10-Q 1 valeantq32015.htm 10-Q 10-Q


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 September 30, 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 — 343,101,797 shares outstanding as of October 19, 2015.





VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 SEPTEMBER 30, 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, investigations 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 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; our ability to further reduce wholesaler 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, including the impact on such matters of the recent reports published by the Organization for Economic Co-operation and Development (OECD) respecting base erosion and profit shifting (BEPS) and the potential enactment in law of such measures by individual countries;
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 (including capital market conditions and a lack of liquidity therein);
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 Brazil, China, 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, tax and other regulatory audits, and regulatory proceedings and settlements thereof (including the matters assumed as part of our acquisition of Salix, the pending investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Southern District of New York, the recent shareholder class action suits and other matters relating to our distribution and pricing practices);
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

iii



other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the FDA, and the results thereof;
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, or other adverse impacts on, our Company, products and business, including as a result of the recent public scrutiny of our pricing and distribution practices, recent statements made by a short seller respecting our business practices and financial accounting and the pending investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Southern District of New York;
the outcome of the review of the Company's business relationship with Philidor Rx Services, LLC and the negative publicity or reputational harm to, or other adverse impacts on, the Company that could derive therefrom;
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 by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and 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 historical 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

iv



December 31, 2014, under Item 1A. "Risk Factors" of Part II of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, under 1A. "Risk Factors" of Part II 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.

v



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
September 30,
2015
 
As of
December 31,
 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,420.0

 
$
322.6

Trade receivables, net
2,696.3

 
2,075.8

Inventories, net
1,199.2

 
950.6

Prepaid expenses and other current assets
953.0

 
650.8

Deferred tax assets, net
727.2

 
193.3

Total current assets
6,995.7

 
4,193.1

Property, plant and equipment, net
1,351.4

 
1,310.5

Intangible assets, net
22,382.1

 
11,255.9

Goodwill
17,374.7

 
9,346.4

Deferred tax assets, net
114.6

 
54.0

Other long-term assets, net
236.1

 
167.4

Total assets
$
48,454.6

 
$
26,327.3

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
476.8

 
$
398.0

Accrued and other current liabilities
3,293.5

 
2,179.4

Acquisition-related contingent consideration
161.6

 
141.8

Current portion of long-term debt
707.0

 
0.9

Deferred tax liabilities, net
11.6

 
10.7

Total current liabilities
4,650.5

 
2,730.8

Acquisition-related contingent consideration
600.2

 
167.0

Long-term debt
30,176.3

 
15,228.0

Pension and other benefit liabilities
221.9

 
239.8

Liabilities for uncertain tax positions
109.3

 
102.6

Deferred tax liabilities, net
6,022.6

 
2,227.5

Other long-term liabilities
209.1

 
197.1

Total liabilities
41,989.9

 
20,892.8

Commitments and contingencies (Note 16)


 


Equity
 
 
 
Common shares, no par value, unlimited shares authorized, 343,094,009 and
 
 
 
  334,402,964 issued and outstanding at September 30, 2015 and December 31, 2014, respectively
9,899.6

 
8,349.2

Additional paid-in capital
244.6

 
243.9

Accumulated deficit
(2,338.5
)
 
(2,365.0
)
Accumulated other comprehensive loss
(1,463.4
)
 
(915.9
)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity
6,342.3

 
5,312.2

Noncontrolling interest
122.4

 
122.3

Total equity
6,464.7

 
5,434.5

Total liabilities and equity
$
48,454.6

 
$
26,327.3


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


1



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(All dollar amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Product sales
$
2,748.2

 
$
2,022.9

 
$
7,590.1

 
$
5,868.1

Other revenues
38.6

 
33.3

 
120.0

 
115.4

 
2,786.8

 
2,056.2

 
7,710.1

 
5,983.5

Expenses
 
 
 
 
 
 
 
Cost of goods sold (exclusive of amortization and impairments of
 
 
 
 
 
 
 
finite-lived intangible assets shown separately below)
634.6

 
545.8

 
1,864.9

 
1,619.5

Cost of other revenues
13.6

 
15.0

 
43.1

 
45.3

Selling, general and administrative
697.6

 
504.1

 
1,956.9

 
1,501.8

Research and development
101.6

 
59.1

 
238.5

 
186.9

Amortization and impairments of finite-lived intangible assets
679.2

 
393.1

 
1,629.8

 
1,113.9

Restructuring, integration and other costs
75.6

 
61.7

 
274.0

 
337.4

In-process research and development impairments and other charges
95.8

 
19.9

 
108.1

 
40.3

Acquisition-related costs
7.0

 
1.6

 
26.3

 
3.7

Acquisition-related contingent consideration
3.8

 
4.0

 
22.6

 
14.8

Other expense (income)
30.2

 
(232.0
)
 
213.2

 
(275.7
)
 
2,339.0

 
1,372.3

 
6,377.4

 
4,587.9

Operating income
447.8

 
683.9

 
1,332.7

 
1,395.6

Interest income
0.7

 
0.8

 
2.5

 
3.8

Interest expense
(420.2
)
 
(258.4
)
 
(1,130.7
)
 
(746.1
)
Loss on extinguishment of debt

 

 
(20.0
)
 
(93.7
)
Foreign exchange and other
(34.0
)
 
(53.0
)
 
(99.5
)
 
(63.0
)
Gain on investments, net

 
3.4

 

 
5.9

(Loss) income before (recovery of) provision for income taxes
(5.7
)
 
376.7

 
85.0

 
502.5

(Recovery of) provision for income taxes
(57.4
)
 
100.3

 
10.4

 
124.4

Net income
51.7

 
276.4

 
74.6


378.1

Less: Net income (loss) attributable to noncontrolling interest
2.2

 
1.0

 
4.4

 
(0.5
)
Net income attributable to Valeant Pharmaceuticals International, Inc.
$
49.5

 
$
275.4

 
$
70.2

 
$
378.6

 
 
 
 
 
 
 
 
Earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.82

 
$
0.21

 
$
1.13

Diluted
$
0.14

 
$
0.81

 
$
0.20

 
$
1.11

 
 
 
 
 
 
 
 
Weighted-average common shares (in millions)
 
 
 
 
 
 
 
Basic
344.9

 
335.4

 
340.8

 
335.2

Diluted
351.0

 
341.3

 
347.2

 
341.4


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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
51.7

 
$
276.4

 
$
74.6

 
$
378.1

Other comprehensive loss
 
 
 
 
 
 
 
Foreign currency translation adjustment
(173.2
)
 
(446.8
)
 
(548.3
)
 
(440.4
)
Unrealized gain on equity method investment, net of tax

 
4.0

 

 
22.5

Net unrealized holding (loss) gain on available-for-sale equity securities:
 
 
 
 
 
 
 
Arising in period

 
(0.9
)
 

 
1.8

Reclassification to net income

 
(1.8
)
 

 
(1.8
)
Pension and postretirement benefit plan adjustments
(0.5
)
 
(0.6
)
 
(1.4
)
 
(1.8
)
Other comprehensive loss
(173.7
)
 
(446.1
)
 
(549.7
)
 
(419.7
)
Comprehensive loss
(122.0
)
 
(169.7
)
 
(475.1
)
 
(41.6
)
Less: Comprehensive income (loss) attributable to noncontrolling interest
0.4

 
2.2

 
2.2

 
(1.0
)
Comprehensive loss attributable to Valeant Pharmaceuticals International, Inc.
$
(122.4
)
 
$
(171.9
)
 
$
(477.3
)
 
$
(40.6
)


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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
 
 
 
 
Net income
$
51.7

 
$
276.4

 
$
74.6

 
$
378.1

Adjustments to reconcile net loss (income) to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization, including impairments of finite-lived intangible assets
726.4

 
439.3

 
1,768.4

 
1,248.1

Amortization and write-off of debt discounts and debt issuance costs
20.5

 
34.6

 
123.7

 
58.1

In-process research and development impairments
95.8

 
19.9

 
108.1

 
20.3

Acquisition accounting adjustment on inventory sold
27.2

 
12.4

 
97.7

 
21.9

Loss (gain) on disposal of assets, net
5.3

 
(254.5
)
 
9.2

 
(254.5
)
Acquisition-related contingent consideration
3.8

 
4.0

 
22.6

 
14.8

Allowances for losses on accounts receivable and inventories
19.6

 
12.0

 
46.4

 
47.6

Deferred income taxes
(91.4
)
 
74.6

 
(79.0
)
 
63.2

Additions (reductions) to accrued legal settlements
25.6

 
(0.9
)
 
31.9

 
(48.2
)
Payments of accrued legal settlements
(26.2
)
 
(0.2
)
 
(32.1
)
 
(1.2
)
Share-based compensation
50.5

 
20.2

 
111.4

 
60.6

Excess tax expense (benefits) from share-based compensation
3.9

 
(15.9
)
 
(21.7
)
 
(17.1
)
Foreign exchange loss
31.0

 
55.1

 
96.6

 
62.4

Loss on extinguishment of debt

 

 
20.0

 
93.7

Payment of accreted interest on contingent consideration
(7.7
)
 
(1.3
)
 
(19.8
)
 
(9.5
)
Other
0.2

 
9.7

 
(13.7
)
 
15.8

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade receivables
(347.2
)
 
(121.4
)
 
(656.0
)
 
(205.2
)
Inventories
(45.6
)
 
(41.5
)
 
(132.4
)
 
(122.8
)
Prepaid expenses and other current assets
(88.5
)
 
5.5

 
(252.0
)
 
34.5

Accounts payable, accrued and other liabilities
281.6

 
90.7

 
334.1

 
18.4

Net cash provided by operating activities
736.5

 
618.7

 
1,638.0

 
1,479.0

 
 
 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
 
 
Acquisition of businesses, net of cash acquired
(115.8
)
 
(606.8
)
 
(14,001.7
)
 
(981.1
)
Acquisition of intangible assets and other assets
(0.1
)
 
(74.3
)
 
(58.1
)
 
(105.8
)
Purchases of property, plant and equipment
(51.1
)
 
(39.6
)
 
(163.7
)
 
(211.2
)
Proceeds from sales and maturities of short-term investments
32.5

 

 
50.2

 

Net settlement of assumed derivative contracts (Note 3)

 

 
184.6

 

Settlement of foreign currency forward exchange contracts

 

 
(26.3
)
 

Purchases of marketable securities
(24.2
)
 

 
(24.5
)
 

Purchase of equity method investment

 

 

 
(75.9
)
Proceeds from sale of assets and businesses, net of costs to sell
2.5

 
1,477.0

 
2.8

 
1,479.8

Decrease (increase) in restricted cash and cash equivalents

 

 
(5.2
)
 

Net cash (used in) provided by investing activities
(156.2
)
 
756.3

 
(14,041.9
)
 
105.8

 
 
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
 
 
Issuance of long-term debt, net of discount

 
555.0

 
16,925.8

 
963.4

Repayments of long-term debt
(29.0
)
 
(1,629.8
)
 
(1,387.2
)
 
(2,184.0
)
Repayments of convertible notes assumed

 

 
(3,122.8
)
 

Issuance of common stock, net

 

 
1,433.7

 

Repurchases of common shares

 

 
(50.0
)
 

Proceeds from exercise of stock options
7.0

 
3.8

 
29.1

 
10.9

Excess tax benefits from share-based compensation
(3.9
)
 
15.9

 
21.7

 
17.1

Payment of employee withholding tax upon vesting of share-based awards
(24.3
)
 
(2.0
)
 
(85.8
)
 
(38.5
)
Payments of contingent consideration
(48.4
)
 
(14.4
)
 
(129.4
)
 
(96.6
)
Payments of financing costs

 
(10.2
)
 
(101.7
)
 
(18.8
)
Other
(9.9
)
 
(0.4
)
 
(10.2
)
 
(14.9
)
Net cash (used in) provided by financing activities
(108.5
)
 
(1,082.1
)
 
13,523.2

 
(1,361.4
)
Effect of exchange rate changes on cash and cash equivalents
(9.8
)
 
(15.3
)
 
(21.9
)
 
(14.9
)
Net increase in cash and cash equivalents
462.0

 
277.6

 
1,097.4

 
208.5

Cash and cash equivalents, beginning of period
958.0

 
531.2

 
322.6

 
600.3

Cash and cash equivalents, end of period
$
1,420.0

 
$
808.8

 
$
1,420.0

 
$
808.8

 
 
 
 
 
 
 
 
Non-Cash Investing and Financing Activities
 
 
 
 
 
 
 
Acquisition of businesses, contingent and deferred consideration obligations at fair value
$
(108.7
)
 
$
(16.0
)
 
$
(783.3
)
 
$
(65.1
)
Acquisition of businesses, debt assumed
(6.1
)
 
(4.5
)
 
(3,129.2
)
 
(8.5
)

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 3, Note 9 and Note 12.
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.
Adoption of New Accounting Standards
In April 2015, the Financial Accounting Standards Board ("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. As permitted, the Company early-adopted this guidance in the second quarter of 2015. The adoption of this guidance, which was applied retrospectively and impacted presentation only, resulted in a reclassification of $26 million as of December 31, 2014 from Other long-term assets, net to Long-term debt (treated as a deduction to Long-term debt) on the consolidated balance sheet. There was no impact on the Company's results of operations. In August 2015, the FASB issued guidance about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. As permitted under this guidance, the Company will continue to present debt issuance costs associated with revolving-debt arrangements as assets.

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)


Recently Issued Accounting Standards, Not Adopted as of September 30, 2015
In May 2014, the 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 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, 2017. Early application is permitted but not before the annual reporting period (and interim reporting period) beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In August 2014, the FASB issued guidance which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new guidance, disclosures are required when conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have any impact on the Company’s financial position and results of operations and, at this time, the Company does not expect any impact on its disclosures.
In 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 adoption of this standard is not expected to have a material impact on the presentation of the Company's results of operations, cash flows or financial position.
In July 2015, the FASB issued guidance which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In September 2015, the FASB issued guidance which eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated.  Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined.  Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior-period information had been revised. The guidance is effective for annual periods beginning after December 15, 2015 and is to be applied prospectively to adjustments of provisional amounts that occur after the effective date.  Early application is permitted. The Company cannot reasonably estimate the impact the adoption will have on its financial position, results of operation and disclosures, as it will depend on future measurement period adjustments.
3.
BUSINESS COMBINATIONS

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)


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:
Salix
Description of the Transaction
On April 1, 2015, the Company acquired Salix, pursuant to the Merger Agreement, among the Company, Valeant, Sun Merger Sub, Inc., a wholly owned subsidiary of Valeant (“Sun Merger Sub”), and Salix. Salix is a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of variety of gastrointestinal (GI) disorders with a portfolio of over 20 marketed products, including Xifaxan®, Uceris®, Apriso®, and Relistor®.
In accordance with the terms of the Merger Agreement, Sun Merger Sub commenced a tender offer (the “Offer”) for all of Salix’s outstanding shares of common stock, par value $0.001 per share (the “Salix Shares”), at a purchase price of $173.00 per Salix Share, net to the holder in cash, without interest, less any applicable withholding taxes. The Offer expired on April 1, 2015, as scheduled. A sufficient number of Salix Shares were validly tendered in the Offer such that the minimum tender condition to the Offer was satisfied, and Sun Merger Sub accepted for payment all such tendered Salix Shares. Following the expiration of the Offer on April 1, 2015, Sun Merger Sub merged with and into Salix, with Salix surviving as a wholly owned subsidiary of Valeant (the “Merger”). The Merger was governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the Merger. At the effective time of the Merger, each Salix Share then outstanding was converted into the right to receive $173.00 in cash, without interest, less any applicable withholding taxes, except for Salix Shares then owned by the Company or Salix or their respective wholly owned subsidiaries, which Salix Shares were cancelled for no consideration.
In connection with the Merger, each unexpired and unexercised option to purchase Salix Shares (the “Salix Options”), whether or not then exercisable or vested, was cancelled and, in exchange therefor, each former holder of any such cancelled Salix Option was entitled to receive, a payment in cash (subject to any applicable withholding or other taxes required by applicable law to be withheld) of an amount equal to the product of (i) the total number of Salix Shares previously subject to such Salix Option and (ii) the excess, if any, of $173.00 over the exercise price per Salix Share previously subject to such Salix Option. Each unvested Salix Share subject to forfeiture restrictions, repurchase rights or other restrictions (the “Salix Restricted Stock”) automatically became fully vested and was cancelled and, in exchange therefor, each former holder of such cancelled Salix Restricted Stock was entitled to receive, a payment in cash (subject to any applicable withholding or other taxes required by applicable law to be withheld) equal to $173.00 per share of Salix Restricted Stock.
The Salix Acquisition (including the Offer and the Merger), as well as related transactions and expenses, were funded through a combination of: (i) the proceeds from an issuance of senior unsecured notes that closed on March 27, 2015; (ii) the proceeds from incremental term loan commitments; (iii) the proceeds from a registered offering of Valeant’s common shares in the United States that closed on March 27, 2015; and (iv) cash on hand.
For further information regarding the debt and equity issuances, see Note 9 and Note 12, respectively.
Fair Value of Consideration Transferred
The following table indicates the consideration transferred to effect the Salix Acquisition:

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)


(In millions except per share data)
 
Conversion
Calculation
 
Fair
Value
Number of shares of Salix common stock outstanding as of acquisition date
 
64.3

 
 

Multiplied by Per Share Merger Consideration
 
$
173.00

 
$
11,123.9

Number of outstanding stock options of Salix cancelled and exchanged for cash(a)
 
0.1

 
10.1

Number of outstanding restricted stock of Salix cancelled and exchanged for cash(a)
 
1.1

 
195.0

 
 
 
 
11,329.0

Less: Cash consideration paid for Salix’s restricted stock that was accelerated at the closing of the Salix Acquisition(a)
 
 
 
(164.5
)
Add: Payment of Salix’s Term Loan B Credit Facility(b)
 
 
 
1,125.2

Add: Payment of Salix’s 6.00% Senior Notes due 2021(b)
 
 
 
842.3

Total fair value of consideration transferred
 
 

 
$
13,132.0

___________________________________
(a)
The purchase consideration paid to holders of Salix stock options and restricted stock attributable to pre-combination services was included as a component of purchase price. Purchase consideration of $165 million paid for outstanding restricted stock that was accelerated by the Company in connection with the Salix Acquisition was excluded from purchase price and accounted for as post-combination expense within Other expense (income) in the second quarter of 2015.
(b)
The repayment of Salix’s Term Loan B Credit Facility has been reflected as part of the purchase consideration as the debt was repaid concurrently with the consummation of the Salix Acquisition and was not assumed by the Company as part of the acquisition. Similarly, the redemption of Salix’s 6.00% Senior Notes due 2021 has been reflected as part of the purchase consideration as the indenture governing the 6.00% Senior Notes due 2021 was satisfied and discharged concurrently with the consummation of the Salix Acquisition and was not assumed by the Company as part of the acquisition.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:
amounts for intangible assets, property and equipment, certain liabilities, and other working capital balances pending finalization of the valuation;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.

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 Date
(as previously
reported)(a)
 
Measurement
Period
Adjustments(b)
 
Amounts
Recognized as of
September 30, 2015
(as adjusted)
Cash and cash equivalents
 
$
113.7

 
$

 
$
113.7

Inventories(c)
 
233.2

 

 
233.2

Other assets(d)
 
1,400.3

 
14.3

 
1,414.6

Property, plant and equipment, net
 
24.3

 

 
24.3

Identifiable intangible assets, excluding acquired IPR&D(e)
 
6,756.3

 

 
6,756.3

Acquired IPR&D(f)
 
5,366.8

 
(90.1
)
 
5,276.7

Current liabilities(g)
 
(1,764.2
)
 
(140.8
)
 
(1,905.0
)
Contingent consideration, including current and long-term portion(h)
 
(327.9
)
 
(45.3
)
 
(373.2
)
Long-term debt, including current portion(i)
 
(3,123.1
)
 

 
(3,123.1
)
Deferred income taxes, net(j)
 
(3,512.0
)
 
92.5

 
(3,419.5
)
Other non-current liabilities
 
(7.3
)
 
(9.0
)
 
(16.3
)
Total identifiable net assets
 
5,160.1

 
(178.4
)
 
4,981.7

Goodwill(k)
 
7,971.9

 
178.4

 
8,150.3

Total fair value of consideration transferred
 
$
13,132.0

 
$

 
$
13,132.0

________________________
(a)
As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.
(b)
The measurement period adjustments primarily reflect: (i) a reduction in acquired in-process research and development ("IPR&D") assets, specifically for the Oral Relistor® program based mainly on revised cost projections (see further discussion of IPR&D programs in (f) below), (ii) an increase in assumed contingent consideration resulting from further assessment of assumptions related to the probability-weighted cash flows and (iii) the tax impact of pre-tax measurement period adjustments as well as reclassifications of certain tax balances. 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.
(c)
Includes an estimated fair value step-up adjustment to inventory of $108 million.
(d)
Primarily includes an estimated fair value of $1.27 billion to record the capped call transactions and convertible bond hedge transactions that were entered into by Salix prior to the Salix Acquisition in connection with its 1.5% Convertible Senior Notes due 2019 and 2.75% Convertible Senior Notes due 2015. These instruments were settled on the date of the Salix Acquisition and, as such, the fair value was based on the settlement amounts. Other assets also includes an estimated insurance recovery of $80 million, based on estimated fair value, related to the legal matters discussed in (g) below.
(e)
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
Product brands
 
10
 
$
6,088.3

Corporate brand
 
20
 
668.0

Total identifiable intangible assets acquired
 
11
 
$
6,756.3

(f)
A multi-period excess earnings methodology (income approach) was used to determine the estimated fair values of the acquired in-process research and development (“IPR&D”) assets from a market participant perspective. The projected cash flows from these assets were adjusted for the probabilities of successful development and commercialization of each project, and the Company used risk-adjusted discount rates of 10%-11% to present value the projected cash flows.
The IPR&D assets primarily relate to Xifaxan® 550 mg for the treatment of irritable bowel syndrome with diarrhea (new indication) in adults ("Xifaxan IBS-D"). In determining the fair value of Xifaxan IBS-D ($4.79 billion as of the acquisition date), the Company assumed material cash inflows would commence in 2015. In May 2015, Xifaxan IBS-D received approval from the U.S. Food and Drug Administration (the "FDA"), and, accordingly, such asset has been reclassified to an amortizable intangible asset as of the approval date and is being amortized over a period of 10 years.
Other IPR&D assets include, among others, Oral Relistor® for the treatment of opioid-induced constipation in adult patients with chronic non-cancer pain and Rifaximin soluble solid dispersion ("SSD") for the treatment of early decompensated liver cirrhosis. In September 2015, the Company

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)


announced that the FDA accepted for review the Company's New Drug Application for Oral Relistor®, and the FDA assigned a Prescription Drug User Fee Act (PDUFA) action date of April 16, 2016. In the third quarter of 2015, the Company terminated the Rifaximin SSD IPR&D program and recognized an impairment charge as described in Note 8.
(g)
Primarily includes an estimated fair value of $1.08 billion to record the warrant transactions that were entered into by Salix prior to the Salix Acquisition in connection with its 1.5% Convertible Senior Notes due 2019 (these instruments were settled on the date of the Salix Acquisition and, as such, the fair value was based on the settlement amounts), as well as accruals for (i) the estimated fair value of $336 million (exclusive of the related insurance recovery described in (d) above) for potential losses and related costs associated with legal matters relating to the legacy Salix business (See Note 16 for additional information regarding these legal matters) and (ii) product returns and rebates of $374 million.
(h)
The contingent consideration consists of potential payments to third parties including developmental milestone payments due upon specified regulatory achievements, commercialization milestones contingent upon achieving specified targets for net sales, and royalty-based payments. The range of potential milestone payments (excluding royalty-based payments) is from nil if none of the milestones are achieved to a maximum of up to approximately $650 million (the majority of which relates to sales-based milestones) over time if all milestones are achieved, in the aggregate, to third parties, including up to $250 million in developmental and sales-based milestones to Progenics Pharmaceuticals, Inc. related to Relistor® (including Oral Relistor®), and various other developmental and sales-based milestones. The total fair value of the contingent consideration of $373 million (including current portion of $11 million) as of the acquisition date was determined using probability-weighted discounted cash flows. Refer to Note 6 for additional information regarding contingent consideration.
(i)
The following table summarizes the fair value of long-term debt assumed as of the acquisition date:
 
 
Amounts
Recognized as of
Acquisition Date
1.5% Convertible Senior Notes due 2019(1)
 
$
1,837.1

2.75% Convertible Senior Notes due 2015(1)
 
1,286.0

Total long-term debt assumed
 
$
3,123.1

____________________________________
(1)
The Company subsequently redeemed these amounts in full in the second quarter of 2015, except for a nominal amount of the 1.5% Convertible Senior Notes due 2019.
(j)
Comprises deferred tax assets ($288 million) and deferred tax liabilities ($3.71 billion).
(k)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
the Company’s expectation to develop and market new product brands, product lines and technology;
cost savings and operating synergies expected to result from combining the operations of Salix with those of the Company;
the value of the continuing operations of Salix’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, Salix’s assembled workforce).
The provisional amount of goodwill has been allocated to the Company’s Developed Markets segment.
Acquisition-Related Costs
The Company has incurred to date $11 million of transaction costs directly related to the Salix Acquisition, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.
Revenue and Net Loss of Salix
The revenues of Salix for the period from the acquisition date to September 30, 2015 were $777 million and net loss was $281 million. The net loss includes the effects of the acquisition accounting adjustments and acquisition-related costs.
Other Business Combinations (excluding the Salix Acquisition)
Description of the Transactions
In the nine-month period ended September 30, 2015, the Company completed other business combinations (excluding the Salix Acquisition), which included the acquisition of the following businesses for an aggregate purchase price of $1.23 billion.

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)


The other business combinations completed during the nine-month period ended September 30, 2015 included contingent consideration arrangements with an aggregate acquisition date fair value of $176 million.
On February 23, 2015, the Company, completed via a "stalking horse bid" in a sales process conducted under the U.S. Bankruptcy Code, acquired certain assets of Dendreon Corporation ("Dendreon") for a purchase price of $415 million, net of cash received ($495 million less cash received of $80 million). The purchase price included approximately $50 million in stock consideration, and such shares were issued in June 2015. The assets acquired from Dendreon included the worldwide rights to the Provenge® product (an immunotherapy treatment designed to treat men with advanced prostate cancer).
On February 10, 2015, the Company acquired certain assets of Marathon Pharmaceuticals, LLC ("Marathon"). The assets acquired from Marathon comprised a portfolio of hospital products, including Nitropress®, Isuprel®, Opium Tincture, Pepcid®, Seconal® Sodium, Amytal® Sodium, and Iprivask® for an aggregate purchase price of $286 million (which is net of a $64 million assumed liability owed to a third party which is reflected in the table below). Also, as part of this acquisition, the Company assumed a contingent consideration liability as described further below.
During the nine-month period ended September 30, 2015, the Company completed other smaller acquisitions which are not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below.
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the business combinations, in the aggregate, as of the applicable acquisition dates. The following recognized amounts related to the Dendreon and Marathon acquisitions, 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.

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)


 
 
Amounts
Recognized as of
Acquisition Dates
 
Measurement
Period
Adjustments(a)
 
Amounts
Recognized as of
September 30, 2015
(as adjusted)
Cash
 
$
81.6

 
$

 
$
81.6

Accounts receivable(b)
 
38.3

 

 
38.3

Inventories
 
118.9

 
(0.3
)
 
118.6

Other current assets
 
18.2

 

 
18.2

Property, plant and equipment
 
85.6

 
(14.3
)
 
71.3

Identifiable intangible assets, excluding acquired IPR&D(c)
 
999.3

 
7.4

 
1,006.7

Acquired IPR&D
 
57.4

 
(1.5
)
 
55.9

Other non-current assets
 
2.8

 

 
2.8

Current liabilities(d)
 
(117.0
)
 

 
(117.0
)
Long-term debt
 
(6.1
)
 

 
(6.1
)
Deferred tax liability, net
 
(14.9
)
 
3.2

 
(11.7
)
Non-current liabilities(d)
 
(117.4
)
 

 
(117.4
)
Total identifiable net assets
 
1,146.7

 
(5.5
)
 
1,141.2

Goodwill(e)
 
86.7

 
(0.9
)
 
85.8

Total fair value of consideration transferred
 
$
1,233.4

 
$
(6.4
)
 
$
1,227.0

________________________
(a)
The measurement period adjustments primarily relate to the Dendreon acquisition and reflect: (i) a reduction in the estimated fair value of property, plant and equipment driven by further assessment of the fair value of a manufacturing facility, (ii) refinements of the estimated fair value of intangible assets, and (iii) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. 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 $38 million, with the gross contractual amount being $39 million, of which the Company expects that $1 million will be uncollectible.
(c)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Dates
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
September 30, 2015
(as adjusted)
Product brands
 
7
 
$
713.4

 
$
0.5

 
$
713.9

Product rights
 
3
 
42.7

 
0.4

 
43.1

Corporate brands
 
9
 
0.7

 

 
0.7

Partner relationships
 
8
 
7.8

 

 
7.8

Technology/know-how
 
10
 
232.7

 
6.5

 
239.2

Other
 
6
 
2.0

 

 
2.0

Total identifiable intangible assets acquired
 
8
 
$
999.3

 
$
7.4

 
$
1,006.7

(d)
As part of the Marathon acquisition, the Company assumed a contingent consideration liability related to potential payments, in the aggregate, of up to approximately $200 million, for Isuprel® and Nitropress®, the amounts of which are dependent on the timing of generic entrants for these products. The fair value of the liability as of the acquisition date was determined using probability-weighted projected cash flows, with $41 million classified in Current liabilities and $46 million classified in Non-current liabilities in the table above. As of September 30, 2015, the assumptions used for determining the fair value of the contingent consideration liability have not changed significantly from those used as of the acquisition date. Through September 30, 2015, the Company has made contingent consideration payments of $22 million related to the Marathon acquisition.
(e)
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.

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)


Acquisition-Related Costs
The Company has incurred to date $9 million, in the aggregate, of transaction costs directly related to these business combinations, 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 September 30, 2015 were $540 million, in the aggregate, and net income was $141 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 $1.43 billion. The aggregate purchase price included contingent consideration payment obligations with an aggregate acquisition date fair value of $133 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 $459 million. Under the terms of the merger agreement, the Company agreed to pay contingent consideration of $25 million upon the achievement of a sales-based milestone for 2014. The fair value of this contingent consideration was determined to be nominal as of the acquisition date, based on the sales forecast. As the sales-based milestone was not achieved, no such payment was made. 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 were not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below. Beginning in December 2014, the Company has consolidated Philidor Rx Services, LLC (“Philidor”) pharmacy network, which includes R&O Pharmacy, LLC.  The Company determined that based on its rights, including its option to acquire Philidor, Philidor is a variable interest entity for which the Company is the primary beneficiary, given its power to direct Philidor’s activities and its obligation to absorb their losses and rights to receive their benefits. As a result, since December 2014, the Company has included the assets and liabilities and results of operations of Philidor in its consolidated financial statements. Net sales recognized through Philidor represent approximately 7% and 6% of the Company's total consolidated net revenue for the three-month and nine-month periods ended September 30, 2015, respectively, and the total assets of Philidor represent less than 1% of the Company's total consolidated assets as of September 30, 2015. The impact of Philidor as a consolidated entity on the Company's net revenues for 2014 was nominal.
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the business combinations, in the aggregate, as of the applicable acquisition dates. The following recognized amounts related to certain smaller acquisitions are provisional and subject to change:
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and

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)


amount of goodwill pending the completion of the valuation of the income tax assets and liabilities.
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
 
Measurement
Period
Adjustments(a)
 
Amounts
Recognized as of
September 30, 2015
(as adjusted)
Cash and cash equivalents
 
$
33.6

 
$
1.1

 
$
34.7

Accounts receivable(b)
 
87.7

 
(5.9
)
 
81.8

Assets held for sale(c)
 
125.7

 
(0.8
)
 
124.9

Inventories
 
170.4

 
(15.9
)
 
154.5

Other current assets
 
19.1

 
(4.9
)
 
14.2

Property, plant and equipment, net
 
58.5

 
(0.6
)
 
57.9

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

 
26.2

 
723.4

Acquired IPR&D(e)
 
65.8

 
(2.8
)
 
63.0

Other non-current assets
 
4.0

 
(2.1
)
 
1.9

Current liabilities
 
(152.0
)
 
(16.9
)
 
(168.9
)
Long-term debt, including current portion
 
(11.2
)
 
0.3

 
(10.9
)
Deferred income taxes, net
 
(116.0
)
 
40.5

 
(75.5
)
Other non-current liabilities
 
(13.4
)
 
(0.1
)
 
(13.5
)
Total identifiable net assets
 
969.4

 
18.1

 
987.5

Noncontrolling interest
 
(15.0
)
 
(4.9
)
 
(19.9
)
Goodwill(f)
 
410.4

 
49.0

 
459.4

Total fair value of consideration transferred
 
$
1,364.8

 
$
62.2

 
$
1,427.0

________________________
(a)
The measurement period adjustments primarily reflect: (i) a net increase in the fair value of contingent consideration related to smaller acquisitions based on assessment of probability and timing assumptions for potential milestone payments, related to factors that existed as of the respective acquisition dates, (ii) a decrease in the net deferred tax liability primarily related to the PreCision and Solta Medical acquisitions, (iii) adjustments to the estimated fair value of intangible assets related to smaller acquisitions, (iv) an increase in current liabilities primarily related to the PreCision acquisition and other smaller acquisitions, and (v) a decrease in inventory primarily related to the Solta Medical acquisition 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 $82 million, with the gross contractual amount being $88 million, of which the Company expects that $6 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:

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)


 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Dates
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
September 30, 2015
(as adjusted)
Product brands
 
10
 
$
506.0

 
$
5.7

 
$
511.7

Product rights
 
8
 
95.2

 
(3.3
)
 
91.9

Corporate brand
 
15
 
28.9

 
4.0

 
32.9

In-licensed products
 
9
 
1.5

 
(0.3
)
 
1.2

Partner relationships
 
9
 
37.5

 
13.6

 
51.1

Other
 
9
 
28.1

 
6.5

 
34.6

Total identifiable intangible assets acquired
 
10
 
$
697.2

 
$
26.2

 
$
723.4

(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:
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 ($194 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 and nine-month periods ended September 30, 2015 and 2014, as if 2015 acquisitions had occurred as of January 1, 2014 and 2014 acquisitions had occurred as of January 1, 2013.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
2,786.8

 
$
2,538.4

 
$
7,737.7

 
$
7,593.5

Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.
57.8

 
14.1

 
(258.2
)
 
(338.7
)
 
 
 
 
 
 
 
 
Income (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.04

 
$
(0.75
)
 
$
(0.99
)
Diluted
$
0.16

 
$
0.04

 
$
(0.75
)
 
$
(0.99
)
Pro forma revenues in the three-month and nine-month periods ended September 30, 2015 as compared to the three-month and nine-month periods ended September 30, 2014 were impacted by the following:
growth from the existing business, including the impact of recent product launches;
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 and nine-month periods ended September 30, 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

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)


to the extent recognized in the three-month and nine-month periods ended September 30, 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;
additional interest expense associated with financing obtained by the Company in connection with the Salix Acquisition; and
the exclusion from pro forma earnings in the three-month and nine-month periods ended September 30, 2015 of the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition date of $25 million and $7 million for the three-month periods ended September 30, 2015 and 2014, $94 million and $15 million for the nine-month periods ended September 30, 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.
DIVESTITURES
In the three and nine-month periods ended September 30, 2014, the Company completed the following divestitures, among others:
On July 10, 2014, the Company sold all rights to Restylane®, Perlane®, Emervel®, Sculptra®, and Dysport® owned or held by the Company to Galderma S.A. (“Galderma”) for approximately $1.40 billion in cash. These assets were included primarily in the Company’s Developed Markets segment. As a result of this transaction, the Company recognized a net gain on sale of $324 million in the third quarter of 2014 within Other expense (income) in the consolidated statement of income. The costs to sell for this divestiture of approximately $43 million were included as part of the net gain on sale (netted against the proceeds in the consolidated statement of cash flows).
On July 1, 2014, the Company sold the worldwide rights in its Metronidazole 1.3% Vaginal Gel antibiotic product, a topical antibiotic for the treatment of bacterial vaginosis, to Actavis Specialty Brands for upfront and certain milestone payments of $10 million, in the aggregate, and minimum royalties for the first three years of commercialization.  This asset was included in the Company’s Developed Markets segment. In addition, royalties are payable to the Company beyond the initial three-year commercialization period. The FDA approved the NDA for Metronidazole 1.3% in March 2014. In connection with the sale of the Metronidazole 1.3%, the Company recognized a loss on sale of $59 million in the third quarter of 2014, as the Company’s accounting policy is to not recognize contingent payments until such amounts are realizable. The loss on sale was included within Other expense (income) in the consolidated statement of income.
5.
RESTRUCTURING, INTEGRATION AND OTHER COSTS
In connection with the Salix Acquisition, 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/or

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)


procurement savings.
Salix Acquisition-Related Cost-Rationalization and Integration Initiatives
The Company estimates that it will incur total costs of approximately $300 million in connection with the cost-rationalization and integration initiatives relating to the Salix Acquisition, which we expect to substantially complete by mid-2016. Since the acquisition date, total costs of $178 million have been incurred through September 30, 2015, including (i) $88 million of restructuring expenses, (ii) $79 million of integration expenses, and (iii) $11 million of acquisition-related costs. The estimate of total costs to be incurred primarily includes: employee termination costs payable to approximately 450 employees of the Company and Salix who have been or will be terminated as a result of the Salix Acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that do not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs.
Salix Restructuring Costs
The following table summarizes the major components of the restructuring costs incurred in connection with the Salix Acquisition since the acquisition date through September 30, 2015:
 
 
Severance and
Related Benefits
 
IPR&D
Termination
Costs
 
Contract
Termination,
Facility Closure
and Other Costs
 
Total

Balance, January 1, 2015
 
$

 
$

 
$

 
$

Costs incurred and/or charged to expense
 
82.4

 

 

 
82.4

Cash payments
 
(25.7
)
 

 

 
(25.7
)
Non-cash adjustments
 
2.2

 

 

 
2.2

Balance, June 30, 2015
 
$
58.9

 
$

 
$

 
$
58.9

Costs incurred and/or charged to expense
 
4.8

 

 
0.7

 
5.5

Cash payments
 
(21.0
)
 

 

 
(21.0
)
Balance, September 30, 2015
 
$
42.7

 
$

 
$
0.7

 
$
43.4

Salix Integration Costs
As mentioned above, the Company has incurred $79 million of integration costs related to the Salix Acquisition since the acquisition date, which related primarily to integration consulting, duplicate labor, transition service, and other costs. The Company made payments of $63 million related to Salix integration costs since the acquisition date.
B&L Acquisition-Related Cost-Rationalization and Integration Initiatives
The Company estimated that it will incur total costs of approximately $600 million (excluding charges of $53 million described under the table below) in connection with the cost-rationalization and integration initiatives relating to the B&L Acquisition, which were substantially completed by the end of 2014. However, restructuring and integration costs of $9 million, in the aggregate, have been incurred in 2015. Since the acquisition date, total costs of $578 million (including $52 million related to cost-rationalization measures at a contact lens manufacturing plant in Waterford, Ireland, as described below) were incurred through September 30, 2015, including (i) $308 million of restructuring expenses, (ii) $257 million of integration expenses, and (iii) $13 million of acquisition-related costs. We do not expect to incur any additional costs beyond 2015. 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 September 30, 2015:

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)


 
 
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

Costs incurred and charged to expense
 
(0.5
)
 

 

 
0.1

 
(0.4
)
Cash payments
 
(3.7
)
 

 

 
(0.1
)
 
(3.8
)
Non-cash adjustments
 
0.3

 

 

 

 
0.3

Balance, June 30, 2015
 
$
3.9

 
$

 
$

 
$
2.8

 
$
6.7

Costs incurred and charged to expense
 
0.4

 

 

 
0.4

 
0.8

Cash payments
 
(1.1
)
 

 

 

 
(1.1
)
Non-cash adjustments
 
(0.2
)
 

 

 
(0.1
)
 
(0.3
)
Balance, September 30, 2015
 
$
3.0

 
$

 
$

 
$
3.1

 
$
6.1

___________________________________
(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, which were recognized in Other expense (income).

(2)
In the nine-month period ended September 30, 2014, the Company recognized $64 million of restructuring charges and made payments of $123 million related to the B&L Acquisition.
B&L Integration Costs
As mentioned above, the Company has incurred $257 million of integration costs related to the B&L Acquisition since the acquisition date. In the nine-month periods ended September 30, 2015 and 2014, the Company incurred $8 million and $123 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 $11 million and $129 million related to B&L integration costs during the nine-month periods ended September 30, 2015 and 2014, respectively.
In addition to the restructuring and integration costs described above, the Company has recognized $52 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 (substantially all of which were recognized in the second quarter of 2014). These costs related to employee termination costs with respect to cost-rationalization measures. A reduction of $4 million was recognized in the second quarter of 2015 based on revised estimates. The Company made payments of $21 million in the nine-month period ended September 30, 2015 with respect to this initiative. The Company made payments of $18 million in the nine-month period ended September 30, 2014 with respect to this initiative.
Other Restructuring and Integration-Related Costs (Excluding Salix and B&L)
In the nine-month period ended September 30, 2015, in addition to the restructuring and integration costs associated with the Salix Acquisition and the B&L Acquisition described above, the Company incurred an additional $98 million of other restructuring, integration-related and other costs. These costs included (i) $66 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $27 million of severance costs, (iii) $4 million of facility closure costs, and (iv)

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)


$1 million of other costs. These costs primarily related to integration and restructuring costs for the Dendreon acquisition and other smaller acquisitions. The Company made payments of $99 million during the nine-month period ended September 30, 2015 (in addition to the payments related to the Salix Acquisition and the B&L Acquisition described above).
In the nine-month period ended September 30, 2014, in addition to the restructuring and integration costs associated with the B&L Acquisition described above, the Company incurred an additional $94 million of other restructuring, integration-related and other costs. These costs included (i) $61 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $19 million of severance costs, (iii) $7 million of facility closure costs, and (iv) $7 million of other costs. These costs primarily related to (i) integration and restructuring costs for the Solta Medical acquisition and other smaller acquisitions and (ii) intellectual property migration and the global consolidation of the Company’s manufacturing facilities. The Company made payments of $87 million during the nine-month period ended September 30, 2014 (in addition to the payments related to the B&L Acquisition described above).
6.
FAIR VALUE MEASUREMENTS
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014:
 
 
As of September 30, 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)
 
$
856.5

 
$
855.7

 
$
0.8

 
$

 
$
4.6

 
$
2.8

 
$
1.8

 
$

Restricted cash and cash equivalents
 
$
4.0

 
$
4.0

 
$

 
$

 
$
9.1

 
$
9.1

 
$

 
$

Liabilities:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration
 
$
(761.8
)
 
$

 
$

 
$
(761.8
)
 
$
(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.
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 9 for information related to the financing of the Salix Acquisition). These derivative contracts were not designated as hedges for accounting purposes, and such contracts matured on April 1, 2015 (which coincides with the consummation of the Salix

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)


Acquisition). A foreign exchange loss of $26 million was recognized in Foreign exchange and other in the consolidated statement of 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 $16 million and $43 million as of September 30, 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 nine-month period ended September 30, 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 nine-month period ended September 30, 2015:
 
Balance,
January 1,
2015
 
Issuances(a)
 
Payments(b)
 
Net
Unrealized
Loss(c)
 
Foreign
Exchange(d)
 
Release from Restricted Cash
 
Balance,
September 30,
2015
Acquisition-related contingent consideration
$
(308.8
)
 
$
(586.1
)
 
$
149.2

 
$
(22.6
)
 
$
2.5

 
$
4.0

 
$
(761.8
)
____________________________________
(a)
Primarily relates to contingent consideration liabilities assumed in the Salix and Marathon acquisitions, as well as the impact of measurement period adjustments, as described in Note 3.
(b)
Primarily relates to payments of acquisition-related contingent consideration related to the OraPharma Topco Holdings, Inc. acquisition consummated in June 2012, the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL in June 2011 (the "Elidel®/Xerese®/Zovirax® agreement"), the iNova acquisition consummated in December 2011, the Targretin® agreement entered into with Eisai Inc. in February 2013, and the Marathon acquisition.
(c)
For the nine-month period ended September 30, 2015, a net loss of $23 million was recognized as Acquisition-related contingent consideration in the consolidated statements of income, primarily reflecting accretion for the time value of money for the Elidel®/Xerese®/Zovirax® agreement and the Salix Acquisition.
(d)
Included in other comprehensive loss.
For the nine-month period ended September 30, 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 nine-month period ended September 30, 2015.
7.
INVENTORIES
The components of inventories as of September 30, 2015 and December 31, 2014 were as follows:
 
 
As of
September 30,
2015
 
As of
December 31,
2014
Raw materials(1)
 
$
267.3

 
$
191.1

Work in process(1)
 
117.2

 
94.2

Finished goods(1)
 
814.7

 
665.3

 
 
$
1,199.2

 
$
950.6

___________________________________

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)


(1)
The components of inventories shown in the table above are net of allowance for obsolescence.
8.
INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The major components of intangible assets as of September 30, 2015 and December 31, 2014 were as follows:
 
 
As of September 30, 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
 
$
21,634.9

 
$
(4,700.9
)
 
$
16,934.0

 
$
10,320.2

 
$
(3,579.8
)
 
$
6,740.4

Corporate brands
 
1,012.6

 
(90.4
)
 
922.2

 
364.2

 
(65.2
)
 
299.0

Product rights
 
3,223.6

 
(1,594.7
)
 
1,628.9

 
3,225.9

 
(1,263.8
)
 
1,962.1

Partner relationships
 
221.1

 
(121.5
)
 
99.6

 
223.1

 
(107.5
)
 
115.6

Technology and other
 
525.7

 
(148.0
)
 
377.7

 
275.5

 
(124.3
)
 
151.2

Total finite-lived intangible assets(1)
 
26,617.9

 
(6,655.5
)
 
19,962.4

 
14,408.9

 
(5,140.6
)
 
9,268.3

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Acquired IPR&D(2)
 
722.2