revenues and costs) or a net
(excluded from revenues) basis. In addition, EITF
06-3
requires disclosure of any such taxes that are reported on a
gross basis as well as the amounts of those taxes in interim and
annual financial statements for each period for which an income
statement is presented. EITF
06-3 will be
effective for Valeant as of January 1, 2007. Valeant
presents sales taxes on a net basis. The adoption of this
standard did not have any significant impact on Valeant.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, “Fair Value
Measurements” (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements but does not change the requirements to
apply fair value in existing accounting standards. Under
SFAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. The
standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. SFAS No. 157 will be effective for
Valeant as of January 1, 2008 and we are currently
assessing the impact that SFAS No. 157 may have on our
financial statements.
SFAS No. 158. In September 2006, the
FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)”, which became effective for Valeant as of
December 31, 2006. SFAS No. 158 requires
companies to recognize the over-funded or under-funded status of
defined benefit postretirement plans as an asset or liability on
the balance sheet. Valeant does not have defined benefit
postretirement plans for its U.S. operations but does
maintain such plans for certain of its foreign operations.
SFAS No. 158 also prescribes that, by
December 31, 2008, the measurement date of a plan to be the
date of its year-end balance sheet, which is the measurement
date Valeant already uses for most its plans. The impact of
adopting FAS 158 resulted in an increase in pension related
assets and an increase in other comprehensive income of
approximately $7,813,000. In addition, we have disclosed
additional information about certain effects on net periodic
benefit cost for the next fiscal year.
SFAS 159. In February 2007 the FASB
issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”,
(SFAS 159) which provides companies with an option to
report selected financial assets and liabilities at fair value.
The objective of SFAS 159 is to reduce both complexity in
accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities
differently. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities. SFAS 159 does
not eliminate any disclosure requirements included in other
accounting standards. We have not yet determined if we will
elect to apply the options presented in SFAS 159, the
earliest effective date that we can make such an election is
January 1, 2008.
EITF
Issue 07-B. The
Emerging Issues Task Force has added an item to its 2007 agenda
entitled “Accounting for Convertible Instruments That
Require or Permit Partial Cash Settlement upon Conversion”.
This issue involves reconsideration of the conclusions reached
in EITF Issues
90-19
“Convertible Bonds with Issuer Option to Settle for Cash
Upon Conversion”, EITF Issue
00-19
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock”
and EITF
03-07
“Accounting for the Settlement of the Equity-Settled
Portion of a Convertible Debt Instrument That Permits or
Requires the Conversion Spread to Be Settled in Stock”. We
accounted for the issuance of our Convertible Subordinated Notes
in accordance with these EITF conclusions (see Notes 6 and
9). Changes in the EITF’s previous conclusions on these
issues could effect the calculations of interest expense and
diluted earnings per share related to debt issues such as our
Convertible
Table of Contents
Subordinated Notes. At this time it is unclear what effect, if
any, the Emerging Issues Task Force actions will have on our
financial statements.
SAB No. 108. In September 2006, the
SEC issued Staff Accounting Bulletin No. 108
(SAB No. 108) regarding the quantification of
financial statement misstatements. SAB No. 108
requires a “dual approach” for quantifications of
errors using both a method that focuses on the income statement
impact, including the cumulative effect of prior years’
misstatements, and a method that focuses on the period-end
balance sheet. SAB No. 108 will be effective for
Valeant as of January 1, 2007. The adoption of this
standard is not expected to have a material impact on Valeant.
The consolidated financial statements appearing elsewhere in
this document have been prepared in conformity with accounting
principles generally accepted in the United States. The
preparation of these statements requires us to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. On an
ongoing basis, we evaluate our estimates, including those
related to product returns, rebates, collectibility of
receivables, inventories, intangible assets, income taxes and
contingencies and litigation. The actual results could differ
materially from those estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.
We recognize revenues from product sales when title and risk of
ownership transfers to the customer. Revenues are recorded net
of provisions for rebates, discounts and returns, which are
estimated and recorded at the time of sale. Allowances for
future returns of products sold to our direct and indirect
customers, who include wholesalers, retail pharmacies and
hospitals, are calculated as a percent of sales based on
historical return percentages taking into account additional
available information on competitive products and contract
changes.
Our product sales are subject to a variety of deductions,
primarily representing rebates and discounts to government
agencies, wholesalers and managed care organizations. These
deductions represent estimates of the related obligations and,
as such, judgment is required when estimating the impact of
these sales deductions on revenues for a reporting period.
In the United States we record provisions for Medicaid, Medicare
and contract rebates based upon our actual experience ratio of
rebates paid and actual prescriptions written during prior
quarters. We apply the experience ratio to the respective
period’s sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
adjusted if necessary to ensure that the historical trends are
as current as practicable. We adjust the ratio to better match
our current experience or our expected future experience, as
appropriate. In developing this ratio, we consider current
contract terms, such as changes in formulary status and discount
rates. If our ratio is not indicative of future experience, our
results could be materially affected.
Outside of the United States, the majority of our rebates are
contractual or legislatively mandated and our estimates are
based on actual invoiced sales within each period; both of these
elements help to reduce the risk of variations in the estimation
process. Some European countries base their rebates on the
government’s unbudgeted pharmaceutical spending and we use
an estimated allocation factor against our actual invoiced sales
to project the expected level of reimbursement. We obtain third
party information that helps us to monitor the adequacy of these
accruals. If our estimates are not indicative of actual
unbudgeted spending, our results could be materially affected.
Historically, our adjustments to actual have not been material;
on a quarterly basis, they generally have been less than 5% of
product sales. The sensitivity of our estimates can vary by
program, type of customer and geographic location. However,
estimates associated with U.S. Medicaid and contract
rebates are most at-risk for material adjustment because of the
extensive time delay between the recording of the accrual and
its ultimate settlement. This interval can range up to one year.
Because of this time lag, in any given quarter, our adjustments
to actual can incorporate revisions of several prior quarters.
Table of Contents
We record sales incentives as a reduction of revenues at the
time the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
We use third-party data to estimate the level of product
inventories, expiration dating, and product demand at our major
wholesalers. Actual results could be materially different from
our estimates, resulting in future adjustments to revenue. For
the years ended December 31, 2006 and 2005, the provision
for sales returns was less than 3% of product sales. We conduct
a review of the current methodology and assess the adequacy of
the allowance for returns on a quarterly basis, adjusting for
changes in assumptions, historical results and business
practices, as necessary.
We earn ribavirin royalties as a result of sales of products by
third-party licensees, Schering-Plough and Roche. Ribavirin
royalties are earned at the time the products subject to the
royalty are sold by the third party and are reduced by an
estimate for discounts and rebates that will be paid in
subsequent periods for those products sold during the current
period. We rely on a limited amount of financial information
provided by Schering-Plough and Roche to estimate the amounts
due to us under the royalty agreements.
In the U.S. market, our current practice is to offer sales
incentives primarily in connection with launches of new products
or changes of existing products where demand has not yet been
established. We monitor and restrict sales in the
U.S. market in order to limit wholesaler purchases in
excess of their
ordinary-course-of-business
inventory levels. We operate Inventory Management Agreements
(IMAs) with major wholesalers in the United States. However,
specific events such as the case of sales incentives described
above or seasonal demand (e.g. antivirals during an outbreak)
may justify larger purchases by wholesalers. We may offer sales
incentives primarily in international markets, where typically
no right of return exists except for goods damaged in transit,
product recalls or replacement of existing products due to
packaging or labeling changes. Our revenue recognition policy on
these types of purchases and on incentives in international
markets is consistent with the policies described above.
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved favorably for us and
could have a material adverse effect on our reported effective
tax rate and after-tax cash flows. We record liabilities for
potential tax assessments based on our estimate of the potential
exposure. New laws and new interpretations of laws and rulings
by tax authorities may affect the liability for potential tax
assessments. Due to the subjectivity and complex nature of the
underlying issues, actual payments or assessments may differ
from our estimates. To the extent that our estimates differ from
amounts eventually assessed and paid our income and cash flows
can be materially and adversely affected.
The Internal Revenue Service has completed an examination of our
tax returns for the years 1997 through 2001 and has proposed
adjustments to our tax liabilities for those years plus
associated interest and penalties. While we have written a
formal protest in response to the proposed adjustments, we have
recorded an additional tax provision of $27,400,000 should we
not prevail in our position. The provision consists of
$62,300,000 as the estimated additional taxes, interest and
penalties associated with the period 1997 to 2001. This amount
is offset by $34,900,000 that would reduce net operating loss
and other carryforwards resulting in no net expense or cash
payment. While we have substantial net operating loss and other
carryforwards available to offset our U.S. tax liabilities,
the additional tax provision we recorded results from annual
utilization limitations on those carryforwards that would result
if the Internal Revenue Service adjustments are upheld.
We assess whether it is more likely than not that we will
realize the tax benefits associated with our deferred tax assets
and establish a valuation allowance for assets that are not
expected to result in a realized tax benefit. A significant
amount of judgment is used in this process, including
preparation of forecasts of future taxable income and evaluation
of tax planning initiatives. If we revise these forecasts or
determine that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made. We increased
the valuation allowance significantly in 2006, 2005 and 2004 to
recognize the uncertainty of realizing the benefits of the
U.S. net operating losses and research credits.
Table of Contents
We evaluate the carrying value of property, plant and equipment
when conditions indicate a potential impairment. We determine
whether there has been impairment by comparing the anticipated
undiscounted future cash flows expected to be generated by the
property, plant and equipment with its carrying value. If the
undiscounted cash flows are less than the carrying value, the
amount of the asset impairment, if any, is then determined by
comparing the carrying value of the property, plant and
equipment with its fair value. Fair value is generally based on
a discounted cash flows analysis, independent appraisals or
preliminary offers from prospective buyers.
We periodically review intangible assets for impairment using an
undiscounted net cash flows approach. We determine whether there
has been impairment by comparing the anticipated undiscounted
future operating cash flows of the products associated with the
intangible asset with its carrying value. If the undiscounted
operating income is less than the carrying value, the amount of
the asset impairment, if any, will be determined by comparing
the value of each intangible asset with its fair value. Fair
value is generally based on a discounted cash flows analysis.
We use a discounted cash flow model to value intangible assets
acquired and for the assessment of impairment. The discounted
cash flow model requires assumptions about the timing and amount
of future cash inflows and outflows, risk, the cost of capital,
and terminal values. Each of these factors can significantly
affect the value of the intangible asset.
The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require
management’s judgment. Any changes in key assumptions about
our businesses and their prospects, or changes in market
conditions, could result in an impairment charge. Some of the
more significant estimates and assumptions inherent in the
intangible asset impairment estimation process include: the
timing and amount of projected future cash flows; the discount
rate selected to measure the risks inherent in the future cash
flows; and the assessment of the asset’s life cycle and the
competitive trends impacting the asset, including consideration
of any technical, legal or regulatory factors.
The purchase price for the Xcel, Infergen, Amarin and Ribapharm
acquisitions were allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed based on
their estimated fair values at the acquisition date. Such a
valuation requires significant estimates and assumptions,
including but not limited to: determining the timing and
expected costs to complete the in-process projects; projecting
regulatory approvals; estimating future cash flows from product
sales resulting from completed products and in-process projects;
and developing appropriate discount rates and probability rates
by project. We believe the fair values assigned to the assets
acquired and liabilities assumed are based on reasonable
assumptions, however, these assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur.
We value IPR&D acquired in a business combination based on
an approach consistent with the AICPA Practice Aid, Assets
Acquired in Business Combinations to be Used in Research and
Development Activities: A Focus in Software, Electronic Devices
and Pharmaceutical Industries. The amounts expensed as
acquired IPR&D represents an estimate of the fair value of
purchased in-process technology for projects that, as of the
acquisition date, had not yet reached technological feasibility
and had no alternative future use. The data used to determine
fair value requires significant judgment. The estimated fair
values were based on our use of a discounted cash flow model.
For each project, the estimated after-tax cash flows were
probability weighted to take account of the stage of completion
and the risks surrounding the successful development and
commercialization. The assumed tax rates are our estimate of the
effective tax rates that will apply to the expected cash flows.
These cash flows were then discounted to a present value using
discount rates between 15% and 20%. The discount rates represent
our weighted average cost of capital for each of the
acquisitions. In addition, solely for the purposes of estimating
the fair value of IPR&D projects acquired, we estimated that
future clinical development costs would be incurred in the
amount of
Table of Contents
$50,000,000 for retigabine (acquired from Xcel) and $25,000,000
for Infergen. See Note 3 of notes to consolidated financial
statements for a discussion of acquisitions.
The major risks and uncertainties associated with the timely and
successful completion of these projects include the uncertainty
of our ability to confirm the safety and efficacy of product
candidates based on the data from clinical trials and of
obtaining necessary regulatory approvals. In addition, no
assurance can be given that the underlying assumptions we used
to forecast the cash flows or the timely and successful
completion of these projects will materialize as estimated. For
these reasons, among others, actual results may vary
significantly from the estimated results.
We are exposed to contingencies in the ordinary course of
business, such as legal proceedings and business-related claims,
which range from product and environmental liabilities to tax
matters. In accordance with SFAS No. 5, Accounting
for Contingencies, we record accruals for such contingencies
when it is probable that a liability will be incurred and the
amount of loss can be reasonably estimated. The estimates are
refined each accounting period, as additional information is
known. See Note 15 of notes to consolidated financial
statements for a discussion of contingencies.
Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on management’s judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Polish Zloty, the Mexican Peso, the Swiss Franc and the Canadian
Dollar. In 2004, and in 2006 we entered into foreign currency
hedge transactions to reduce our exposure to variability in the
Euro which is the currency for the majority of our royalty
revenues. In May and July 2005, and again in December 2006 we
entered hedge transactions to reduce our net investment exposure
to the Polish Zloty.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally
include country risk, credit risk and legal risk and are not
discussed or quantified in the following analysis. At
December 31, 2006 the fair value of our financial
instruments was (in thousands):
We currently do not hold financial instruments for trading or
speculative purposes. Our financial assets are not subject to
significant interest rate risk due to their short duration. At
December 31, 2006 we had $7,800,000 of foreign denominated
variable rate debt that would subject us to both interest rate
and currency risks. In 2004 we entered into an interest rate
swap agreement with respect to $150,000,000 principal amount of
our 7.0% Senior Notes. A 100 basis-point increase in
interest rates affecting our financial instruments would not
have had a material effect on our 2006 pretax earnings. In
addition, we had $780,000,000 of fixed rate debt as of
December 31, 2006 that requires U.S. Dollar repayment.
To the extent that we require, as a source of debt repayment,
earnings and cash flow from some of our units located in foreign
countries, we are subject to risk of changes in the value of
certain currencies relative to the U.S. Dollar.
Table of Contents
Quarterly
Financial Data
Following is a summary of quarterly financial data for the years
ended December 31, 2006 and 2005 (in thousands, except per
share data):
Table of Contents
Table of Contents
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 31,
2006
The other schedules have not been submitted because they are not
applicable.
Table of Contents
To the Board of Directors and
Stockholders of Valeant Pharmaceuticals International:
We have completed integrated audits of Valeant Pharmaceuticals
International’s consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2006 in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in
the accompanying index, present fairly, in all material
respects, the financial position of Valeant Pharmaceuticals
International and its subsidiaries at December 31, 2006 and
2005, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123R, Share Based Payment, as of
January 1, 2006.
Internal
control over financial reporting
Also, in our opinion, management’s assessment, included in
“Management’s Report on Internal Control Over
Financial Reporting” appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”), is
fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audits.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail,
Table of Contents
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Orange County, California
March 1, 2007
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
December 31,
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
For the Years Ended December 31,
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
For the Years Ended December 31, 2006, 2005, and 2004
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
For the Years Ended December 31,
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In these financial statements and this annual report,
“we”, “us” and “our” refers to
Valeant Pharmaceuticals International (“Valeant”) and
its subsidiaries.
Organization: We are a global, specialty
pharmaceutical company that develops, manufactures and markets a
broad range of pharmaceutical products. Additionally, we
generate royalty revenues from the sale of ribavirin by
Schering-Plough Ltd. (“Schering-Plough”) and F.
Hoffman-LaRoche (“Roche”).
Principles of Consolidation: The accompanying
consolidated financial statements include the accounts of
Valeant, its wholly owned subsidiaries and all of its
majority-owned subsidiaries. Minority interest in results of
operations of consolidated subsidiaries represents the minority
stockholders’ share of the income or loss of these
consolidated subsidiaries. All significant intercompany account
balances and transactions have been eliminated.
Cash and Cash Equivalents: Cash equivalents
include repurchase agreements, certificates of deposit, money
market funds and municipal debt securities which, at the time of
purchase, have maturities of three months or less. For purposes
of the consolidated statements of cash flows, we consider highly
liquid investments with a maturity of three months or less at
the time of purchase to be cash equivalents. The carrying amount
of these assets approximates fair value due to the short-term
maturity of these investments. At December 31, 2006 and
2005, cash equivalents totaled $194,720,000 and $93,142,000,
respectively.
Marketable Securities: We invest in investment
grade securities and classify these securities as
available-for-sale
as they typically have maturities of one year or less and are
highly liquid. As of December 31, 2006, the fair market
value of these securities approximates cost.
Allowance for Doubtful Accounts: We evaluate
the collectiblity of accounts receivable on a regular basis. The
allowance is based upon various factors including the financial
condition and payment history of major customers, an overall
review of collections experience on other accounts and economic
factors or events expected to affect our future collections
experience.
Inventories: Inventories, which include
material, direct labor and factory overhead, are stated at the
lower of cost or market. Cost is determined on a
first-in,
first-out (“FIFO”) basis. We evaluate the carrying
value of inventories on a regular basis, taking into account
such factors as historical and anticipated future sales compared
with quantities on hand, the price we expect to obtain for
products in their respective markets compared with historical
cost and the remaining shelf life of goods on hand.
Property, Plant and Equipment: Property, plant
and equipment are stated at cost. We primarily use the
straight-line method for depreciating property, plant and
equipment over their estimated useful lives. Buildings are
depreciated up to 40 years, machinery and equipment are
depreciated from
3-11 years,
furniture and fixtures from
5-10 years
and leasehold improvements and capital leases are amortized over
their useful lives, limited to the life of the related lease. We
follow the policy of capitalizing expenditures that materially
increase the lives of the related assets and charge maintenance
and repairs to expense. Upon sale or retirement, the costs and
related accumulated depreciation or amortization are eliminated
from the respective accounts and the resulting gain or loss is
included in income. From time to time, if there is an indication
of possible asset impairment, we evaluate the carrying value of
property, plant and equipment. We determine if there has been
asset impairment by comparing the anticipated undiscounted
future cash flows expected to be generated by the property,
plant and equipment with its carrying value. If the undiscounted
cash flows are less than the carrying value, the amount of the
asset impairment, if any, is determined by comparing the
carrying value of the property, plant and equipment with its
fair value. Fair value is generally based on a discounted cash
flows analysis, appraisals or preliminary offers from
prospective buyers. In the years ended December 31, 2006,
2005 and 2004, we recorded asset impairment charges of
$97,344,000, $2,322,000 and $18,000,000 respectively, on certain
of our fixed assets. See Note 2.
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Acquired In-Process Research and
Development: We charge the costs associated with
acquired in-process research and development
(“IPR&D”) to expense. These amounts represent an
estimate of the fair value of purchased in-process technology
for projects that, as of the acquisition date, had not yet
reached technological feasibility and had no alternative future
use. The estimation of fair value requires significant judgment.
Differences in those judgments would have the impact of changing
our allocation of purchase price to goodwill, which is an
intangible asset that is not amortized. We incurred significant
IPR&D expenses related to the acquisitions of Xcel and
Infergen in 2005 and Amarin in 2004.
The major risks and uncertainties associated with the timely and
successful completion of IPR&D projects consist of the
ability to confirm the safety and efficacy of the technology
based on the data from clinical trials and obtaining necessary
regulatory approvals. In addition, no assurance can be given
that the underlying assumptions used to forecast the cash flows
or the timely and successful completion of such projects will
materialize as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.
Goodwill and Intangible Assets: Our intangible
assets comprise product marketing rights, related patents and
trademarks for pharmaceutical products, and rights under the
ribavirin license agreements. The product rights primarily
relate to either 1) mature pharmaceutical products without
patent protection, or 2) patented products. The mature
products display a stable and consistent revenue stream over a
relatively long period of time. The patented products generally
have steady growth rates up until the point of patent expiration
when revenues decline due to the introduction of generic
competition. We amortize the mature products using the
straight-line method over the estimated remaining life of the
product (ranging from 5-19 years for current products)
where the pattern of revenues is generally flat over the
remaining life. We amortize patented products using the
straight-line method over the remaining life of the patent
because the revenues are generally growing until patent
expiration.
We amortize the license rights for ribavirin on an accelerated
basis because of the significant decline in royalties which
started in 2003 upon the expiration of a U.S. patent;
amortization is scheduled to be completed in 2008.
Intangible assets are tested for impairment when possible
indicators of impairment are identified. We recorded asset
impairment charges for intangible assets of $1,075,000,
$7,417,000 and $4,797,000 in 2006, 2005, and 2004 respectively.
The charge in 2006 relates to two products in Spain. The charge
in 2005 primarily relates to products sold in the United
Kingdom, Germany and Spain which experienced revenue declines in
recent years. The charge in 2004 primarily related to products
sold in Italy for which the patent life was reduced by a decree
by the Italian government. We evaluate intangible assets by
comparing the carrying value of each intangible asset to the
related undiscounted future cash flows. If the carrying value
exceeds the undiscounted cash flows, the amount of the asset
impairment is determined by comparing the carrying value to its
fair value, as determined using discounted cash flows analysis.
Revenue Recognition: We recognize revenues
from product sales when title and risk of ownership transfers to
the customer and all required elements as described in SEC Staff
Accounting Bulletin No. 104 have been addressed. We
record revenues net of provisions for rebates, discounts and
returns, which are established at the time of sale. We calculate
allowances for future returns of products sold to our direct and
indirect customers, who include wholesalers, retail pharmacies
and hospitals, as a percent of sales based on our historical
return percentages and taking into account additional available
information on competitive products and contract changes. Where
we do not have data sharing agreements, we use third-party data
to estimate the level of product inventories, expiration dating,
and product demand at our major wholesalers and in retail
pharmacies. We have data sharing agreements with the three
largest wholesalers in the US. Based upon this information,
adjustments are made to the allowance accrual if deemed
necessary. Actual results could be materially different from our
estimates, resulting in future adjustments to revenue. We review
our current methodology and assess the adequacy of the allowance
for returns on a quarterly basis, adjusting for changes in
assumptions, historical results and business practices, as
necessary.
Table of Contents
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In the United States, we record provisions for Medicaid,
Medicare and contract rebates based upon our actual experience
ratio of rebates paid and actual prescriptions during prior
quarters. We apply the experience ratio to the respective
period’s sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
compared to industry data and claims made by states and other
contract organizations to ensure that the historical trends are
representative of current experience and that our accruals are
adequate.
Our reserve for rebates, product returns and allowances is
included in accrued liabilities and was $47,370,000 and
$37,848,000 at December 31, 2006 and 2005, respectively.
We earn ribavirin royalties as a result of our license of
product rights and technologies to Schering-Plough and Roche.
Ribavirin royalties are earned at the time the products subject
to the royalty are sold by Schering-Plough and Roche. We rely on
a limited amount of financial information provided by
Schering-Plough and Roche to estimate the amounts due to us
under the royalty agreements.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||