10-Q 1 valeantq12015.htm FORM 10-Q Valeant Q1 2015


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-14956
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
British Columbia, Canada 
(State or other jurisdiction of
incorporation or organization)
98-0448205 
(I.R.S. Employer Identification No.)
2150 St. Elzéar Blvd. West, Laval, Quebec 
(Address of principal executive offices)
H7L 4A8 
(Zip Code)
(514) 744-6792
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
(Do not check if a smaller 
reporting company)
Smaller reporting company 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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares, no par value — 342,479,119 shares outstanding as of April 27, 2015.





VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
INDEX
Part I.
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


i



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
Introductory Note
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries.
In this Form 10-Q, references to “$” are to United States (“U.S.”) dollars, references to “€” are to Euros, and references to RUR are to Russian rubles.
Forward-Looking Statements
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:
 To the extent any statements made in this Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, “forward-looking statements”).
 These forward-looking statements relate to, among other things: the expected benefits of our acquisitions and other transactions (including the acquisition of Salix Pharmaceuticals, Ltd. (“Salix”)), such as cost savings, operating synergies and growth potential of the Company; our business strategy, business plans and prospects, product pipeline, prospective products or product approvals, future performance or results of current and anticipated products; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as certain litigation and regulatory proceedings; general market conditions; and our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity and income taxes.
 Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “should”, “target”, “potential”, “opportunity”, “tentative”, “positioning”, “designed”, “create”, “predict”, “project”, “forecast”, “seek”, “ongoing”, “increase”, or “upside” and variations or other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-Q that contain forward-looking statements are qualified by these cautionary statements. These statements are based upon the current expectations and beliefs of management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:
the challenges and difficulties associated with managing the rapid growth of our Company and a large complex business;
our ability to retain, motivate and recruit executives and other key employees;
the introduction of products that compete against our products that do not have patent or data exclusivity rights;
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis;
factors relating to the acquisition and integration of the companies, businesses and products acquired by the Company, such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities,

ii



equipment and other assets, and the achievement of the anticipated benefits from such integrations, as well as risks associated with the acquired companies, businesses and products;
factors relating to our ability to achieve all of the estimated synergies from our acquisitions as a result of cost-rationalization and integration initiatives. These factors may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions, some of which have not yet been made;
factors relating to our recent acquisition of Salix, including the impact of substantial additional debt on our financial condition and results of operations; our ability to effectively and efficiently integrate the operations of the Company and Salix; our ability to achieve the estimated synergies from this transaction; the challenges associated with entering into Salix's gastrointestinal (GI) business, which is a new business for our Company; our ability to reduce inventory levels of certain of Salix's products and the timing of such reduction; and, once integrated, the effects of such business combination on our future financial condition, operating results, strategy and plans;
our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
our substantial debt and debt service obligations and their impact on our financial condition and results of operations;
our future cash flow, our ability to service and repay our existing debt, our ability to raise additional funds, if needed, and any restrictions that are or may be imposed as a result of our current and future indebtedness, in light of our current and projected levels of operations, acquisition activity and general economic conditions;
any downgrade by rating agencies in our corporate credit ratings, which may impact, among other things, our ability to raise additional debt capital and implement elements of our growth strategy;
interest rate risks associated with our floating rate debt borrowings;
the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets (including the challenges created by new and different regulatory regimes in such countries);
adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the recent instability in Russia, Ukraine and the Middle East);
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
the introduction of generic competitors of our branded products;
our ability to obtain and maintain sufficient intellectual property rights over our products and defend against challenges to such intellectual property;
the expense, timing and outcome of legal proceedings, arbitrations, investigations and regulatory proceedings and settlements thereof;  
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or withdrawals of products from the market;
the availability of and our ability to obtain and maintain adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the U.S. Food and Drug Administration (the "FDA"), Health Canada and similar agencies in other countries (such as the anticipated approval by the FDA of Salix's Xifaxan® product for the indication of irritable bowel syndrome with diarrhea ("IBS-D")), legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;

iii



the results of continuing safety and efficacy studies by industry and government agencies;
the availability and extent to which our products are reimbursed by government authorities and other third party payors, as well as the impact of obtaining or maintaining such reimbursement on the price of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price of our products in connection therewith;
the impact of price control restrictions on our products, including the risk of mandated price reductions;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products, which could lead to material impairment charges;
the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
negative publicity or reputational harm to our products and business;
the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing;
our ability to obtain components, raw materials or finished products supplied by third parties and other manufacturing and related supply difficulties, interruptions and delays;
the disruption of delivery of our products and the routine flow of manufactured goods;
the seasonality of sales of certain of our products;
declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control;
compliance with, or the failure to comply with, health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and pricing practices, worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate;
potential ramifications, including possible financial penalties, relating to Salix's restatement of its historical financial results and our ability to address historic weaknesses in Salix's internal control over financial reporting;
interruptions, breakdowns or breaches in our information technology systems; and
other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing.
 Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under Item 1A. "Risk Factors" of this Form 10-Q, and in the Company's other filings with the SEC and CSA. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes, except as required by law. We caution that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list of important factors that may affect future results is not exhaustive and should not be considered a complete statement of all potential risks and uncertainties.

iv



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
 
As of
March 31,
 2015
 
As of
December 31,
 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,864.4

 
$
322.6

Trade receivables, net
2,108.8

 
2,075.8

Inventories, net
998.9

 
950.6

Restricted cash and cash equivalents (Note 8)
10,354.9

 
9.1

Prepaid expenses and other current assets
660.9

 
632.8

Assets held for sale
7.8

 
8.9

Deferred tax assets, net
196.5

 
193.3

Total current assets
16,192.2

 
4,193.1

Property, plant and equipment, net
1,334.8

 
1,310.5

Intangible assets, net
11,554.6

 
11,255.9

Goodwill
9,161.4

 
9,346.4

Deferred tax assets, net
151.7

 
54.0

Other long-term assets, net
171.2

 
193.1

Total assets
$
38,565.9

 
$
26,353.0

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
352.5

 
$
398.0

Accrued and other current liabilities
2,424.4

 
2,179.4

Acquisition-related contingent consideration
186.3

 
141.8

Current portion of long-term debt
122.8

 
0.9

Deferred tax liabilities, net
11.1

 
10.7

Total current liabilities
3,097.1

 
2,730.8

Acquisition-related contingent consideration
198.9

 
167.0

Long-term debt
25,897.9

 
15,253.7

Pension and other benefit liabilities
227.7

 
239.8

Liabilities for uncertain tax positions
98.7

 
102.6

Deferred tax liabilities, net
2,261.5

 
2,227.5

Other long-term liabilities
208.9

 
197.1

Total liabilities
31,990.7

 
20,918.5

Commitments and contingencies (Note 15)


 


Equity
 
 
 
Common shares, no par value, unlimited shares authorized, 342,266,409 and
 
 
 
  334,402,964 issued and outstanding at March 31, 2015 and December 31, 2014, respectively
9,810.3

 
8,349.2

Additional paid-in capital
260.9

 
243.9

Accumulated deficit
(2,291.3
)
 
(2,365.0
)
Accumulated other comprehensive loss
(1,327.6
)
 
(915.9
)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity
6,452.3

 
5,312.2

Noncontrolling interest
122.9

 
122.3

Total equity
6,575.2

 
5,434.5

Total liabilities and equity
$
38,565.9

 
$
26,353.0


The accompanying notes are an integral part of these consolidated financial statements.


1



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(All dollar amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
 
 Three Months Ended
March 31,
 
2015
 
2014
Revenues
 
 
 
Product sales
$
2,146.9

 
$
1,851.1

Other revenues
44.0

 
35.1

 
2,190.9

 
1,886.2

Expenses
 
 
 
Cost of goods sold (exclusive of amortization and impairments of
 
 
 
finite-lived intangible assets shown separately below)
560.4

 
504.1

Cost of other revenues
14.3

 
14.3

Selling, general and administrative
573.8

 
482.0

Research and development
55.8

 
61.3

Amortization and impairments of finite-lived intangible assets
365.2

 
355.2

Restructuring, integration and other costs
55.0

 
133.6

In-process research and development impairments and other charges

 
12.0

Acquisition-related costs
9.8

 
1.5

Acquisition-related contingent consideration
7.1

 
8.9

Other expense (income)
6.1

 
(43.3
)
 
1,647.5

 
1,529.6

Operating income
543.4

 
356.6

Interest income
0.9

 
1.8

Interest expense
(297.8
)
 
(246.5
)
Loss on extinguishment of debt
(20.0
)
 
(93.7
)
Foreign exchange and other
(71.1
)
 
(13.4
)
Income before provision for income taxes
155.4

 
4.8

Provision for income taxes
80.9

 
25.1

Net income (loss)
74.5


(20.3
)
Less: Net income attributable to noncontrolling interest
0.8

 
2.3

Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.
$
73.7

 
$
(22.6
)
 
 
 
 
Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
Basic
$
0.22

 
$
(0.07
)
Diluted
$
0.21

 
$
(0.07
)
 
 
 
 
Weighted-average common shares (in millions)
 
 
 
Basic
336.8

 
334.9

Diluted
343.4

 
334.9


The accompanying notes are an integral part of these consolidated financial statements.

2



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
 
Three Months Ended
March 31,
 
2015
 
2014
Net income (loss)
$
74.5

 
$
(20.3
)
Other comprehensive loss
 
 
 
Foreign currency translation adjustment
(411.5
)
 
(7.4
)
Pension and postretirement benefit plan adjustments
(0.4
)
 
(0.6
)
Other comprehensive loss
(411.9
)
 
(8.0
)
Comprehensive loss
(337.4
)
 
(28.3
)
Less: Comprehensive income attributable to noncontrolling interest
0.6

 
1.5

Comprehensive loss attributable to Valeant Pharmaceuticals International, Inc.
$
(338.0
)
 
$
(29.8
)


The accompanying notes are an integral part of these consolidated financial statements.

3



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
 
Three Months Ended
March 31,
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
74.5

 
$
(20.3
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization, including impairments of finite-lived intangible assets
407.0

 
401.1

Amortization and write-off of debt discounts and debt issuance costs
10.5

 
12.2

Acquisition accounting adjustment on inventory sold
24.5

 
5.2

Acquisition-related contingent consideration
7.1

 
8.9

Allowances for losses on accounts receivable and inventories
12.2

 
19.6

Deferred income taxes
62.5

 
10.0

Additions (reductions) to accrued legal settlements
1.5

 
(48.8
)
Payments of accrued legal settlements
(3.0
)
 

Share-based compensation
35.0

 
24.8

Tax benefits from stock options exercised
(17.9
)
 
(1.2
)
Foreign exchange loss
75.9

 
12.6

Loss on extinguishment of debt
20.0

 
93.7

Payment of accreted interest on contingent consideration
(2.2
)
 
(0.7
)
Other
(7.2
)
 
9.7

Changes in operating assets and liabilities:
 
 
 
Trade receivables
(67.0
)
 
(30.1
)
Inventories
(38.5
)
 
(69.2
)
Prepaid expenses and other current assets
(45.1
)
 
4.2

Accounts payable, accrued and other liabilities
(58.7
)
 
52.6

Net cash provided by operating activities
491.1

 
484.3

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisition of businesses, net of cash acquired
(795.0
)
 
(306.3
)
Acquisition of intangible assets and other assets
(48.8
)
 
(21.1
)
Purchases of property, plant and equipment
(65.8
)
 
(58.1
)
Proceeds from sales and maturities of short-term investments
17.7

 

Increase in restricted cash and cash equivalents (Note 8)
(10,349.1
)
 

Other
0.5

 
1.4

Net cash used in investing activities
(11,240.5
)
 
(384.1
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of long-term debt, net of discount
12,004.4

 
360.6

Repayments of long-term debt
(1,110.3
)
 
(433.9
)
Issuance of common stock, net
1,433.7

 

Proceeds from exercise of stock options
14.5

 
3.5

Tax benefits from stock options exercised
17.9

 
1.2

Payment of employee withholding tax upon vesting of share-based awards
(15.9
)
 
(27.7
)
Payments of contingent consideration
(12.3
)
 
(9.7
)
Payments of financing costs
(26.6
)
 
(9.9
)
Other
0.9

 
(6.8
)
Net cash provided by (used in) financing activities
12,306.3

 
(122.7
)
Effect of exchange rate changes on cash and cash equivalents
(15.1
)
 
(1.5
)
Net increase (decrease) in cash and cash equivalents
1,541.8

 
(24.0
)
Cash and cash equivalents, beginning of period
322.6

 
600.3

Cash and cash equivalents, end of period
$
1,864.4

 
$
576.3

 
 
 
 
Non-Cash Investing and Financing Activities
 
 
 
Acquisition of businesses, contingent and deferred consideration obligations at fair value
$
(286.9
)
 
$
(21.7
)
Acquisition of businesses, debt assumed

 
(4.0
)

The accompanying notes are an integral part of these consolidated financial statements.

4



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
1.
DESCRIPTION OF BUSINESS
The Company is a multinational, specialty pharmaceutical and medical device company, continued under the laws of the Province of British Columbia, that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries.
On April 1, 2015, the Company acquired Salix Pharmaceuticals, Ltd. ("Salix"), pursuant to an Agreement and Plan of Merger dated February 20, 2015, as amended on March 16, 2015 (the "Merger Agreement"), with Salix surviving as a wholly-owned subsidiary of Valeant Pharmaceuticals International ("Valeant"), a subsidiary of the Company (the "Salix Acquisition").
For further information regarding the Salix Acquisition, including the related financing, see note 8 titled "LONG-TERM DEBT", note 11 titled "SHAREHOLDERS' EQUITY", and note 17 titled "SUBSEQUENT EVENTS".
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements (the “unaudited consolidated financial statements”) have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these condensed notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). The unaudited consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2014. The unaudited consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations for the interim periods presented.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
Use of Estimates
In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.
Recently Issued Accounting Standards, Not Adopted as of March 31, 2015
In May 2014, the Financial Accounting Standard Board ("FASB") and the International Accounting Standards Board issued converged guidance on recognizing revenue from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity will: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition to these provisions, the new standard provides implementation guidance on several other topics, including the accounting for certain revenue-related costs, as well as enhanced disclosure requirements. The new guidance requires entities to disclose both quantitative

5


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In August 2014, the FASB issued guidance which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new guidance, disclosures are required when conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have any impact on the Company’s financial position and results of operations and, at this time, the Company does not expect any impact on its disclosures.
In February 2015, the FASB issued guidance which amends certain consolidation requirements. The new guidance has the following stipulations, among others: (i) eliminates the presumption that a general partner should consolidate a limited partnership and eliminates the consolidation model specific to limited partnerships, (ii) clarifies when fees paid to a decision maker should be a factor to include in the consolidation of variable interest entities (“VIEs”), (iii) amends the guidance for assessing how relationships of related parties affect the consolidation analysis of VIEs, and (iv) reduces the number of VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds. The guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early application is permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In April 2015, the FASB issued guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. The guidance is effective for annual periods beginning after December 15, 2015, and all annual and interim periods thereafter. Early application is permitted. The adoption of this guidance, which will be applied retrospectively, will not have a material impact on the Company’s financial position and results of operations, as it will impact balance sheet presentation only.
3.
BUSINESS COMBINATIONS
The Company’s business strategy involves selective acquisitions with a focus on core geographies and therapeutic classes.
(a) Business combinations in 2015 included the following:
In the three-month period ended March 31, 2015, the Company completed certain business combinations, which included the February 23, 2015 acquisition of the assets of Dendreon Corporation ("Dendreon") and the February 10, 2015 acquisition of certain assets of Marathon Pharmaceuticals, LLC ("Marathon"), as well as other smaller acquisitions, for an aggregate purchase price of $1.02 billion. The Dendreon acquisition was completed via a "stalking horse bid" in a sales process conducted under the U.S. Bankruptcy Code for a purchase price of $415 million, net of cash received ($495 million less cash received of $80 million). The purchase price includes approximately $50 million in stock consideration. The assets acquired from Dendreon included the worldwide rights to the Provenge® product (an immunotherapy treatment designed to treat men with advanced prostate cancer). The assets acquired from Marathon comprised a portfolio of hospital products, including Nitropress®, Isuprel®, Opium Tincture, Pepcid®, Seconal® Sodium, Amytal® Sodium, and Iprivask® for an aggregate purchase price of $286 million (which is net of a $64 million assumed liability owed to a third party which is reflected in the table below).
The business combinations completed during the first quarter of 2015 included contingent consideration arrangements with an aggregate acquisition date fair value of $90 million, primarily driven by the contingent consideration liability assumed as part of the acquisition of certain assets of Marathon (as described further below).
The smaller acquisitions not specifically identified above are not material individually or in the aggregate. The Dendreon and Marathon acquisitions, as well as the other smaller acquisitions, are included in the aggregated amounts presented below.
Assets Acquired and Liabilities Assumed

6


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the business combinations, in the aggregate, as of the applicable acquisition dates. Due to the timing of these acquisitions, these amounts are provisional and subject to change. The Company will finalize these amounts as it obtains the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in retrospective adjustments to the provisional amounts recognized at the acquisition dates. These changes could be significant. The Company will finalize these amounts no later than one year from the respective acquisition dates.
 
 
Amounts
Recognized as of
Acquisition Dates
Cash
 
$
80.2

Accounts receivable(a)
 
23.9

Inventories
 
104.3

Other current assets
 
17.9

Property, plant and equipment
 
71.3

Identifiable intangible assets, excluding acquired IPR&D(b)
 
851.8

Acquired IPR&D
 
1.5

Other non-current assets
 
1.2

Deferred tax asset, net
 
5.8

Current liabilities(c)
 
(91.8
)
Non-current liabilities(c)
 
(96.0
)
Total identifiable net assets
 
970.1

Goodwill(d)
 
50.8

Total fair value of consideration transferred
 
$
1,020.9

________________________
(a)
The gross contractual amount of trade accounts receivable acquired was $24 million, which the Company expects will be fully collectible.
(b)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Dates
Product brands
 
7
 
$
580.4

Product rights
 
3
 
42.6

Partner relationships
 
8
 
7.8

Technology/know-how
 
10
 
219.0

Other
 
6
 
2.0

Total identifiable intangible assets acquired
 
8
 
$
851.8

(c)
As part of the Marathon acquisition, the Company assumed a contingent consideration liability related to potential payments for Isuprel® and Nitropress®, the amounts of which are dependent on the timing of generic entrants for these products. The fair value of the liability was determined using probability-weighted projected cash flows, with $41 million classified in Current liabilities and $46 million classified in Non-current liabilities in the table above.
(d)
The goodwill relates primarily to the Marathon and other smaller acquisitions. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Substantially all of the goodwill is expected to be deductible for tax purposes. The goodwill represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations with those of the Company.
The provisional amount of goodwill has been allocated primarily to the Company’s Developed Markets segment.
Acquisition-Related Costs

7


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


The Company has incurred to date $8 million, in the aggregate, of transaction costs directly related to business combinations which closed in the first quarter of 2015, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.
Revenue and Net Income
The revenues of these business combinations for the period from the respective acquisition dates to March 31, 2015 were $168 million, in the aggregate, and net income was $43 million, in the aggregate. The net income includes the effects of the acquisition accounting adjustments and acquisition-related costs.
(b) Business combinations in 2014 included the following:
In the year ended December 31, 2014, the Company completed business combinations, which included the acquisition of the following businesses, for an aggregate purchase price of $1.35 billion. The aggregate purchase price included contingent consideration payment obligations with an aggregate acquisition date fair value of $94 million.
On July 7, 2014, the Company acquired all of the outstanding common stock of PreCision Dermatology, Inc. (“PreCision”) for an aggregate purchase price of $453 million. Under the terms of the merger agreement, the Company may also pay contingent consideration of $25 million upon the achievement of a sales-based milestone. The fair value of this contingent consideration was determined to be nominal as of the acquisition date, based on the sales forecast. As of March 31, 2015, the assumptions used for determining the fair value of contingent consideration have not changed significantly from those used at the acquisition date. The Company recognized a post-combination expense of $20 million within Other (income) expense in the third quarter of 2014 related to the acceleration of unvested stock options for PreCision employees. In connection with the acquisition of PreCision, the Company was required by the Federal Trade Commission (“FTC”) to divest the rights to PreCision’s Tretin-X® (tretinoin) cream product and PreCision’s generic tretinoin gel and cream products. PreCision develops and markets a range of medical dermatology products, treating a number of topical disease states such as acne and atopic dermatitis with products such as Locoid® and Clindagel®.
On January 23, 2014, the Company acquired all of the outstanding common stock of Solta Medical, Inc. (“Solta Medical”) for $293 million, which includes $2.92 per share in cash and $44 million for the repayment of Solta Medical’s long-term debt, including accrued interest. Solta Medical designs, develops, manufactures, and markets energy-based medical device systems for aesthetic applications, and its products include the Thermage CPT® system, the Fraxel® repair system, the Clear + Brilliant® system, and the Liposonix® system.
During the year ended December 31, 2014, the Company completed other smaller acquisitions, including the consolidation of variable interest entities, which are not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below.
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the business combinations, in the aggregate, as of the applicable acquisition dates. The following recognized amounts related to the PreCision acquisition, as well as certain smaller acquisitions, are provisional and subject to change:
amounts for intangible assets, property and equipment, inventories, receivables and other working capital adjustments pending finalization of the valuation;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in retrospective adjustments to the provisional amounts recognized at the acquisition dates. These changes could be significant. The Company will finalize these amounts no later than one year from the respective acquisition dates.

8


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


 
 
Amounts
Recognized as of
Acquisition Dates
 
Measurement
Period
Adjustments(a)
 
Amounts
Recognized as of
March 31, 2015
(as adjusted)
Cash and cash equivalents
 
$
33.6

 
$
1.0

 
$
34.6

Accounts receivable(b)
 
87.7

 
(6.5
)
 
81.2

Assets held for sale(c)
 
125.7

 
(0.6
)
 
125.1

Inventories
 
170.4

 
(15.3
)
 
155.1

Other current assets
 
19.1

 
(1.1
)
 
18.0

Property, plant and equipment, net
 
58.5

 
(3.0
)
 
55.5

Identifiable intangible assets, excluding acquired IPR&D(d)
 
697.2

 
6.3

 
703.5

Acquired IPR&D(e)
 
65.8

 
(2.8
)
 
63.0

Other non-current assets
 
4.0

 
(2.1
)
 
1.9

Current liabilities
 
(152.0
)
 
(18.2
)
 
(170.2
)
Long-term debt, including current portion
 
(11.2
)
 

 
(11.2
)
Deferred income taxes, net
 
(116.0
)
 
36.0

 
(80.0
)
Other non-current liabilities
 
(13.4
)
 
(0.1
)
 
(13.5
)
Total identifiable net assets
 
969.4

 
(6.4
)
 
963.0

Noncontrolling interest
 
(15.0
)
 
0.2

 
(14.8
)
Goodwill(f)
 
410.4

 
(9.5
)
 
400.9

Total fair value of consideration transferred
 
$
1,364.8

 
$
(15.7
)
 
$
1,349.1

________________________
(a)
The measurement period adjustments primarily reflect: (i) a decrease in the net deferred tax liability primarily related to the PreCision and Solta Medical acquisitions and (ii) reductions in the estimated fair value of inventory for Solta Medical and other smaller acquisitions. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.
(b)
The fair value of trade accounts receivable acquired was $81 million, with the gross contractual amount being $88 million, of which the Company expects that $7 million will be uncollectible.
(c)
Assets held for sale relate to the Tretin-X® product rights and the product rights for the generic tretinoin gel and cream products acquired in the PreCision acquisition, which were subsequently divested in the third quarter of 2014.
(d)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Dates
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
March 31, 2015
(as adjusted)
Product brands
 
10
 
$
506.0

 
$
8.3

 
$
514.3

Product rights
 
8
 
95.2

 
(3.3
)
 
91.9

Corporate brand
 
15
 
28.9

 
1.7

 
30.6

In-licensed products
 
9
 
1.5

 
(0.4
)
 
1.1

Partner relationships
 
9
 
37.5

 

 
37.5

Other
 
9
 
28.1

 

 
28.1

Total identifiable intangible assets acquired
 
10
 
$
697.2

 
$
6.3

 
$
703.5

(e)
The acquired IPR&D assets primarily relate to programs from smaller acquisitions. In addition, the Solta Medical acquisition includes a program for the development of a next generation Thermage® product.
(f)
The goodwill relates primarily to the PreCision and Solta Medical acquisitions. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Substantially all of the goodwill is not expected to be deductible for tax purposes. The goodwill recorded from the PreCision and Solta Medical acquisitions represents the following:

9


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


cost savings, operating synergies and other benefits expected to result from combining the operations of PreCision and Solta Medical with those of the Company;
the Company’s expectation to develop and market new products and technology; and
intangible assets that do not qualify for separate recognition (for instance, PreCision’s and Solta Medical’s assembled workforces).
The provisional amount of goodwill from the PreCision acquisition has been allocated to the Company’s Developed Markets segment ($178 million). The amount of goodwill from the Solta Medical acquisition has been allocated to both the Company’s Developed Markets segment ($56 million) and Emerging Markets segment ($38 million).
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for the three-month periods ended March 31, 2015 and 2014, as if the 2015 acquisitions had occurred as of January 1, 2014 and the 2014 acquisitions had occurred as of January 1, 2013.
 
Three Months Ended
March 31,
 
2015
 
2014
Revenues
$
2,270.4

 
$
2,056.4

Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.
93.8

 
(73.9
)
 
 
 
 
Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
Basic
$
0.28

 
$
(0.22
)
Diluted
$
0.27

 
$
(0.22
)
The increase in pro forma revenues in the three-month period ended March 31, 2015 as compared to the three-month period ended March 31, 2014 was primarily due to growth from the existing business, including the impact of recent product launches. These increases were partially offset by a negative foreign currency exchange impact and lower sales resulting from the July 2014 divestiture of facial aesthetic fillers and toxins.
The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and the acquired businesses described above. Except to the extent realized in the three-month period ended March 31, 2015, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the three-month period ended March 31, 2015, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with those of the acquired businesses.
The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the 2015 acquisitions and the 2014 acquisitions been completed on January 1, 2014 and January 1, 2013, respectively. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily the following adjustments:
elimination of the historical intangible asset amortization expense of these acquisitions;
additional amortization expense related to the fair value of identifiable intangible assets acquired;
adjustments to depreciation expense related to fair value adjustments to property, plant and equipment acquired;
the exclusion from pro forma earnings in the three-month periods ended March 31, 2015 and 2014 of the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition date of $24 million and $5 million for the three-month periods ended March 31, 2015 and 2014 and the acquisition-related costs incurred for these acquisitions, and the inclusion of those amounts in pro forma earnings for the corresponding comparative periods.
In addition, all of the above adjustments were adjusted for the applicable tax impact.
4.
RESTRUCTURING, INTEGRATION AND OTHER COSTS

10


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


In connection with the Bausch & Lomb Holdings Incorporated (“B&L”) acquisition (the "B&L Acquisition"), as well as other acquisitions, the Company has implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:
workforce reductions across the Company and other organizational changes;
closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;
leveraging research and development spend; and
procurement savings.
B&L Acquisition-Related Cost-Rationalization and Integration Initiatives
The Company estimates that it will incur total costs of approximately $600 million (excluding charges of $53 million described under the table below) in connection with these cost-rationalization and integration initiatives relating to the B&L Acquisition, which were substantially completed by the end of 2014. However, costs have been incurred in 2015 and additional costs may still be incurred later in the year. Since the acquisition date, total costs of $578 million (including $56 million related to cost-rationalization measures at a contact lens manufacturing plant in Waterford, Ireland, as described below) have been incurred through March 31, 2015, including (i) $311 million of restructuring expenses, (ii) $254 million of integration expenses, and (iii) $13 million of acquisition-related costs. The estimate of total costs to be incurred primarily includes: employee termination costs payable to approximately 3,000 employees of the Company and B&L who have been or will be terminated as a result of the B&L Acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs.
B&L Restructuring Costs
The following table summarizes the major components of the restructuring costs incurred in connection with the B&L Acquisition since the acquisition date through March 31, 2015:
 
 
Employee Termination Costs
 
IPR&D
Termination
Costs
 
Contract
Termination,
Facility Closure
and Other Costs
 
 
 
Severance and
Related Benefits
 
Share-Based
Compensation(1)
 
 
 
Total
Balance, January 1, 2013
 
$

 
$

 
$

 
$

 
$

Costs incurred and/or charged to expense
 
155.7

 
52.8

 

 
25.6

 
234.1

Cash payments
 
(77.8
)
 
(52.8
)
 

 
(7.8
)
 
(138.4
)
Non-cash adjustments
 
11.4

 

 

 
(6.8
)
 
4.6

Balance, December 31, 2013
 
$
89.3

 
$

 
$

 
$
11.0

 
$
100.3

Costs incurred and charged to expense
 
46.0

 

 

 
23.7

 
69.7

Cash payments
 
(110.7
)
 

 

 
(24.9
)
 
(135.6
)
Non-cash adjustments
 
(5.7
)
 

 

 
(5.4
)
 
(11.1
)
Balance, December 31, 2014(2)
 
$
18.9

 
$

 
$

 
$
4.4

 
$
23.3

Costs incurred and charged to expense
 
3.0

 

 

 
0.9

 
3.9

Cash payments
 
(12.6
)
 

 

 
(1.3
)
 
(13.9
)
Non-cash adjustments
 
(1.5
)
 

 

 
(1.2
)
 
(2.7
)
Balance, March 31, 2015
 
$
7.8

 
$

 
$

 
$
2.8

 
$
10.6

___________________________________
(1)
Relates to B&L’s previously cancelled performance-based options and the acceleration of unvested stock options for B&L employees as a result of the B&L Acquisition were recognized in Other (income) expense.

(2)
In the three-month period ended March 31, 2014, the Company recognized $29 million of restructuring charges and made payments of $54 million related to the B&L Acquisition.

11


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


B&L Integration Costs
As mentioned above, the Company has incurred $254 million of integration costs related to the B&L Acquisition since the acquisition date. In the three-month periods ended March 31, 2015 and 2014, the Company incurred $5 million and $69 million, respectively, of integration costs related to the B&L Acquisition, which related primarily to integration consulting, duplicate labor, transition service, and other costs. The Company made payments of $8 million and $57 million related to B&L integration costs during the three-month periods ended March 31, 2015 and 2014, respectively.
In addition to the restructuring and integration costs described above, the Company has recognized $56 million of restructuring costs related to a contact lens manufacturing plant in Waterford, Ireland (the plant was acquired as part of the B&L Acquisition) since the acquisition date, of which a nominal amount was recognized in the three-month period ended March 31, 2015. These costs related to employee termination costs with respect to cost-rationalization measures. The Company made payments of $16 million in the three-month period ended March 31, 2015 with respect to this initiative.
Other Restructuring and Integration-Related Costs (Excluding B&L)
In the three-month period ended March 31, 2015, in addition to the restructuring and integration costs associated with the B&L Acquisition described above, the Company incurred an additional $46 million of other restructuring, integration-related and other costs. These costs included (i) $23 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $21 million of severance costs, (iii) $1 million of facility closure costs, and (iv) $1 million of other costs. These costs primarily related to integration and restructuring costs for the Dendreon and other smaller acquisitions. The Company made payments of $27 million during the three-month period ended March 31, 2015 (in addition to the payments related to the B&L Acquisition described above).
In the three-month period ended March 31, 2014, in addition to the restructuring and integration costs associated with the B&L Acquisition described above, the Company incurred an additional $35 million of other restructuring, integration-related and other costs. These costs included (i) $12 million of severance costs, (ii) $11 million of integration consulting, duplicate labor, transition service, and other costs, (iii) $8 million of facility closure costs, and (iv) $4 million of other costs. These costs primarily related to (i) integration and restructuring costs for other smaller acquisitions and (ii) intellectual property migration and the global consolidation of the Company’s manufacturing facilities. The Company made payments of $26 million during the three-month period ended March 31, 2014 (in addition to the payments related to the B&L Acquisition described above).
5.
FAIR VALUE MEASUREMENTS
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value as of March 31, 2015 and December 31, 2014:

12


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


 
 
As of March 31, 2015
 
As of December 31, 2014
 
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents(1)
 
$
120.3

 
$
115.0

 
$
5.3

 
$

 
$
4.6

 
$
2.8

 
$
1.8

 
$

Restricted cash and cash equivalents(2)
 
$
10,354.9

 
$
10,354.9

 
$

 
$

 
$
9.1

 
$
9.1

 
$

 
$

Liabilities:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 

Foreign exchange contracts(3)
 
$
(26.6
)
 
$

 
$
(26.6
)
 
$

 
$

 
$

 
$

 
$

Acquisition-related contingent consideration
 
$
(385.2
)
 
$

 
$

 
$
(385.2
)
 
$
(308.8
)
 
$

 
$

 
$
(308.8
)
___________________________________
(1)
Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition, primarily including money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

(2)
The restricted cash and cash equivalents is primarily invested in highly liquid money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature. Refer to Note 8 titled "LONG-TERM DEBT" for additional information regarding the restricted cash and cash equivalents.

(3)
In March 2015, the Company entered into foreign currency forward-exchange contracts to sell €1.53 billion and buy U.S. Dollars in order to reduce its exposure to the variability in expected cash inflows attributable to the changes in foreign exchange rates related to the €1.50 billion aggregate principal amount and related interest of 4.50% senior unsecured notes due 2023 (the "Euro Notes") issued on March 27, 2015, the proceeds of which were used to finance the Salix Acquisition (see note 8 titled "LONG-TERM DEBT" for additional information). These derivative contracts are not designated as hedges for accounting purposes, and such contracts matured on April 1, 2015 (which coincides with the consummation of the Salix Acquisition). As of March 31, 2015, the Company recorded $27 million within Accrued and other current liabilities in the consolidated balance sheets representing the fair value of these derivatives (the fair value approximates the settlement amount), and a foreign exchange loss of $27 million was recognized in Foreign exchange and other in the consolidated income (loss) for the three-month period ended March 31, 2015.
In addition to the above, the Company has time deposits valued at cost, which approximates fair value due to their short-term maturities. The carrying value of $25 million and $43 million as of March 31, 2015 and December 31, 2014, respectively, related to these investments is classified within Prepaid expenses and other current assets in the consolidated balance sheets. These investments are Level 2.
There were no transfers between Level 1 and Level 2 during the three-month period ended March 31, 2015.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined using unobservable (Level 3) inputs. These inputs include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the three-month period ended March 31, 2015:
 
Balance,
January 1,
2015
 
Issuances(a)
 
Payments(b)
 
Net
Unrealized
Loss(c)
 
Foreign
Exchange(d)
 
Release from Restricted Cash
 
Balance,
March 31,
2015(e)
Acquisition-related contingent consideration
$
(308.8
)
 
$
(90.2
)
 
$
14.5

 
$
(7.1
)
 
$
3.9

 
$
2.5

 
$
(385.2
)
____________________________________
(a)
Primarily relates to a contingent consideration liability assumed in the Marathon acquisition, as described in note 3 titled "BUSINESS COMBINATIONS".

13


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


(b)
Primarily relates to payments of acquisition-related contingent consideration for the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL in June 2011 (the "Elidel®/Xerese®/Zovirax® agreement").
(c)
For the three months ended March 31, 2015, a net loss of $7 million was recognized as Acquisition-related contingent consideration in the consolidated statements of income (loss), primarily reflecting accretion for the time value of money for the Elidel®/Xerese®/Zovirax® agreement.
(d)
Included in other comprehensive income (loss).
(e)
For the three months ended March 31, 2015, there were no transfers into or out of Level 3.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
There were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis subsequent to initial recognition in the three-month period ended March 31, 2015.
6.
INVENTORIES
The components of inventories as of March 31, 2015 and December 31, 2014 were as follows:
 
 
As of
March 31,
2015
 
As of
December 31,
2014
Raw materials(1)
 
$
239.1

 
$
191.1

Work in process(1)
 
101.1

 
94.2

Finished goods(1)
 
658.7

 
665.3

 
 
998.9

 
950.6

___________________________________
(1)
The components of inventories shown in the table above are presented net of allowance for obsolescence.
7.
INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The major components of intangible assets as of March 31, 2015 and December 31, 2014 were as follows:
 
 
As of March 31, 2015
 
As of December 31, 2014
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization,
Including
Impairments
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization,
Including
 Impairments
 
Net
Carrying
Amount
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Product brands
 
$
10,691.4

 
$
(3,763.8
)
 
$
6,927.6

 
$
10,320.2

 
$
(3,579.8
)
 
$
6,740.4

Corporate brands
 
352.7

 
(67.4
)
 
285.3

 
364.2

 
(65.2
)
 
299.0

Product rights
 
3,248.2

 
(1,360.8
)
 
1,887.4

 
3,225.9

 
(1,263.8
)
 
1,962.1

Partner relationships
 
203.0

 
(102.5
)
 
100.5

 
223.1

 
(107.5
)
 
115.6

Technology and other
 
496.3

 
(131.6
)
 
364.7

 
275.5

 
(124.3
)
 
151.2

Total finite-lived intangible assets
 
14,991.6

 
(5,426.1
)
 
9,565.5

 
14,408.9

 
(5,140.6
)
 
9,268.3

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Acquired IPR&D
 
291.6

 

 
291.6

 
290.1

 

 
290.1

Corporate brand(1)
 
1,697.5

 

 
1,697.5

 
1,697.5

 

 
1,697.5

 
 
$
16,980.7

 
$
(5,426.1
)
 
$
11,554.6

 
$
16,396.5

 
$
(5,140.6
)
 
$
11,255.9

____________________________________
(1)
Represents the B&L corporate trademark, which has an indefinite useful life and is therefore not amortized.
Estimated aggregate amortization expense, as of March 31, 2015, for each of the five succeeding years ending December 31 is as follows:

14


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


 
 
2015
 
2016
 
2017
 
2018
 
2019
Amortization expense(1)
 
$
1,466.4

 
$
1,379.5

 
$
1,317.2

 
$
1,184.1

 
$
1,043.6

____________________________________
(1)
Estimated amortization expense shown in the table above does not include potential future impairments of finite-lived intangible assets, if any, nor does it include any amortization with respect to the Salix Acquisition which was completed on April 1, 2015.
Goodwill
The changes in the carrying amount of goodwill in the three-month period ended March 31, 2015 were as follows:
 
 
Developed
Markets
 
Emerging
Markets
 
Total
Balance, January 1, 2015
 
$
7,115.0

 
$
2,231.4

 
$
9,346.4

Additions(a)
 
41.4

 
9.4

 
50.8

Adjustments(b)
 
4.0

 
0.6

 
4.6

Foreign exchange and other
 
(161.2
)
 
(79.2
)
 
(240.4
)
Balance, March 31, 2015
 
$
6,999.2

 
$
2,162.2

 
$
9,161.4

____________________________________
(a)
Primarily relates to the Marathon acquisition, as well as other smaller acquisitions (as described in note 3).
(b)
Primarily reflects the impact of measurement period adjustments related to the PreCision acquisition.
As described in note 3 titled "BUSINESS COMBINATIONS", the allocations of the goodwill balance associated with the certain acquisitions are provisional and subject to the completion of the valuation of the assets acquired and liabilities assumed.
8.
LONG-TERM DEBT
A summary of the Company’s consolidated long-term debt as of March 31, 2015 and December 31, 2014, respectively, is outlined in the table below:

15


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


 
 
Maturity
Date
 
As of
March 31,
2015
 
As of
December 31,
2014
Revolving Credit Facility(1)
 
April 2018
 
$
225.0

 
$
165.0

Series A-1 Tranche A Term Loan Facility(1)
 
April 2016
 
139.1

 
139.6

Series A-2 Tranche A Term Loan Facility(1)
 
April 2016
 
135.3

 
135.7

Series A-3 Tranche A Term Loan Facility(1)
 
October 2018
 
1,877.3

 
1,637.9

Series D-2 Tranche B Term Loan Facility(1)
 
February 2019
 
1,084.1

 
1,089.7

Series C-2 Tranche B Term Loan Facility(1)
 
December 2019
 
834.0

 
838.3

Series E-1 Tranche B Term Loan Facility(1)
 
August 2020
 
2,529.5

 
2,544.9

Senior Notes:
 
 
 
 
 
 
6.875%
 
December 2018
 

 
497.7

7.00%
 
October 2020
 
687.6

 
687.5

6.75%
 
August 2021
 
650.0

 
650.0

7.25%
 
July 2022
 
543.4

 
543.2

6.375%
 
October 2020
 
2,226.6

 
2,225.6

6.75%
 
August 2018
 
1,586.8

 
1,585.8

7.50%
 
July 2021
 
1,609.1

 
1,608.4

5.625%
 
December 2021
 
892.9

 
892.6

5.50%
 
March 2023
 
991.7

 

5.375%
 
March 2020
 
1,977.6

 

5.875%
 
May 2023
 
3,213.5

 

4.50%(2)
 
May 2023
 
1,591.5

 

6.125%
 
April 2025
 
3,213.5

 

Other(3)
 
Various
 
12.2

 
12.7

 
 
 
 
26,020.7

 
15,254.6

Less current portion
 
 
 
(122.8
)
 
(0.9
)
Total long-term debt
 
 
 
$
25,897.9

 
$
15,253.7

____________________________________
(1)
Together, the “Senior Secured Credit Facilities” under the Company’s Third Amended and Restated Credit and Guaranty Agreement, as amended (the “Credit Agreement”).
(2)
Represents the U.S. dollar equivalent of Euro-denominated debt (discussed below).
(3)
Relates primarily to the debentures from B&L.
The Company’s Senior Secured Credit Facilities and indentures related to its senior notes contain customary covenants, including, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates.
The Company’s Senior Secured Credit Facilities also contain specified financial covenants (consisting of a secured leverage ratio and an interest coverage ratio), various customary affirmative covenants and specified events of default. The Company’s indentures also contain certain customary affirmative covenants and specified events of default.
As of March 31, 2015, the Company was in compliance with all covenants related to the Company’s outstanding debt.
The total fair value of the Company’s long-term debt, with carrying values of $26.02 billion and $15.25 billion at March 31, 2015 and December 31, 2014, was $26.93 billion and $15.78 billion, respectively. The fair value of the Company’s long-term debt is estimated using the quoted market prices for the same or similar debt issuances (Level 2).

16


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


Senior Secured Credit Facilities
On January 22, 2015, the Company and certain of its subsidiaries, as guarantors, entered into joinder agreements to allow for an increase in commitments under the Revolving Credit Facility to $1.50 billion and the issuance of $250 million in incremental term loans under the Series A-3 Tranche A Term Loan Facility. The Revolving Credit Facility and the Series A-3 Tranche A Term Loan Facility terms remained unchanged.
On March 5, 2015, the Company entered into an amendment to the Credit Agreement to implement certain revisions in connection with the Salix Acquisition. The amendment, among other things, permitted the Salix Acquisition and the refinancing, repayment, termination and discharge of Salix's outstanding indebtedness, as well as the issuance of senior unsecured notes to be used to fund the Salix Acquisition (as described below). The amendment also modified the interest coverage ratio financial maintenance covenant applicable to the Company through March 31, 2016.
Concurrently with the Salix Acquisition, the Company entered into joinders to the Credit Agreement to allow for the issuance of incremental term loans in an aggregate principal amount of $5.15 billion. See note 17 titled “SUBSEQUENT EVENTS” for additional information.
For the three-month period ended March 31, 2015, the effective rate of interest on the Company’s borrowings was as follows: (i) 2.45% per annum under the Revolving Credit Facility, (ii) 2.39% per annum under the Series A-1 Tranche A Term Loan Facility, (iii) 2.38% per annum under both the Series A-2 Tranche A Term Loan Facility and the Series A-3 Tranche A Term Loan Facility, and (iv) 3.50% per annum under the Series D-2 Tranche B Term Loan Facility, the Series C-2 Tranche B Term Loan Facility, and the Series E-1 Tranche B Term Loan Facility.
5.50% Senior Notes due 2023
On January 30, 2015, the Company issued $1.00 billion aggregate principal amount of the 5.50% senior unsecured notes due 2023 ("2023 Notes") in a private placement. The 2023 Notes mature on March 1, 2023 and bear interest at the rate of 5.50% per annum, payable semi-annually in arrears, commencing on September 1, 2015. In connection with the issuance of the 2023 Notes, the Company incurred approximately $8 million in underwriting fees, which were recognized as debt issue discount and resulted in net proceeds of $992 million. The 2023 Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor of the Company’s existing Senior Secured Credit Facilities.
The net proceeds of the 2023 Notes offering were used to (i) redeem all of the outstanding 6.875% senior notes on February 17, 2015, as described below, (ii) repay amounts drawn under the Revolving Credit Facility, and (iii) for general corporate purposes.
The indenture governing the terms of the 2023 Notes provides that at any time prior to March 1, 2018, the Company may redeem up to 40% of the aggregate principal amount of the 2023 Notes using the proceeds of certain equity offerings at a redemption price of 105.50% of the principal amount of the 2023 Notes, plus accrued and unpaid interest to the date of redemption. On or after March 1, 2018, the Company may redeem all or a portion of the 2023 Notes at the redemption prices applicable to the 2023 Notes, as set forth in the 2023 Notes indenture, plus accrued and unpaid interest to the date of redemption.
If the Company experiences a change in control, the Company may be required to repurchase the 2023 Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the 2023 Notes repurchased, plus accrued and unpaid interest to, but excluding the applicable purchase date of the 2023 Notes.
6.875% Senior Notes
On February 17, 2015, Valeant redeemed $500 million of the outstanding principal amount of its 6.875% senior notes due December 2018 (the "December 2018 Notes") for $524 million, including a call premium of $17 million, plus accrued and unpaid interest, and satisfied and discharged the December 2018 Notes indenture. In connection with this transaction, the Company recognized a loss on extinguishment of debt of $20 million in the three-month period ended March 31, 2015.
Senior Unsecured Notes
On March 27, 2015, VRX Escrow Corp. (the "Issuer"), a newly formed wholly owned Canadian subsidiary of the Company, issued $2 billion aggregate principal amount of 5.375% senior unsecured notes due 2020 (the "2020 Notes"), $3.25 billion aggregate principal amount of 5.875% senior unsecured notes due 2023 (the "May 2023 Notes"), €1.50 billion aggregate principal amount of the Euro Notes, and $3.25 billion aggregate principal amount of 6.125% senior unsecured notes due 2025 (the "2025 Notes" and, together with the 2020 Notes, the May 2023 Notes and the Euro Notes, the "Notes") in a private

17


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


placement. In connection with the issuance of the Notes, the Company incurred approximately $114 million in underwriting fees, in the aggregate, which were recognized as debt issue discount.
In addition, the Issuer entered into an escrow and security agreement (the “Escrow Agreement”) dated as of March 27, 2015, with an escrow agent. Pursuant to the Escrow Agreement, the proceeds from the issuance of the Notes, together with cash sufficient to fund certain accrued and unpaid interest on the Notes, were deposited into escrow accounts and held as collateral security for the Issuer’s obligations until the consummation of the Salix Acquisition which occurred on April 1, 2015. As of March 31, 2015, the Company included $10.34 billion within Restricted cash and cash equivalents on the consolidated balance sheet.
At the time of the closing of the Salix Acquisition in April 2015, (1) the Issuer was voluntarily liquidated and all of its obligations were assumed by, and all of its assets were distributed to, the Company, (2) the Company assumed all of the Issuer's obligations under the Notes and the related indenture and (3) the funds previously held in escrow were released to the Company and were used to finance the Salix Acquisition.
The net proceeds from the issuance of the Notes, together with borrowings under the Company's incremental term loan facilities (described in note 17 titled “SUBSEQUENT EVENTS”), equity financing (described in note 11 titled “SHAREHOLDERS’ EQUITY”) and cash on hand, were used to fund (i) the transactions contemplated by the Merger Agreement, (ii) the refinancing, repayment, termination and discharge of Salix’s outstanding indebtedness (a portion of Salix’s indebtedness remains outstanding and will be repaid at a future date with proceeds from the incremental term loan facilities), and (iii) certain transaction expenses.
The 2020 Notes will mature on March 15, 2020 and bear interest at the rate of 5.375% per annum, payable semi-annually in arrears, commencing on September 15, 2015. The May 2023 Notes and the Euro Notes will mature on May 15, 2023 and bear interest at the rate of 5.875% and 4.50% per annum, respectively, payable semi-annually in arrears, commencing on November 15, 2015. The 2025 Notes will mature on April 15, 2025 and bear interest at the rate of 6.125% per annum, payable semi-annually in arrears, commencing on October 15, 2015.
The Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor of the Company’s existing Senior Secured Credit Facilities.
The indenture governing the terms of the Notes provides that the Company may redeem up to 40% of the aggregate principal amount of each series of the Notes using the proceeds of certain equity offerings, subject to specified conditions, at any time prior to (i) March 15, 2017 with respect to the 2020 Notes and at a redemption price of 105.375% of the principal amount of the 2020 Notes, plus accrued and unpaid interest to the date of the redemption, (ii) May 15, 2018 with respect to the May 2023 Notes and at a redemption price of 105.875% of the principal amount of the May 2023 Notes, plus accrued and unpaid interest to the date of the redemption, (iii) May 15, 2018 with respect to the Euro Notes and at a redemption price of 104.50% of the principal amount of the Euro Notes, plus accrued and unpaid interest to the date of the redemption, and (iv) April 15, 2018 with respect to the 2025 Notes and at a redemption price of 106.125% of the principal amount of the 2025 Notes, plus accrued and unpaid interest to the date of the redemption. On or after March 15, 2017, May 15, 2018, May 15, 2018, and April 15, 2020, the Company may redeem all or a portion of the 2020 Notes, the May 2023 Notes, the Euro Notes, and the 2025 Notes, respectively, at the redemption prices applicable to each series of the Notes, as set forth in the indenture.
If the Company experiences a change in control, the Company may be required to repurchase the Notes, as applicable, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the applicable series of the Notes repurchased, plus accrued and unpaid interest to, but excluding the applicable purchase date of such series of the Notes.
Commitment Letter
In connection with the Salix Acquisition, the Company entered into a commitment letter dated as of February 20, 2015 (as amended and restated as of March 8, 2015, the “Commitment Letter”), with a syndicate of banks, led by Deutsche Bank and HSBC. Pursuant to the Commitment Letter, commitment parties committed to provide (i) incremental term loans pursuant to the Credit Agreement of up to $5.55 billion and (ii) senior unsecured increasing rate bridge loans under a new senior unsecured bridge facility of up to $9.60 billion. Subsequently, the Company obtained $15.25 billion in debt financing comprised of a combination of the incremental term loan facilities under the Company's existing Credit Agreement in an aggregate principal amount of $5.15 billion (of which $4.15 billion of tranche B term loans were fully drawn in April 2015, and $1.00 billion of tranche A term loans will be borrowed at a future date) and the issuance of the Notes in the U.S. dollar equivalent aggregate principal amount of approximately $10.1 billion, as described above. In the first quarter of 2015, the Company expensed $72

18


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


million of financing costs associated with the Commitment Letter to Interest expense in the consolidated statement of income (loss).
In addition, on March 27, 2015, the Company issued new equity of approximately $1.45 billion to fund the Salix Acquisition (see note 11 titled “SHAREHOLDERS’ EQUITY” for additional information).
9.
SHARE-BASED COMPENSATION
The following table summarizes the components and classification of share-based compensation expense related to stock options and restricted share units (“RSUs”) for the three-month periods ended March 31, 2015 and 2014:
 
Three Months Ended
March 31,
 
2015
 
2014
Stock options
$
3.9

 
$
5.1

RSUs
31.1

 
19.7

Share-based compensation expense
$
35.0

 
$
24.8

 
 
 
 
Research and development expenses
$
1.5

 
$
1.4

Selling, general and administrative expenses
33.5

 
23.4

Share-based compensation expense
$
35.0

 
$
24.8

In the three-month periods ended March 31, 2015 and 2014, the Company granted approximately 72,000 stock options with a weighted-average exercise price of $192.62 per option and approximately 72,000 stock options with a weighted-average exercise price of $144.86 per option, respectively. The weighted-average fair values of all stock options granted to employees in the three-month periods ended March 31, 2015 and 2014 were $63.11 and $53.29, respectively.
In the three-month periods ended March 31, 2015 and 2014, the Company granted approximately 5,000 time-based RSUs with a weighted-average grant date fair value of $196.71 per RSU and approximately 60,000 time-based RSUs with a weighted-average grant date fair value of $137.66 per RSU, respectively.
In the three-month periods ended March 31, 2015 and 2014, the Company granted approximately 600,000 performance-based RSUs with a weighted-average grant date fair value of $307.21 per RSU and approximately 99,000 performance-based RSUs with a weighted-average grant date fair value of $248.97 per RSU, respectively.
As of March 31, 2015, the total remaining unrecognized compensation expense related to non-vested stock options, time-based RSUs and performance-based RSUs amounted to $335 million, in the aggregate, which will be amortized over a weighted-average period of 3.92 years.
10.
PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers certain U.S. employees and employees in certain other countries.
Net Periodic (Benefit) Cost
The following table provides the components of net periodic (benefit) cost for the Company’s defined benefit pension plans and postretirement benefit plan for the three-month periods ended March 31, 2015 and 2014:

19


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


 
 
Pension Benefit Plans
 
Postretirement
Benefit
Plan
 
U.S. Plan
 
Non-U.S. Plans
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
0.4

 
$
0.1

 
$
0.8

 
$
1.0

 
$
0.5

 
$
0.4

Interest cost
 
2.4

 
2.7

 
1.6

 
2.2

 
0.5

 
0.6

Expected return on plan assets
 
(3.6
)
 
(3.7
)
 
(2.0
)
 
(2.0
)
 
(0.1
)
 
(0.1
)
Amortization of prior service credit
 

 

 
(0.1
)
 

 
(0.6
)
 
(0.6
)
Amortization of net loss
 

 

 
0.4

 

 

 

Net periodic (benefit) cost
 
$
(0.8
)
 
$
(0.9
)
 
$
0.7

 
$
1.2

 
$
0.3

 
$
0.3

During the three-month period ended March 31, 2015, the Company contributed $2 million and $1 million to the U.S. and Non-U.S. pension benefit plans, respectively. In 2015, the Company expects to contribute $10 million and $7 million to the U.S. and Non-U.S. pension benefit plans, respectively, inclusive of amounts contributed to the plans during the three-month period ended March 31, 2015.
11.
SHAREHOLDERS’ EQUITY
 
Valeant Pharmaceuticals International, Inc. Shareholders
 
 
 
 
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Valeant
Pharmaceuticals
International, Inc.
Shareholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance, January 1, 2014
333.0

 
$
8,301.2

 
$
228.8

 
$
(3,278.5
)
 
$
(132.8
)
 
$
5,118.7

 
$
114.6

 
$
5,233.3

Common shares issued under share-based compensation plans
0.5

 
15.0

 
(11.5
)
 

 

 
3.5

 

 
3.5

Share-based compensation

 

 
24.8

 

 

 
24.8

 

 
24.8

Employee withholding taxes related to share-based awards

 

 
(27.7
)
 

 

 
(27.7
)
 

 
(27.7
)
Tax benefits from stock options exercised

 

 
1.2

 

 

 
1.2

 

 
1.2

Acquisition of noncontrolling interest

 

 
(1.1
)
 

 

 
(1.1
)
 
(2.2
)
 
(3.3
)
 
333.5

 
8,316.2

 
214.5

 
(3,278.5
)
 
(132.8
)
 
5,119.4

 
112.4

 
5,231.8

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss (income)

 

 

 
(22.6
)
 

 
(22.6
)
 
2.3

 
(20.3
)
Other comprehensive loss

 

 

 

 
(7.2
)
 
(7.2
)
 
(0.8
)
 
(8.0
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
(29.8
)
 
1.5

 
(28.3
)
Balance, March 31, 2014
333.5

 
$
8,316.2

 
$
214.5

 
$
(3,301.1
)
 
$
(140.0
)
 
$
5,089.6

 
$
113.9

 
$
5,203.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
334.4

 
$
8,349.2

 
$
243.9

 
$
(2,365.0
)
 
$
(915.9
)
 
$
5,312.2

 
$
122.3

 
$
5,434.5

Issuance of common stock (see below)
7.3

 
1,431.9

 

 

 

 
1,431.9

 

 
1,431.9

Common shares issued under share-based compensation plans
0.6

 
29.2

 
(14.7
)
 

 

 
14.5

 

 
14.5

Share-based compensation

 

 
35.0

 

 

 
35.0

 

 
35.0

Employee withholding taxes related to share-based awards

 

 
(21.2
)
 

 

 
(21.2
)
 

 
(21.2
)
Tax benefits from stock options exercised

 

 
17.9

 

 

 
17.9

 

 
17.9

 
342.3

 
9,810.3

 
260.9

 
(2,365.0
)
 
(915.9
)
 
6,790.3

 
122.3

 
6,912.6

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
73.7

 

 
73.7

 
0.8

 
74.5

Other comprehensive loss

 

 

 

 
(411.7
)
 
(411.7
)
 
(0.2
)
 
(411.9
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
(338.0
)
 
0.6

 
(337.4
)
Balance, March 31, 2015
342.3

 
$
9,810.3

 
$
260.9

 
$
(2,291.3
)
 
$
(1,327.6
)
 
$
6,452.3

 
$
122.9

 
$
6,575.2

____________________________________
On March 27, 2015, the Company completed, pursuant to an Underwriting Agreement dated March 17, 2015 with Deutsche Bank Securities Inc. on behalf of several underwriters, a registered offering in the United States of 7,286,432 of its common shares, no par value, at a price of $199.00 per common share, for aggregate gross proceeds of approximately $1.45 billion.

20


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


In connection with the issuance of these new common shares, the Company incurred approximately $18 million of issuance costs, which has been reflected as reduction to the gross proceeds from the equity issuance. The proceeds of this offering were used to fund the Salix Acquisition. The Company granted the underwriters an option to purchase additional common shares equal to up to 15% of the common shares initially issued in the offering. This option was not exercised by the underwriters.
12.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of March 31, 2015 and 2014, were as follows:
 
 
Foreign
Currency
Translation
Adjustment
 
Pension
Adjustment
 
Total
Balance, January 1, 2014
 
$
(170.3
)
 
$
37.5

 
$
(132.8
)
Foreign currency translation adjustment
 
(6.6
)
 

 
(6.6
)
Pension adjustment(1)
 

 
(0.6
)
 
(0.6
)
Balance, March 31, 2014
 
$
(176.9
)
 
$
36.9

 
$
(140.0
)
 
 
 
 
 
 
 
Balance, January 1, 2015
 
$
(886.5
)
 
$
(29.4
)
 
$
(915.9
)
Foreign currency translation adjustment
 
(411.3
)
 

 
(411.3
)
Pension adjustment(1)
 

 
(0.4
)
 
(0.4
)
Balance, March 31, 2015
 
$
(1,297.8
)
 
$
(29.8
)
 
$
(1,327.6
)
____________________________________
(1)
Reflects changes in defined benefit obligations and related plan assets of the Company’s defined benefit pension plans and the U.S. postretirement benefit plan (refer to note 10 titled "PENSION AN POSTRETIREMENT EMPLOYEE BENEFIT PLANS").
Income taxes are not provided for foreign currency translation adjustments arising on the translation of the Company’s operations having a functional currency other than the U.S. dollar. Income taxes allocated to reclassification adjustments were not material.
13.
INCOME TAXES
In the three-month period ended March 31, 2015, the Company recognized an income tax expense of $81 million, comprised of $80 million related to the expected tax expense in tax jurisdictions outside of Canada and an income tax expense of $1 million related to Canadian income taxes. In the three-month period ended March 31, 2015, the Company’s effective tax rate was different from the Company’s statutory Canadian tax rate due to tax expense generated from the Company’s annualized mix of earnings by jurisdiction.
The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets is estimated to be $940 million as of March 31, 2015 and was $859 million as of December 31, 2014. The Company will continue to assess this amount for appropriateness on a go-forward basis associated with the deferred tax assets previously established.
As of March 31, 2015, the Company had $345 million of unrecognized tax benefits, which included $40 million relating to interest and penalties. Of the total unrecognized tax benefits, $106 million would reduce the Company’s effective tax rate, if recognized. The Company anticipates that a minimal amount of unrecognized tax benefits may be resolved within the next 12 months.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2015, the Company had accrued $33 million for interest and $7 million for penalties.
The Company is currently under examination by the Canada Revenue Agency for three separate cycles: (a) years 2005 to 2006, (b) 2007 through 2009, and (c) 2010 through 2011. In February 2013, the Company received a proposed audit adjustment

21


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)


for the years 2005 through 2007. The Company disagrees with the adjustments and has filed a Notice of Objection. The total proposed adjustment would result in a loss of tax attributes which are subject to a full valuation allowance and would not result in material change to the provision for income taxes.
The Company’s U.S. consolidated federal income tax return for the 2011 and 2012 tax years is currently under examination by the Internal Revenue Service. The Company remains under examination for various state tax audits in the U.S. for years 2002 to 2013. In addition, certain affiliates of the Company in other regions outside of Canada and the U.S. are currently under examination by relevant taxing authorities, and all necessary accruals have been recorded, including uncertain tax benefits. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's financial statements.
14.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc. for the three-month periods ended March 31, 2015 and 2014 were calculated as follows:
 
Three Months Ended
March 31,
 
2015
 
2014
Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.
$
73.7

 
$
(22.6
)
 
 
 
 
Basic weighted-average number of common shares outstanding
336.8

 
334.9

Diluted effect of stock options, RSUs and other(a)
6.6

 

Diluted weighted-average number of common shares outstanding
343.4

 
334.9

 
 
 
 
Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
Basic
$
0.22

 
$