10-Q 1 valeantq12016.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2016
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 — 343,030,281 shares outstanding as of June 2, 2016.




EXPLANATORY NOTE
As described in additional detail in the Explanatory Note to our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), misstatements were identified in connection with the previous revenue recognition for certain transactions with the Philidor Rx Services, LLC (“Philidor”) pharmacy network. On March 21, 2016, management of the Company (as defined herein), the Company's Audit and Risk Committee (the “ARC”) and the Company's Board of Directors (the “Board”) concluded that the Company’s audited financial statements for the year ended, and unaudited financial information for the quarter ended, December 31, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and the unaudited financial statements for the quarter ended March 31, 2015 included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 should no longer be relied upon due to these misstatements and other qualitative factors. In addition, due to the fact that the first quarter 2015 results are included within the financial statements for the six-month period ended June 30, 2015 included in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and the financial statements for the nine-month period ended September 30, 2015 included in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, management, the ARC and the Board also concluded that the financial statements for such six-month and nine-month periods reflected in those Quarterly Reports should no longer be relied upon.
In the 2015 Form 10-K, we restated our consolidated financial statements for the year ended, and unaudited financial information for the quarter ended, December 31, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and the unaudited financial statements for the quarter ended March 31, 2015 included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, the six-month period ended June 30, 2015 included in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, and the nine-month period ended September 30, 2015 included in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015. The unaudited financial statements for the quarter ended March 31, 2015 included in this Form 10-Q have been restated, see Note 2 titled "RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS" of notes to the unaudited consolidated financial statements for additional details regarding the restatement.
As of December 31, 2015, management determined that the Company did not maintain effective internal control over financial reporting due to the existence of material weaknesses related to tone at the top of the organization and non-standard revenue transactions, particularly at or near quarter ends. As of March 31, 2016, due to the existence of these material weaknesses, management has concluded that the Company’s disclosure controls and procedures were not effective.  See Item 4 of this Form 10-Q and Item 9A of the 2015 Form 10-K for further information.






VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
INDEX
Part I.
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


i



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
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, taken together. 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. Unless otherwise indicated, the statistical and financial data contained in this Form 10-Q are presented as of March 31, 2016.
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: our business strategy, business plans and prospects, product pipeline, prospective products or product approvals, product development and distribution plans, future performance or results of current and anticipated products; the expected benefits of our acquisitions and other transactions, such as cost savings, operating synergies and growth potential of the Company; the impact of material weaknesses in our internal control over financial reporting; our liquidity and our ability to satisfy our debt maturities as they become due; the impact of our distribution, fulfillment and other third party arrangements; proposed price reductions and limitations; changes in management; our ability to reduce debt levels; our ability to reduce certain inventory levels; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meet the financial and other covenants contained in our Credit Agreement and senior note indentures; the changes in our forecast for the fiscal year 2016; and our impairment assessments, including the assumptions used therein and the results thereof.
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, intentions, 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 expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New York and the State of North Carolina Department of Justice, the pending investigation by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, pending investigations by the U.S. Senate Special Committee on Aging and the U.S. House Committee on Oversight and Government Reform, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the document subpoena from the New Jersey State Bureau of Securities and a number of pending purported class action litigations in the U.S. and Canada and other claims, investigations or proceedings that may be initiated or that may be asserted;

ii



our ability to manage the transition to our new Chairman and Chief Executive Officer, the success of such individual in assuming the roles of Chairman and Chief Executive Officer and the ability of such individual to implement and achieve the strategies and goals of the Company as they develop;
the election of the slate of directors who are standing for election at our upcoming annual general meeting of shareholders, many of whom are new or recently appointed directors, and our ability to manage the transition to this new Board of Directors and the success of these individuals in their new roles as members of the Board of Directors of the Company;
potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm that may result from the completed review by the Ad Hoc Committee of our Board of Directors;
the effect of the misstatements identified in, and the resultant restatement of, certain of our previously issued financial statements and results (as further described herein); the material weaknesses in our internal control over financial reporting identified by the Company; and any claims, investigations or proceedings (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity or reputational harm that may arise as a result;
the effectiveness of the remediation measures and actions currently being implemented and to be taken in the future to remediate the material weaknesses in our internal control over financial reporting identified by the Company, our deficient control environment and the contributing factors leading to the misstatement of our results and the impact such measures may have on the Company and our businesses;
potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the recent public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor;
the current scrutiny of our business practices including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York, the U.S. Senate Special Committee on Aging, the U.S. House Committee on Oversight and Government Reform and the State of North Carolina Department of Justice) and any pricing controls or price reductions that may be sought or imposed (or that we may elect to implement) on our products as a result thereof (such as the recent decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products);
any default under the terms of our senior notes indentures or Credit Agreement and our ability, if any, to cure or obtain waivers of such default;
any delay in the filing of any subsequent financial statements or other filings and any default under the terms of our senior notes indentures or Credit Agreement as a result of such delays;
our substantial debt (and potential future indebtedness) and current and future debt service obligations and their impact on our financial condition, cash flows and results of operations;
our ability to meet the financial and other covenants contained in our Credit Agreement, senior note indentures and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including the restrictions imposed by the April 11, 2016 amendment (the “April 2016 amendment”) to our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we achieve a specified leverage ratio;
our ability to service and repay our existing or any future debt, including our ability to reduce our outstanding debt levels during 2016 in accordance with our stated intention;
any downgrade by rating agencies in our credit ratings (such as the recent downgrades by Moody’s Investors Service and Standard & Poor’s Ratings Services), which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances;
our ability to raise additional funds, as needed, in light of our current and projected levels of operations, general economic conditions (including capital market conditions) and any restrictions or limitations imposed by the financial and other covenants of our debt agreements with respect to incurring additional debt;

iii



any further reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2016 or beyond, which could lead to, among other things, a failure to meet the financial and/or other covenants contained in our Credit Agreement and/or senior note indentures and/or impairment in the goodwill associated with certain of our reporting units (including our U.S. reporting unit) or impairment charges related to certain of our products (in particular, our Addyi® product) or other intangible assets, which impairments could be material;
changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units (such as our U.S. reporting unit) or impairment charges related to certain of our products (in particular, our Addyi® product) or other intangible assets;
the potential divestiture of certain of our assets or businesses and our ability to successfully complete any future divestitures on commercially reasonable terms and on a timely basis, or at all;
the impact of any such future divestitures on our Company, including the reduction in the size or scope of our business or market share, any loss on sale or any adverse tax consequences suffered as a result of such divestitures;
our shift in focus to minimal business development activity through acquisitions in 2016 and possibly beyond as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by the April 2016 amendment to our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we achieve a specified leverage ratio;
the uncertainties associated with the acquisition and launch of new products (in particular, our Addyi® product launched in October 2015), including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges;
our ability to retain, motivate and recruit executives and other key employees and the termination or resignation of executives or key employees, such as the recent departure of our former chief executive officer;
our ability to implement effective succession planning for our executives and key employees;
our ability to successfully manage the transition of new executives and key employees, such as our new Corporate Controller;
our implemented and proposed price freezes and reductions on certain of our products, including the recent decision of the Company to take no further price increases on, and to implement an enhanced rebate program with respect to, our Nitropress® and Isuprel® products and the planned price reductions in conjunction with our arrangements with Walgreen Co. ("Walgreens"), and any future pricing freezes, reductions, increases or changes we may elect to make, as well as any proposed or future legislative price controls or price regulation, including mandated price reductions, that may impact our products;
the challenges and difficulties associated with managing a large complex business, which has grown rapidly over the last few years;
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
the success of our recent and future fulfillment and other arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, pharmacy benefit managers ("PBMs"), third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws and the ability of the anticipated increased volume across all distribution channels resulting from such arrangements to offset the impact of lower average selling prices associated with these arrangements;
the extent to which our products are reimbursed by government authorities, PBMs and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our former relationship with Philidor, any alleged wrongdoing by Philidor and our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;

iv



our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries, including the impact on such matters of the proposals published by the Organization for Economic Co-operation and Development ("OECD") respecting base erosion and profit shifting ("BEPS");
the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor;
the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets (including the challenges created by new and different regulatory regimes in such countries);
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 instability in Brazil, Russia, Ukraine, Argentina, certain countries in Africa and the Middle East);
our ability to reduce wholesaler inventory levels in Russia, Poland and certain other countries, in-line with our targeted levels for such markets;
our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property;
the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
once the additional limitations in our Credit Agreement restricting our ability to make acquisitions are no longer applicable, and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis;
factors relating to the acquisition and integration of the companies, businesses and products that have been acquired by the Company (and that may in the future be acquired by the Company, once the additional limitations in our Credit Agreement restricting our ability to make acquisitions are no longer applicable and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, and the achievement of the anticipated benefits from such integrations, as well as risks associated with the acquired companies, businesses and products;
factors relating to our ability to achieve all of the estimated synergies from such acquisitions as a result of cost-rationalization and integration initiatives. These factors may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions, some of which have not yet been made;
the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof;
our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays;
the disruption of delivery of our products and the routine flow of manufactured goods;
ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA"), and the results thereof;
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
interest rate risks associated with our floating rate debt borrowings;

v



our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our recent arrangements with Walgreens;
our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements;
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or withdrawals of products from the market;
the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products (such as our Addyi® product launched in October 2015), which could lead to material impairment charges;
the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
the seasonality of sales of certain of our products;
declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control;
compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate, including with respect to recent government inquiries on pricing;
the impact of the upcoming United States elections, including any healthcare reforms arising therefrom, including with respect to pricing controls;
factors relating to our acquisition of Salix Pharmaceuticals, Ltd. (“Salix”), including the impact of substantial additional debt on our financial condition, cash flows and results of operations; our ability to effectively and efficiently integrate the operations of the Company and Salix; our ability to achieve the estimated synergies from this transaction; once integrated, the effects of such business combination on our future financial condition, operating results, strategy and plans; and, our ability to achieve the anticipated benefits of such acquisition, including the anticipated revenue growth resulting from such acquisition (such as the anticipated revenue of the Xifaxan® product, including the recently-approved IBS-D indication);
potential ramifications, including financial penalties, relating to Salix's restatement of its historical financial results;
illegal distribution or sale of counterfeit versions of our products;
interruptions, breakdowns or breaches in our information technology systems; and
other risks detailed from time to time in our filings with the SEC and the Canadian Securities Administrators (the “CSA”) (including in our 2015 Form 10-K), as well as our ability to anticipate and manage the risks associated with the foregoing.

vi



Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found in our 2015 Form 10-K under Item 1A. “Risk Factors” 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.

vii



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
 
As of
March 31,
2016
 
As of
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,310.4

 
$
597.3

Trade receivables, net
2,692.7

 
2,686.9

Inventories, net
1,320.2

 
1,256.6

Prepaid expenses and other current assets
910.4

 
966.4

Total current assets
6,233.7

 
5,507.2

Property, plant and equipment, net
1,465.5

 
1,441.8

Intangible assets, net
22,346.0

 
23,083.0

Goodwill
18,600.7

 
18,552.8

Deferred tax assets, net
163.2

 
156.0

Other long-term assets, net
210.8

 
223.7

Total assets
$
49,019.9

 
$
48,964.5

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
438.1

 
$
433.7

Accrued and other current liabilities
3,337.9

 
3,859.1

Acquisition-related contingent consideration
146.3

 
196.8

Current portion of long-term debt
675.1

 
823.0

Total current liabilities
4,597.4

 
5,312.6

Acquisition-related contingent consideration
951.7

 
959.1

Long-term debt
31,303.4

 
30,265.4

Pension and other benefit liabilities
194.8

 
190.4

Liabilities for uncertain tax positions
117.7

 
120.2

Deferred tax liabilities, net
5,896.6

 
5,902.4

Other long-term liabilities
182.7

 
184.6

Total liabilities
43,244.3

 
42,934.7

Commitments and contingencies (Note 16)


 


Equity
 
 
 
Common shares, no par value, unlimited shares authorized, 343,019,163 and
 
 
 
  342,926,531 issued and outstanding at March 31, 2016 and December 31, 2015, respectively
9,905.9

 
9,897.4

Additional paid-in capital
351.6

 
304.9

Accumulated deficit
(3,123.4
)
 
(2,749.7
)
Accumulated other comprehensive loss
(1,478.6
)
 
(1,541.6
)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity
5,655.5

 
5,911.0

Noncontrolling interest
120.1

 
118.8

Total equity
5,775.6

 
6,029.8

Total liabilities and equity
$
49,019.9

 
$
48,964.5


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


1



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(All dollar amounts expressed in millions of U.S. dollars, except per share data)
(Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
(restated)
Revenues
 
 
 
Product sales
$
2,336.1

 
$
2,126.1

Other revenues
35.5

 
44.0

 
2,371.6

 
2,170.1

Operating Expenses
 
 
 
Cost of goods sold (exclusive of amortization and impairments of
 
 
 
finite-lived intangible assets shown separately below)
620.2

 
507.9

Cost of other revenues
9.7

 
14.3

Selling, general and administrative
812.6

 
573.8

Research and development
103.1

 
55.8

Amortization and impairments of finite-lived intangible assets
694.5

 
365.2

Restructuring, integration and other costs
38.0

 
55.0

Acquisition-related costs
1.8

 
13.9

Acquisition-related contingent consideration
2.4

 
7.1

Other expense
23.1

 
6.1

 
2,305.4

 
1,599.1

Operating income
66.2

 
571.0

Interest income
0.9

 
0.9

Interest expense
(426.6
)
 
(297.8
)
Loss on extinguishment of debt

 
(20.0
)
Foreign exchange and other
(6.2
)
 
(71.1
)
(Loss) income before provision for income taxes
(365.7
)
 
183.0

Provision for income taxes
7.2

 
84.5

Net (loss) income
(372.9
)

98.5

Less: Net income attributable to noncontrolling interest
0.8

 
0.8

Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
$
(373.7
)
 
$
97.7

 
 
 
 
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
Basic
$
(1.08
)
 
$
0.29

Diluted
$
(1.08
)
 
$
0.28

 
 
 
 
Weighted-average common shares outstanding (in millions)
 
 
 
Basic
344.9

 
336.8

Diluted
344.9

 
343.4


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
March 31,
 
2016
 
2015
(restated)
Net (loss) income
$
(372.9
)
 
$
98.5

Other comprehensive loss
 
 
 
Foreign currency translation adjustment
63.9

 
(411.5
)
Pension and postretirement benefit plan adjustments
(0.4
)
 
(0.4
)
Other comprehensive income (loss)
63.5

 
(411.9
)
Comprehensive loss
(309.4
)
 
(313.4
)
Less: Comprehensive income attributable to noncontrolling interest
1.3

 
0.6

Comprehensive loss attributable to Valeant Pharmaceuticals International, Inc.
$
(310.7
)
 
$
(314.0
)


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

3



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
(restated)
Cash Flows From Operating Activities
 
 
 
Net (loss) income
$
(372.9
)
 
$
98.5

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, including impairments of finite-lived intangible assets
746.8

 
407.0

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

 
10.5

Acquisition accounting adjustment on inventory sold
28.9

 
24.5

Acquisition-related contingent consideration
2.4

 
7.1

Allowances for losses on accounts receivable and inventories
28.4

 
12.2

Deferred income tax (benefit) expense
(26.2
)
 
66.0

Additions to accrued legal settlements
1.6

 
1.5

Payments of accrued legal settlements
(2.8
)
 
(3.0
)
Loss on deconsolidation
18.4

 

Share-based compensation
63.5

 
35.0

Tax expense (benefit) from share-based compensation
1.4

 
(17.9
)
Foreign exchange (gain) loss
(1.8
)
 
75.9

Loss on extinguishment of debt

 
20.0

Payment of accreted interest on contingent consideration
(2.2
)
 
(2.2
)
Other
1.9

 
(7.2
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables
5.5

 
(67.0
)
Inventories
(85.9
)
 
(91.0
)
Prepaid expenses and other current assets
156.5

 
(45.1
)
Accounts payable, accrued and other liabilities
(25.9
)
 
(33.7
)
Net cash provided by operating activities
558.1

 
491.1

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisition of businesses, net of cash acquired
(18.5
)
 
(795.0
)
Acquisition of intangible assets and other assets
(7.3
)
 
(48.8
)
Purchases of property, plant and equipment
(62.3
)
 
(65.8
)
Reduction of cash due to deconsolidation
(30.2
)
 

Proceeds from sales and maturities of short-term investments

 
17.7

Proceeds from sale of assets and businesses, net of costs to sell
6.3

 

Increase in restricted cash and cash equivalents

 
(10,349.1
)
Other

 
0.5

Net cash used in investing activities
(112.0
)
 
(11,240.5
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of long-term debt, net of discount
1,220.0

 
12,001.0

Repayments of long-term debt
(425.6
)
 
(1,110.3
)
Short-term debt borrowings
0.7

 
3.2

Short-term debt repayments
(0.7
)
 
(2.3
)
Issuance of common stock, net

 
1,433.7

Proceeds from exercise of stock options
0.8

 
14.5

Tax (expense) benefit from share-based compensation
(1.4
)
 
17.9

Payment of employee withholding tax upon vesting of share-based awards
(7.7
)
 
(15.9
)
Payments of contingent consideration
(25.6
)
 
(12.3
)
Payments of deferred consideration
(500.0
)
 

Payments of financing costs
(0.3
)
 
(23.2
)
Other
(1.0
)
 

Net cash provided by financing activities
259.2

 
12,306.3

Effect of exchange rate changes on cash and cash equivalents
7.8

 
(15.1
)
Net increase in cash and cash equivalents
713.1

 
1,541.8

Cash and cash equivalents, beginning of period
597.3

 
322.6

Cash and cash equivalents, end of period
$
1,310.4

 
$
1,864.4

 
 
 
 
Non-Cash Investing and Financing Activities
 
 
 
Acquisition of businesses, contingent and deferred consideration obligations at fair value
$

 
$
(286.9
)
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
Valeant Pharmaceuticals International, Inc. (the "Company") is a multinational, specialty pharmaceutical and medical device company, continued under the laws of the Province of British Columbia, that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries.
On April 1, 2015, the Company acquired Salix Pharmaceuticals, Ltd. ("Salix"), pursuant to an Agreement and Plan of Merger dated February 20, 2015, as amended on March 16, 2015 (the "Salix Merger Agreement"), with Salix surviving as a wholly owned subsidiary of Valeant Pharmaceuticals International ("Valeant"), a subsidiary of the Company (the "Salix Acquisition").
For further information regarding the Salix Acquisition, see Note 4.
2.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
This footnote discloses the nature of the restatement matters described below and shows the impact of the restatement matters on the Company's consolidated financial statements for the three months ended March 31, 2015.
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), the Company has restated its consolidated financial statements for the year ended December 31, 2014 (including the financial information for the three months ended December 31, 2014), the three months ended March 31, 2015, six months ended June 30, 2015 and nine months ended September 30, 2015. The Company filed the 2015 Form 10-K on April 29, 2016. Additional information regarding the restatement is contained in that filing. Prior period financial information in this Form 10-Q has been amended where necessary to reflect the restatement. Therefore, this Form 10-Q should be read in conjunction with the Company’s 2015 Form 10-K.
On December 15, 2014, the Company entered into a purchase option agreement with Philidor Rx Services, LLC (“Philidor”) and its members in which the Company received an exclusive option to acquire 100% of the equity interest in Philidor, and as of which time Philidor was consolidated with the Company for accounting purposes as a variable interest entity for which the Company was the primary beneficiary. Prior to consolidation, revenue on sales to Philidor was recognized by the Company on a sell-in basis (i.e., recorded when the Company delivered product to Philidor). The Company determined that certain sales transactions for deliveries to Philidor in the second half of 2014 leading up to the execution of the purchase option agreement were not executed in the normal course of business under applicable accounting standards and included actions taken by the Company (including fulfillment of unusually large orders with extended payment terms and increased pricing, an emphasis on delivering product prior to the execution of the purchase option agreement and seeking and filling a substitute order of equivalent value for an unavailable product) in contemplation of the purchase option agreement. As a result of these actions, revenue for certain transactions completed prior to entry into the purchase option agreement should have been recognized on a sell-through basis (i.e., record revenue when Philidor dispensed the products to patients) rather than incorrectly recognized on the sell-in basis utilized by the Company. Additionally, related to these and certain earlier transactions, the Company has since concluded that collectability was not reasonably assured at the time the revenue was originally recognized, and, thus, these transactions should have been recognized at a later date (when collectability was reasonably assured which the Company determined coincides with when the inventory is sold through to the end customer) instead of on a sell-in basis. Following the consolidation of Philidor on the date of entry into the purchase option agreement, the Company began recognizing revenue as Philidor dispensed product to patients. The restatement of previously issued financial statements, primarily for these Philidor-related adjustments, reduced revenue for the three months ended March 31, 2015 by approximately $21 million and increased the Company's net income attributable to Valeant Pharmaceuticals International, Inc. and diluted earnings per share for the three months ended March 31, 2015 by approximately $24 million or $0.07 per share.
The following tables summarize the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the three months ended March 31, 2015, as reported on the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on April 30, 2015, compared to the restated financial statements. The individual restatement matters that underlie the restatement adjustments are described below and are reflected and quantified, as applicable, in the footnotes to the below tables.

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)


(a)
Philidor revenue recognition adjustments - The correction of the misstatement from recognizing revenue related to sales to Philidor from a sell-in to sell-through basis had the effect of eliminating certain revenue recorded in 2014 prior to the date that Philidor was consolidated as a variable interest entity. The revenue that was eliminated from 2014 did not result in an increase to revenue in subsequent periods as a result of the Company having previously recognized that revenue, subsequent to the consolidation of Philidor, when Philidor dispensed the product to patients. Under the sell-in method previously utilized by the Company with respect to sales to Philidor prior to its consolidation in December 2014, revenue was recognized upon delivery of the products to Philidor. At the date of consolidation, certain of that previously sold inventory was still held by Philidor. Subsequent to the consolidation, Philidor recognized revenue on that inventory when it dispensed products to patients, and that revenue was consolidated into the Company’s results. As long as those pre-consolidation sales transactions were in the normal course of business under applicable accounting standards and not entered into in contemplation of the purchase option agreement, the Company’s historical accounting for this revenue was in accordance with U.S. GAAP. The Company has since determined that certain sales transactions for deliveries to Philidor, leading up to the purchase option agreement, were not executed in the normal course of business under applicable accounting standards and included actions taken by the Company (including fulfillment of unusually large orders with extended payment terms and increased pricing, an emphasis on delivering product prior to the execution of the purchase option agreement and seeking and filling a substitute order of equivalent value for an unavailable product) in contemplation of the purchase option agreement. As such, revenue, net of managed care rebates, of $58 million previously recorded in 2014 was corrected. However, because that revenue was also recorded by Philidor subsequent to consolidation, upon dispensing of products to patients, the elimination of this revenue in 2014, prior to consolidation, did not result in additional revenue being recorded in 2015. Additionally, provisions for managed care rebates of $21 million previously recorded in 2014 are now recognized against that revenue in the first quarter of 2015.
At the time of the consolidation of Philidor in December 2014, under the acquisition method of accounting, the Company recorded the fair value of the inventory on hand at Philidor at the net price the Company previously sold the inventory to Philidor, exclusive of the impact of managed care rebates.  The restatement adjustments to eliminate the revenue for certain sales transactions between the Company and Philidor prior to consolidation, resulted in a reduction, for accounting purposes, to the amount of inventory that the Company acquired from Philidor.  Eliminating the pre-consolidation sales described above had the effect of reducing pre-tax profit that was recognized in 2014 by $39 million. The majority of this profit is now recognized in 2015 as a reduction to previously recorded Cost of Goods Sold as the restated carrying amount of this inventory does not include the stepped up value resulting from the Company's consolidation of Philidor.
(b)
Accrued liability adjustment - Unrelated to Philidor, the Company recorded an accrual for previously unrecorded professional fees related to acquisition-related costs.
(c)
Tax effect of restatement adjustments - The Company calculated the tax effect of the adjustments noted above.

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)



CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

 
Three Months Ended March 31,
 
2015
(As Previously Reported)
 
Restatement
Adjustments
 
2015
(Restated)
 
Restatement
Ref
Revenues
 
 
 
 
 
 
 
Product sales
$
2,146.9

 
$
(20.8
)
 
$
2,126.1

 
(a)
Other revenues
44.0

 

 
44.0

 
 
 
2,190.9

 
(20.8
)
 
2,170.1

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

 
(52.5
)
 
507.9

 
(a)
Cost of other revenues
14.3

 

 
14.3

 
 
Selling, general and administrative
573.8

 

 
573.8

 
 
Research and development
55.8

 

 
55.8

 
 
Amortization and impairment of finite-lived intangible assets
365.2

 

 
365.2

 
 
Restructuring, integration and other costs
55.0

 

 
55.0

 
 
Acquisition-related costs
9.8

 
4.1

 
13.9

 
(b)
Acquisition-related contingent consideration
7.1

 

 
7.1

 
 
Other expense
6.1

 

 
6.1

 
 
 
1,647.5

 
(48.4
)
 
1,599.1

 
 
Operating income
543.4

 
27.6

 
571.0

 
 
Interest income
0.9

 

 
0.9

 
 
Interest expense
(297.8
)
 

 
(297.8
)
 
 
Loss on extinguishment of debt
(20.0
)
 

 
(20.0
)
 
 
Foreign exchange and other
(71.1
)
 

 
(71.1
)
 
 
Income before provision for income taxes
155.4

 
27.6

 
183.0

 
 
Provision for income taxes
80.9

 
3.6

 
84.5

 
(c)
Net income
74.5

 
24.0

 
98.5

 
 
Less: Net income attributable to noncontrolling interest
0.8

 

 
0.8

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

 
$
24.0

 
$
97.7

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

 
$
0.07

 
$
0.29

 
 
Diluted
$
0.21

 
$
0.07

 
$
0.28

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in millions)
 
 
 
 
 
 
 
Basic
336.8

 
 
 
336.8

 
 
Diluted
343.4

 
 
 
343.4

 
 

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)


There was no net impact of the 2015 restatement adjustments on net cash provided by operating activities, net cash used in investing activities and net cash provided by financing activities in the Consolidated Statement of Cash Flows. The adjustments only had an impact on certain captions within cash flows from operating activities.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
 
2015
(As Previously Reported)
 
Restatement
Adjustments
 
2015
(Restated)
 
Restatement
Ref
Cash Flow From Operating Activities
 
 
 
 
 
 
 
Net income
$
74.5

 
$
24.0

 
$
98.5

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

 

 
407.0

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

 

 
10.5

 
 
Acquisition accounting adjustment on inventory sold
24.5

 

 
24.5

 
 
Acquisition-related contingent consideration
7.1

 

 
7.1

 
 
Allowances for losses on accounts receivable and inventories
12.2

 

 
12.2

 
 
Deferred income taxes
62.4

 
3.6

 
66.0

 
(c)
Additions to accrued legal settlements
1.5

 

 
1.5

 
 
Payments of accrued legal settlements
(3.0
)
 

 
(3.0
)
 
 
Share-based compensation
35.0

 

 
35.0

 
 
Tax benefits from share based compensation
(17.9
)
 

 
(17.9
)
 
 
Foreign exchange loss
75.9

 

 
75.9

 
 
Loss on extinguishment of debt
20.0

 

 
20.0

 
 
Payment of accreted interest on contingent consideration
(2.2
)
 

 
(2.2
)
 
 
Other
(7.2
)
 

 
(7.2
)
 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade receivables
(67.0
)
 

 
(67.0
)
 
 
Inventories
(38.5
)
 
(52.5
)
 
(91.0
)
 
(a)
Prepaid expenses and other current assets
(45.1
)
 

 
(45.1
)
 
 
Accounts payable, accrued and other liabilities
(58.6
)
 
24.9

 
(33.7
)
 
(a), (b)
Net cash provided by operating activities
491.1

 

 
491.1

 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
(11,240.5
)
 

 
(11,240.5
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
12,306.3

 

 
12,306.3

 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(15.1
)
 

 
(15.1
)
 
 
Net increase in cash and cash equivalents
1,541.8

 

 
1,541.8

 
 
Cash and cash equivalents, beginning of period
322.6

 

 
322.6

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

 
$

 
$
1,864.4

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

 
$
(286.9
)
 
 

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)


3.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements (the “unaudited consolidated financial statements”) have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these condensed notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in the Company’s 2015 Form 10-K. The unaudited consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2015. The unaudited consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
Use of Estimates
In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.
Adoption of New Accounting Standards
In February 2015, the FASB issued guidance which amends certain consolidation requirements. The new guidance has the following stipulations, among others: (i) eliminates the presumption that a general partner should consolidate a limited partnership and eliminates the consolidation model specific to limited partnerships, (ii) clarifies when fees paid to a decision maker should be a factor to include in the consolidation of VIEs, (iii) amends the guidance for assessing how relationships of related parties affect the consolidation analysis of VIEs, and (iv) reduces the number of VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds. The guidance was effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2015. The Company adopted this standard as of January 1, 2016 using the modified retrospective approach, as permitted, and, as such, prior periods were not retrospectively adjusted. The adoption of this standard did not have a material impact on the presentation of the Company's results of operations, cash flows or financial position.
Recently Issued Accounting Standards, Not Adopted as of March 31, 2016
In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity will: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition to these provisions, the new standard provides implementation guidance on several other topics, including the accounting for certain revenue-related costs, as well as enhanced disclosure requirements. The new guidance requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued an amendment to clarify the implementation guidance around considerations of whether an entity is a principal or an agent, impacting whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued an amendment to

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)


clarify guidance on identifying performance obligations and the implementation guidance on licensing. In May 2016, the FASB issued amendments to certain aspects of the new revenue guidance (including transition, collectability, noncash consideration and the presentation of sales and other similar taxes) and provided certain practical expedients. The guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early application is permitted but not before the annual reporting period (and interim reporting period) beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In August 2014, the FASB issued guidance which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new guidance, disclosures are required when conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have any impact on the Company’s financial position and results of operations and, at this time, the Company does not expect any impact on its disclosures.
In July 2015, the FASB issued guidance which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position and results of operations.
In January 2016, the FASB issued guidance which amends the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured under the fair value option. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In February 2016, the FASB issued new guidance on leases. The new guidance will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions. Current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions. Consistent with the current lease standard, the new guidance addresses two types of leases: finance leases and operating leases. Finance leases will be accounted for in substantially the same manner as capital leases are accounted for under current GAAP. Operating leases will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with operating leases under existing GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception. The new guidance will also require lessees and lessors to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities. The new guidance is effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2018. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and cash flows.
4.
ACQUISITIONS

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 Company’s business strategy has involved selective acquisitions with a focus on core geographies and therapeutic classes.
Business combinations in 2015 included the following:
Amoun
Description of the Transaction
On October 19, 2015, the Company acquired Mercury (Cayman) Holdings, the holding company of Amoun Pharmaceutical Company S.A.E. (“Amoun”), for consideration of approximately $911 million, including contingent payments (the “Amoun Acquisition”).  Amoun develops and markets a wide range of pharmaceutical brands in therapeutic areas such as anti-hypertensives, broad spectrum antibiotics, and anti-diarrheals primarily in North Africa and the Middle East.
Fair Value of Consideration Transferred
The fair value of consideration transferred to effect the Amoun Acquisition consisted of $847 million in cash, plus contingent consideration based upon the achievement of specified sales-based milestones. The range of potential milestone payments as of the acquisition date is from nil, if none of the milestones are achieved, to a maximum of up to approximately $75 million over time, if all milestones are achieved, in the aggregate. The total fair value of the contingent consideration of $64 million as of the acquisition date was determined using probability-weighted discounted cash flows. Refer to Note 6 for additional information regarding contingent consideration. The Company recognized a post-combination expense of $12 million within Other expense (income) in the fourth quarter of 2015 related to cash bonuses paid to Amoun employees.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:
amounts for intangible assets, property, plant and equipment, certain liabilities, and other working capital balances pending finalization of the valuation;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the provisional amounts recognized at the acquisition date in the reporting period in which the adjustments are determined. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.

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 Date
(as previously
reported)(a)
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
March 31, 2016
(as adjusted)
Cash
 
$
43.5

 
$

 
$
43.5

Accounts receivable(b)
 
64.2

 

 
64.2

Inventories
 
37.9

 

 
37.9

Other current assets
 
12.2

 

 
12.2

Property, plant and equipment
 
96.4

 
(1.0
)
 
95.4

Identifiable intangible assets, excluding acquired in-process research and development ("IPR&D")(c)
 
528.0

 
(0.2
)
 
527.8

Acquired IPR&D
 
18.5

 
(1.1
)
 
17.4

Other non-current assets
 
0.1

 

 
0.1

Current liabilities
 
(30.8
)
 

 
(30.8
)
Deferred tax liability, net(d)
 
(130.5
)
 
0.5

 
(130.0
)
Other non-current liabilities
 
(11.2
)
 
2.9

 
(8.3
)
Total identifiable net assets
 
628.3

 
1.1

 
629.4

Goodwill(e)
 
282.0

 
(0.2
)
 
281.8

Total fair value of consideration transferred
 
$
910.3

 
$
0.9

 
$
911.2

________________________
(a)
As previously reported in the Company’s 2015 Form 10-K.
(b)
The fair value of trade accounts receivable acquired was $64 million, with the gross contractual amount being $66 million, of which the Company expects that $2 million will be uncollectible.
(c)
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
March 31, 2016
(as adjusted)
Product brands
 
9
 
$
490.8

 
$
(0.1
)
 
$
490.7

Corporate brand
 
15
 
37.2

 
(0.1
)
 
37.1

Total identifiable intangible assets acquired
 
9
 
$
528.0

 
$
(0.2
)
 
$
527.8

(d)
Comprised of deferred tax liabilities partially offset by nominal deferred tax assets.
(e)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
the Company’s expectation to develop and market new products and expand its business to new geographic markets;
the value of the continuing operations of Amoun's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, Amoun's assembled workforce).
The provisional amount of goodwill has been allocated to the Company’s Emerging Markets segment.
Sprout
Description of the Transaction
On October 1, 2015, the Company acquired Sprout Pharmaceuticals, Inc. (“Sprout”), pursuant to the merger agreement, among Sprout, the Company, Valeant, Miranda Acquisition Sub, Inc., a wholly owned subsidiary of Valeant, and Shareholder Representative Services LLC, as stockholder representative, on a debt-free basis (the “Sprout Acquisition”), for an aggregate purchase price of $1.45 billion, which includes cash plus contingent consideration. Sprout has focused solely on the delivery

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)


of a treatment option for the unmet need of pre-menopausal women with acquired, generalized hypoactive sexual desire disorder (HSDD) as characterized by low sexual desire that causes marked distress or interpersonal difficulty and is not due to a co-existing medical or psychiatric condition, problems within the relationship, or the effects of a medication or other drug substance. In August 2015, Sprout received approval from the U.S. Food and Drug Administration ("FDA") on its New Drug Application ("NDA") for flibanserin, which is being marketed as Addyi® in the U.S. (launched in the U.S. in October 2015). Sprout also has global rights to flibanserin. In connection with the acquisition of Sprout, the Company has a contractual obligation for expenditures of at least $200 million with respect to Addyi® for selling, general and administrative, marketing and research and development expenses from the period commencing January 1, 2016 through June 30, 2017.
Fair Value of Consideration Transferred
The Company paid approximately $530 million, inclusive of customary purchase price adjustments, upon closing of the transaction in October 2015, and an additional payment in the amount of $500 million (acquisition date fair value of $495 million), included in accrued and other current liabilities as of December 31, 2015, was paid in the first quarter of 2016. In addition, the transaction includes contingent consideration representing payments to the former shareholders and former holders of vested stock appreciation rights of Sprout for a share of future profits. The share of future profits with the former shareholders and former holders of vested stock appreciation rights of Sprout is uncapped and commences on the date that the earlier of the following events occurs (a) net cumulative worldwide sales of flibanserin products (plus any amounts received from sublicenses on the sale of flibanserin products) exceed $1 billion or (b) July 1, 2017, and continues until December 31, 2030. The total fair value of the contingent consideration of $422 million as of the acquisition date was determined using a Monte Carlo Simulation. Refer to Note 6 for additional information regarding contingent consideration.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:
amounts for intangible assets, certain liabilities, and other working capital balances pending finalization of the valuation;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the provisional amounts recognized at the acquisition date in the reporting period in which the adjustments are determined. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
 
 
Amounts
Recognized as of
Acquisition Date
(as previously
reported)(a)
Cash and cash equivalents
 
$
26.6

Inventories
 
11.0

Other assets
 
1.6

Identifiable intangible assets(b)
 
993.7

Current liabilities
 
(4.4
)
Deferred income taxes, net
 
(351.9
)
Total identifiable net assets
 
676.6

Goodwill(c)
 
769.9

Total fair value of consideration transferred
 
$
1,446.5

________________________
(a)
As previously reported in the Company’s 2015 Form 10-K.

13


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


(b)
Consists of product rights with a weighted-average useful life of 11 years.
(c)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
the Company’s potential ability to develop and market the product to additional types of patients/indications and launch the product in a variety of new geographies;
the value of the continuing operations of Sprout's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, Sprout's assembled workforce).
The provisional amount of goodwill has been allocated to the Company’s Developed Markets segment.
Salix
Description of the Transaction
On April 1, 2015, the Company acquired Salix, pursuant to the Salix Merger Agreement, among the Company, Valeant, Sun Merger Sub, Inc., a wholly owned subsidiary of Valeant (“Sun Merger Sub”), and Salix. Salix is a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of variety of gastrointestinal ("GI") disorders with a portfolio of over 20 marketed products, including Xifaxan®, Uceris®, Apriso®, Glumetza®, and Relistor®.
In accordance with the terms of the Salix Merger Agreement, Sun Merger Sub commenced a tender offer (the “Offer”) for all of Salix’s outstanding shares of common stock, par value $0.001 per share (the “Salix Shares”), at a purchase price of $173.00 per Salix Share, net to the holder in cash, without interest, less any applicable withholding taxes. The Offer expired on April 1, 2015, as scheduled. A sufficient number of Salix Shares were validly tendered in the Offer such that the minimum tender condition to the Offer was satisfied, and Sun Merger Sub accepted for payment all such tendered Salix Shares. Following the expiration of the Offer on April 1, 2015, Sun Merger Sub merged with and into Salix, with Salix surviving as a wholly owned subsidiary of Valeant (the “Merger”). The Merger was governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the Merger. At the effective time of the Merger, each Salix Share then outstanding was converted into the right to receive $173.00 in cash, without interest, less any applicable withholding taxes, except for Salix Shares then owned by the Company or Salix or their respective wholly owned subsidiaries, which Salix Shares were cancelled for no consideration.
In connection with the Merger, each unexpired and unexercised option to purchase Salix Shares (the “Salix Options”), whether or not then exercisable or vested, was cancelled and, in exchange therefor, each former holder of any such cancelled Salix Options was entitled to receive, a payment in cash (subject to any applicable withholding or other taxes required by applicable law to be withheld) of an amount equal to the product of (i) the total number of Salix Shares previously subject to such Salix Options and (ii) the excess, if any, of $173.00 over the exercise price per Salix Share previously subject to such Salix Options. Each unvested Salix Share subject to forfeiture restrictions, repurchase rights or other restrictions (the “Salix Restricted Stock”) automatically became fully vested and was cancelled and, in exchange therefor, each former holder of such cancelled Salix Restricted Stock was entitled to receive, a payment in cash (subject to any applicable withholding or other taxes required by applicable law to be withheld) equal to $173.00 per share of Salix Restricted Stock.
The Salix Acquisition (including the Offer and the Merger), as well as related transactions and expenses, were funded through a combination of: (i) the proceeds from an issuance of senior unsecured notes that closed on March 27, 2015; (ii) the proceeds from incremental term loan commitments; (iii) the proceeds from a registered offering of the Company’s common shares in the United States that closed on March 27, 2015; and (iv) cash on hand.
Fair Value of Consideration Transferred
The following table indicates the consideration transferred to effect the Salix Acquisition:

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)


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

 
 

Multiplied by Per Share Merger Consideration
 
$
173.00

 
$
11,123.9

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

 
10.1

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

 
195.0

 
 
 
 
11,329.0

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

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

Total fair value of consideration transferred
 
 

 
$
13,132.0

___________________________________
(a)
The purchase consideration paid to holders of Salix stock options and restricted stock attributable to pre-combination services was included as a component of the purchase price. Purchase consideration of $165 million paid for outstanding restricted stock that was accelerated by the Company in connection with the Salix Acquisition was excluded from the purchase price and accounted for as post-combination expense within Other expense (income) in the second quarter of 2015.
(b)
The repayment of Salix’s Term Loan B Credit Facility has been reflected as part of the purchase consideration as the debt was repaid concurrently with the consummation of the Salix Acquisition and was not assumed by the Company as part of the acquisition. Similarly, the redemption of Salix’s 6.00% Senior Notes due 2021 has been reflected as part of the purchase consideration as the indenture governing the 6.00% Senior Notes due 2021 was satisfied and discharged concurrently with the consummation of the Salix Acquisition and was not assumed by the Company as part of the acquisition.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
 
 
Amounts
Recognized as of
Acquisition Date
(as previously
reported)(a)
 
Measurement
Period
Adjustments(b)
 
Amounts
Recognized as of
December 31, 2015
(as adjusted)
Cash and cash equivalents
 
$
113.7

 
$

 
$
113.7

Inventories(c)
 
233.2

 
(0.6
)
 
232.6

Other assets(d)
 
1,400.3

 
10.1

 
1,410.4

Property, plant and equipment, net
 
24.3

 

 
24.3

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

 

 
6,756.3

Acquired IPR&D(f)
 
5,366.8

 
(183.9
)
 
5,182.9

Current liabilities(g)
 
(1,764.2
)
 
(175.0
)
 
(1,939.2
)
Contingent consideration, including current and long-term portion(h)
 
(327.9
)
 
(6.2
)
 
(334.1
)
Long-term debt, including current portion(i)
 
(3,123.1
)
 

 
(3,123.1
)
Deferred income taxes, net(j)
 
(3,512.0
)
 
84.1

 
(3,427.9
)
Other non-current liabilities
 
(7.3
)
 
(36.0
)
 
(43.3
)
Total identifiable net assets
 
5,160.1

 
(307.5
)
 
4,852.6

Goodwill(k)
 
7,971.9

 
307.5

 
8,279.4

Total fair value of consideration transferred
 
$
13,132.0

 
$

 
$
13,132.0

________________________
(a)
As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.
(b)
The measurement period adjustments primarily reflect: (i) a reduction in acquired IPR&D assets, specifically for the Oral Relistor® program based mainly on refinement of the pricing assumptions and cost projections (see further discussion of IPR&D programs in (f) below) and (ii) the tax impact of pre-tax measurement period adjustments as well as reclassifications of certain tax balances impacting current liabilities. The measurement period

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)


adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s consolidated financial statements. As the measurement period for the Salix Acquisition closed in the fourth quarter of 2015, there were no measurement period adjustments recorded in the first quarter of 2016.
(c)
Includes an estimated fair value step-up adjustment to inventory of $108 million.
(d)
Primarily includes an estimated fair value of $1.27 billion to record the capped call transactions and convertible bond hedge transactions that were entered into by Salix prior to the Salix Acquisition in connection with its 1.5% Convertible Senior Notes due 2019 and 2.75% Convertible Senior Notes due 2015. These instruments were settled on the date of the Salix Acquisition and, as such, the fair value was based on the settlement amounts. Other assets also includes an estimated insurance recovery of $80 million, based on estimated fair value, related to the legal matters discussed in (g) below.
(e)
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
(as previously
reported)
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
December 31, 2015
(as adjusted)
Product brands
 
10
 
$
6,088.3

 
$
1.3

 
$
6,089.6

Corporate brand
 
20
 
668.0

 
(1.3
)
 
666.7

Total identifiable intangible assets acquired
 
11
 
$
6,756.3

 
$

 
$
6,756.3

(f)
A multi-period excess earnings methodology (income approach) was used to determine the estimated fair values of the acquired IPR&D assets from a market participant perspective. The projected cash flows from these assets were adjusted for the probabilities of successful development and commercialization of each project, and the Company used risk-adjusted discount rates of 9.5%-11% to present value the projected cash flows.
The IPR&D assets primarily relate to Xifaxan® 550 mg for the treatment of irritable bowel syndrome with diarrhea (new indication) in adults ("Xifaxan® IBS-D"). In determining the fair value of Xifaxan® IBS-D ($4.79 billion as of the acquisition date), the Company assumed material cash inflows would commence in 2015. In May 2015, Xifaxan® IBS-D received approval from the FDA, and, accordingly, such asset has been reclassified to an amortizable intangible asset as of the approval date and is being amortized over a period of 10 years.
Other IPR&D assets include, among others, Oral Relistor® for the treatment of opioid-induced constipation in adult patients with chronic non-cancer pain and Rifaximin soluble solid dispersion ("SSD") for the treatment of early decompensated liver cirrhosis. In September 2015, the Company announced that the FDA accepted for review the Company's NDA for Oral Relistor®, and the FDA assigned a Prescription Drug User Fee Act (PDUFA) action date of April 19, 2016. In April 2016, the Company announced that the FDA had extended the PDUFA action date for Oral Relistor® to July 19, 2016 to allow time for a full review of the Company's responses to certain information requests from the FDA. In the third quarter of 2015, the Company terminated the Rifaximin SSD IPR&D program and recognized an impairment charge as described in Note 8.
(g)
Primarily includes an estimated fair value of $1.08 billion to record the warrant transactions that were entered into by Salix prior to the Salix Acquisition in connection with its 1.5% Convertible Senior Notes due 2019 (these instruments were settled on the date of the Salix Acquisition and, as such, the fair value was based on the settlement amounts), as well as accruals for (i) the estimated fair value of $336 million (exclusive of the related insurance recovery described in (d) above) for potential losses and related costs associated with legal matters relating to the legacy Salix business (See Note 16 for additional information regarding these legal matters) and (ii) product returns and rebates of $375 million.
(h)
The contingent consideration consists of potential payments to third parties including developmental milestone payments due upon specified regulatory achievements, commercialization milestones contingent upon achieving specified targets for net sales, and royalty-based payments. As of the acquisition date, the range of potential milestone payments (excluding royalty-based payments) is from nil, if none of the milestones are achieved, to a maximum of up to approximately $650 million (the majority of which relates to sales-based milestones) over time, if all milestones are achieved, in the aggregate, to third parties. This amount includes up to $250 million in developmental and sales-based milestones to Progenics Pharmaceuticals, Inc. related to Relistor® (including Oral Relistor®), and various other developmental and sales-based milestones. The total fair value of the contingent consideration of $334 million as of the acquisition date was determined using probability-weighted discounted cash flows. Refer to Note 6 for additional information regarding the contingent consideration.
(i)
The following table summarizes the fair value of long-term debt assumed as of the acquisition date:
 
 
Amounts
Recognized as of
Acquisition Date
1.5% Convertible Senior Notes due 2019(1)
 
$
1,837.1

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

Total long-term debt assumed
 
$
3,123.1

____________________________________
(1)
The Company subsequently redeemed these amounts in full in the second quarter of 2015, except for a nominal amount of the 1.5% Convertible Senior Notes due 2019.

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)


(j)
Comprises deferred tax assets ($303 million) and deferred tax liabilities ($3.73 billion).
(k)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
the Company’s expectation to develop and market new product brands, product lines and technology;
cost savings and operating synergies expected to result from combining the operations of Salix with those of the Company;
the value of the continuing operations of Salix’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, Salix’s assembled workforce).
Goodwill has been allocated to the Company’s Developed Markets segment.
Other 2015 Business Combinations (excluding the Amoun Acquisition, the Sprout Acquisition, and the Salix Acquisition)
Description of the Transactions
In the year ended December 31, 2015, the Company completed other business combinations (excluding the Amoun Acquisition, the Sprout Acquisition, and the Salix Acquisition), which included the acquisition of the following businesses, for an aggregate purchase price of $1.41 billion. The other business combinations completed during the year ended December 31, 2015 included contingent consideration arrangements with an aggregate acquisition date fair value of $191 million, primarily related to the acquisition of certain assets of Marathon Pharmaceuticals, LLC ("Marathon") (see below), as well as milestone payments and royalties related to other smaller acquisitions. Refer to Note 6 for additional information regarding contingent consideration.
On February 23, 2015, the Company, completed via a "stalking horse bid" in a sales process conducted under the U.S. Bankruptcy Code, acquired certain assets of Dendreon Corporation ("Dendreon") for a purchase price of $415 million, net of cash received ($495 million less cash received of $80 million). The purchase price included approximately $50 million in stock consideration, and such shares were issued in June 2015. The assets acquired from Dendreon included the worldwide rights to the Provenge® product (an immunotherapy treatment designed to treat men with advanced prostate cancer).
On February 10, 2015, the Company acquired certain assets of Marathon. The assets acquired from Marathon comprised a portfolio of hospital products, including Nitropress®, Isuprel®, Opium Tincture, Pepcid®, Seconal® Sodium, Amytal® Sodium, and Iprivask® for an aggregate purchase price of $286 million (which is net of a $64 million assumed liability owed to a third party which is reflected in the table below). Also, as part of this acquisition, the Company assumed a contingent consideration liability as described further below.
In the year ended December 31, 2015, the Company completed other smaller acquisitions which are not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below.
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the business combinations, in the aggregate, as of the applicable acquisition dates. The following recognized amounts related to certain smaller acquisitions are provisional and subject to change:
amounts for intangible assets, property and equipment, inventories, receivables and other working capital adjustments pending finalization of the valuation;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in adjustments to the

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)


provisional amounts recognized at the acquisition dates. These changes could be significant. The Company will finalize these amounts no later than one year from the respective acquisition dates.
 
 
Amounts
Recognized as of
Acquisition Dates(as previously reported)
 
Measurement
Period
Adjustments(a)
 
Amounts
Recognized as of
March 31, 2016
(as adjusted)
Cash
 
$
92.2

 
$

 
$
92.2

Accounts receivable(b)
 
49.5

 
(3.0
)
 
46.5

Inventories
 
142.9

 
(2.2
)
 
140.7

Other current assets
 
20.2

 
(0.2
)
 
20.0

Property, plant and equipment
 
94.6

 
(15.0
)
 
79.6

Identifiable intangible assets, excluding acquired IPR&D(c)
 
1,121.6

 
(36.8
)
 
1,084.8

Acquired IPR&D
 
57.5

 
(3.7
)
 
53.8

Other non-current assets
 
2.9

 

 
2.9

Deferred tax (liability) asset, net
 
(54.7
)
 
60.8

 
6.1

Current liabilities(d)
 
(123.9
)
 
(3.9
)
 
(127.8
)
Long-term debt
 
(6.1
)
 

 
(6.1
)
Non-current liabilities(d)
 
(117.4
)
 
0.2

 
(117.2
)
Total identifiable net assets
 
1,279.3

 
(3.8
)
 
1,275.5

Goodwill(e)
 
141.9

 
(5.2
)
 
136.7

Total fair value of consideration transferred
 
$
1,421.2

 
$
(9.0
)
 
$
1,412.2

________________________
(a)
The measurement period adjustments primarily relate to the acquisition of certain assets of Dendreon and reflect: (i) an increase to the deferred tax assets based on further assessment of the Dendreon net operating losses ("NOLs") available to the Company post-acquisition, (ii) a reduction in the estimated fair value of intangible assets based on further assessment of assumptions related to the probability-weighted cash flows, (iii) a reduction in the estimated fair value of property, plant and equipment driven by further assessment of the fair value of a manufacturing facility, and (iv) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. The adjustments recorded in the current period did not have a significant impact on the Company’s consolidated financial statements.
(b)
The fair value of trade accounts receivable acquired was $47 million, with the gross contractual amount being $51 million, of which the Company expects that $4 million will be uncollectible.
(c)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Dates (as previously reported)
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
March 31, 2016
(as adjusted)
Product brands
 
7
 
$
741.2

 
$
0.4

 
$
741.6

Product rights
 
3
 
42.7

 
(0.7
)
 
42.0

Corporate brands
 
16
 
6.6

 

 
6.6

Partner relationships
 
8
 
7.8

 

 
7.8

Technology/know-how
 
10
 
321.3

 
(36.5
)
 
284.8

Other
 
6
 
2.0

 

 
2.0

Total identifiable intangible assets acquired
 
8
 
$
1,121.6

 
$
(36.8
)
 
$
1,084.8

(d)
As part of the acquisition of certain assets of Marathon, the Company assumed a contingent consideration liability related to potential payments, in the aggregate, of up to approximately $200 million as of the acquisition date, for Isuprel® and Nitropress®, the amounts of which are dependent on the timing of generic entrants for these products. The fair value of the liability as of the acquisition date was determined using probability-weighted projected cash flows, with $41 million classified in Current liabilities and $46 million classified in Non-current liabilities in the table above. As of March 31, 2016, the assumptions used for determining the fair value of the contingent consideration liability have not changed significantly from those used as of the acquisition date. The Company made contingent consideration payments related to the Marathon acquisition of $35 million during 2015 and an additional $10 million during the first quarter of 2016.

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)


(e)
The goodwill relates primarily to certain smaller acquisitions and the acquisition of certain assets of Marathon. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. The majority of the goodwill is not expected to be deductible for tax purposes. The goodwill represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations with those of the Company.
The provisional amount of goodwill has been allocated primarily to the Company’s Developed Markets segment.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for the three-month period ended March 31, 2015, as if the 2015 acquisitions had occurred as of January 1, 2014.
 
 
Three Months Ended
March 31,
 
 
2015
(restated)
Revenues
 
$
2,271.2

Net loss attributable to Valeant Pharmaceuticals International, Inc.
 
(269.8
)
 
 
 
Loss per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
Basic
 
$
(0.78
)
Diluted
 
$
(0.78
)
The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and the acquired businesses described above. Except to the extent realized in the three-month period ended March 31, 2015, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the three-month period ended March 31, 2015, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with those of the acquired businesses.
The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the 2015 acquisitions been completed on January 1, 2014. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily the following adjustments:
elimination of historical intangible asset amortization expense of these acquisitions;
additional amortization expense related to the fair value of identifiable intangible assets acquired;
additional depreciation expense related to fair value adjustment to property, plant and equipment acquired;
additional interest expense associated with the financing obtained by the Company in connection with the Salix Acquisition; and
the exclusion of $24 million related to the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition dates.
In addition, all of the above adjustments were adjusted for the applicable tax impact.
2015 Asset Acquisitions
On October 1, 2015, pursuant to an agreement entered into with AstraZeneca Collaboration Ventures, LLC (“AstraZeneca”), the Company was granted an exclusive license to develop and commercialize brodalumab. Brodalumab is an IL-17 receptor monoclonal antibody in development for patients with moderate-to-severe plaque psoriasis and psoriatic arthritis. Under the agreement, the Company holds the exclusive rights to develop and commercialize brodalumab globally, except in Japan and certain other Asian countries where rights are held by Kyowa Hakko Kirin Co., Ltd under a prior arrangement with Amgen Inc., the originator of brodalumab. The Company assumed all remaining development obligations associated with the regulatory approval for brodalumab subsequent to the acquisition. Regulatory submission in the U.S. and European Union for brodalumab

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)


in moderate-to-severe psoriasis occurred in November 2015, and, in January 2016, the Company announced that the FDA accepted for review the Biologics License Application ("BLA") for brodalumab and assigned a PDUFA action date of November 16, 2016. Under the terms of the agreement, the Company made an up-front payment to AstraZeneca of $100 million in October 2015, which was recognized in In-process research and development impairments and other charges in the fourth quarter of 2015 in the consolidated statement of (loss) income as the product has not yet received regulatory approval at the time of the acquisition. In addition, the Company may pay additional pre-launch milestones of up to $170 million and sales-related milestone payments of up to $175 million following launch. Upon launch, AstraZeneca and the Company will share profits.
5.
RESTRUCTURING, INTEGRATION AND OTHER COSTS
In connection with the Salix Acquisition, as well as other acquisitions, the Company has implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:
workforce reductions across the Company and other organizational changes;
closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;
leveraging research and development spend; and/or
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 the Company expects to substantially complete by mid-2016. Since the acquisition date, total costs of $238 million have been incurred through March 31, 2016, including (i) $123 million of integration expenses, (ii) $100 million of restructuring expenses, and (iii) $15 million of acquisition-related costs. The estimate of total costs to be incurred primarily includes: employee termination costs payable to approximately 475 employees of the Company and Salix who have been terminated as a result of the Salix Acquisition; potential IPR&D termination costs related to the transfer to other parties of product-development programs that do not align with the Company's research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs.
Salix Restructuring Costs
The following table summarizes the major components of the restructuring costs incurred in connection with the Salix Acquisition since the acquisition date through March 31, 2016:
 
 
Severance and
Related Benefits
 
Contract
Termination,
Facility Closure
and Other Costs
 
Total
Balance, January 1, 2015
 
$

 
$

 
$

Costs incurred and/or charged to expense
 
90.6

 
0.9

 
91.5

Cash payments
 
(57.8
)
 
(0.3
)
 
(58.1
)
Non-cash adjustments
 
2.2

 

 
2.2

Balance, December 31, 2015
 
$
35.0

 
$
0.6

 
$
35.6

Costs incurred and/or charged to expense
 
0.7

 
7.7

 
8.4

Cash payments
 
(11.1
)
 
(0.3
)
 
(11.4
)
Balance, March 31, 2016
 
$
24.6

 
$
8.0

 
$
32.6

Salix Integration Costs

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)


As mentioned above, the Company has incurred $123 million of integration costs related to the Salix Acquisition since the acquisition date. In the three-month period ended March 31, 2016, the Company incurred $13 million, which related primarily to integration consulting, duplicate labor, transition service, and other costs. The Company made payments of $8 million related to Salix integration costs during three-month period ended March 31, 2016.
Other Restructuring and Integration-Related Costs (Excluding Salix)
In the three-month period ended March 31, 2016, in addition to the restructuring and integration costs associated with the Salix Acquisition described above, the Company incurred an additional $17 million of other restructuring, integration-related and other costs. These costs included (i) $13 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $2 million of severance costs, and (iii) $2 million of facility closure costs. These costs primarily related to restructuring and integration costs for other smaller acquisitions. The Company made payments of $20 million during the three-month period ended March 31, 2016 (in addition to the payments related to the Salix Acquisition described above).
In the three-month period ended March 31, 2015, the Company incurred an additional $55 million of other restructuring, integration-related and other costs. These costs included (i) $28 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $24 million of severance costs, (iii) $2 million of facility closure costs, and (iv) $1 million of other costs. These costs primarily related to restructuring and integration costs for the acquired assets of Dendreon and other smaller acquisitions. The Company made payments of $65 million during the three-month period ended March 31, 2015.
6.
FAIR VALUE MEASUREMENTS
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value as of March 31, 2016 and December 31, 2015:
 
 
As of March 31, 2016
 
As of December 31, 2015
 
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents(1)
 
$
920.3

 
$
902.0

 
$
18.3

 
$

 
$
167.2

 
$
156.1

 
$
11.1

 
$

Liabilities:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration
 
$
(1,098.0
)
 
$

 
$

 
$
(1,098.0
)
 
$
(1,155.9
)
 
$

 
$

 
$
(1,155.9
)
___________________________________
(1)
Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition, primarily including money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

21


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


In March 2015, the Company entered into foreign currency forward-exchange contracts to sell €1.53 billion and buy U.S. Dollars in order to reduce its exposure to the variability in expected cash inflows attributable to the changes in foreign exchange rates related to the €1.50 billion aggregate principal amount and related interest of 4.50% senior unsecured notes due 2023 (the "Euro Notes") issued on March 27, 2015, the proceeds of which were used to finance the Salix Acquisition. These derivative contracts were not designated as hedges for accounting purposes, and such contracts matured on April 1, 2015 (which coincides with the consummation of the Salix Acquisition). A foreign exchange loss of $26 million was recognized in Foreign exchange and other in the consolidated statement of (loss) income for the three-month period ended March 31, 2015.
In addition to the above, the Company has time deposits valued at cost, which approximates fair value due to their short-term maturities. The carrying value of $16 million as of both March 31, 2016 and December 31, 2015, related to these investments is classified within Prepaid expenses and other current assets in the consolidated balance sheets. These investments are Level 2.
There were no transfers between Level 1 and Level 2 during the three-month period ended March 31, 2016.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis or Monte Carlo Simulation, using unobservable (Level 3) inputs. These inputs may include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows; and (iv) volatility of projected performance (Monte Carlo Simulation). Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the three-month period ended March 31, 2016:
 
Balance,
January 1,
2016
 
Payments/
Settlements(a)
 
Net
Unrealized
Loss
 
Foreign
Exchange(b)
 
Balance,
March 31,
2016
Acquisition-related contingent consideration
$
(1,155.9
)
 
$
52.4

 
$
(2.4
)
 
$
7.9

 
$
(1,098.0
)
____________________________________
(a)
Primarily relates to the settlement of contingent consideration obligation in connection with the termination of the arrangements with and relating to Philidor and payments of acquisition-related contingent consideration related to the acquisition of certain assets of Marathon, the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL in June 2011 (the "Elidel®/Xerese®/Zovirax® agreement"), and other smaller acquisitions.
(b)
Included in other comprehensive income.
There were no transfers into or out of Level 3 during the three-month period ended March 31, 2016.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
There were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis subsequent to initial recognition in the three-month period ended March 31, 2016.
For further information regarding asset impairment charges, see Note 8.
7.
INVENTORIES
The components of inventories as of March 31, 2016 and December 31, 2015 were as follows:
 
 
As of
March 31,
2016
 
As of
December 31,
2015
Raw materials(1)
 
$
324.1

 
$
289.3

Work in process(1)
 
141.7

 
152.7

Finished goods(1)
 
854.4

 
814.6

 
 
$
1,320.2

 
$
1,256.6


22


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


___________________________________
(1)
The components of inventories shown in the table above are net of allowance for obsolescence.
8.
INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The major components of intangible assets as of March 31, 2016 and December 31, 2015 were as follows:
 
 
As of March 31, 2016
 
As of December 31, 2015
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization,
Including
Impairments
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization,
Including
 Impairments
 
Net
Carrying
Amount
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Product brands
 
$
22,124.1

 
$
(5,798.3
)
 
$
16,325.8

 
$
22,082.8

 
$
(5,236.4
)
 
$
16,846.4

Corporate brands
 
1,047.1

 
(116.6
)
 
930.5

 
1,066.1

 
(107.1
)
 
959.0

Product rights/patents
 
4,300.1

 
(1,845.2
)
 
2,454.9

 
4,339.9

 
(1,711.7
)
 
2,628.2

Partner relationships
 
175.2

 
(131.5
)
 
43.7

 
217.6

 
(170.3
)
 
47.3

Technology and other
 
449.3

 
(164.5
)
 
284.8

 
480.3

 
(186.1
)
 
294.2

Total finite-lived intangible assets(1)
 
28,095.8

 
(8,056.1
)
 
20,039.7

 
28,186.7

 
(7,411.6
)
 
20,775.1

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Acquired IPR&D(2)
 
608.8

 

 
608.8

 
610.4

 

 
610.4

Corporate brand(3)
 
1,697.5

 

 
1,697.5

 
1,697.5

 

 
1,697.5

 
 
$
30,402.1

 
$
(8,056.1
)
 
$
22,346.0

 
$
30,494.6

 
$
(7,411.6
)
 
$
23,083.0

____________________________________
(1)
In the fourth quarter of 2015, the Company recognized impairment charges of $79 million related to the write-off of intangible assets and $23 million related to the write-off of property, plant and equipment, in connection with the termination (the termination was announced in October 2015) of the arrangements with and relating to Philidor (Developed Markets segment). In addition, in the fourth quarter of 2015, the Company recognized an impairment charge of $27 million related to the write-off of ezogabine/retigabine (immediate-release formulation) (Developed Markets segment) resulting from further analysis of commercialization strategy and projections. GlaxoSmithKline plc (‘‘GSK’’) controls all sales force promotion for ezogabine/retigabine.
In the third quarter of 2015, the Company recognized an impairment charge of $26 million related to Zelapar® (Developed Markets segment), resulting from declining sales trends.
These impairment charges were recognized in Amortization and impairments of finite-lived intangible assets in the consolidated statements of (loss) income for the respective periods.
(2)
The Company acquired certain IPR&D assets as part of the Salix Acquisition, as described further in Note 4.
In the fourth quarter of 2015, the Company wrote off an IPR&D asset of $28 million related to the Emerade® development program in the U.S. (Developed Markets segment) based on analysis of feedback received from the FDA, and such program was terminated in the U.S.
In the third quarter of 2015, the Company wrote off an IPR&D asset of $90 million related to the Rifaximin SSD development program (Developed Markets segment) based on analysis of Phase 2 study data, and the program was subsequently terminated.
In the second quarter of 2015, the Company wrote off an IPR&D asset of $12 million related to the Arestin® Peri-Implantitis development program (Developed Markets segment), resulting from analysis of Phase 3 study data.
The write-offs of the IPR&D assets were recognized in In-process research and development impairments and other charges in the consolidated statements of (loss) income for the respective periods.
(3)
Represents the corporate trademark, related to the acquisition of Bausch & Lomb Holdings Inc. ("B&L") in August 2013, which has an indefinite useful life and is therefore not amortized.
Estimated aggregate amortization expense, as of March 31, 2016, for each of the five succeeding years ending December 31 is as follows:

23


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


 
 
2016
 
2017
 
2018
 
2019
 
2020
Amortization expense(1)
 
$
2,683.3

 
$
2,615.6

 
$
2,485.6

 
$
2,357.6

 
$
2,150.6

____________________________________
(1)
Estimated amortization expense shown in the table above does not include potential future impairments of finite-lived intangible assets, if any.
Goodwill
The changes in the carrying amount of goodwill in the three-month period ended March 31, 2016 were as follows:
 
 
Developed
Markets
 
Emerging
Markets
 
Total
Balance, January 1, 2016
 
$
16,141.3

 
$
2,411.5

 
$
18,552.8

Additions
 
0.7

 

 
0.7

Reclassification(1)
 
(36.2
)
 

 
(36.2
)
Foreign exchange and other
 
75.5

 
7.9

 
83.4

Balance, March 31, 2016
 
$
16,181.3

 
$
2,419.4

 
$
18,600.7

____________________________________
(1)
Relates to the reclassification of goodwill attributable to a group of assets that has been classified as assets held for sale (included in prepaid expenses and other current assets) as of March 31, 2016.
As described in Note 4, the allocations of the goodwill balance associated with certain acquisitions are provisional and subject to the completion of the valuation of the assets acquired and liabilities assumed.
Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company operates in two operating and reportable segments: Developed Markets and Emerging Markets. The Developed Markets segment consists of four reporting units based on geography, namely (i) U.S., (ii) Canada and Australia, (iii) Western Europe, and (iv) Japan. The Emerging Markets segment consists of three reporting units based on geography, namely (i) Central and Eastern Europe, Middle East and Africa, (ii) Latin America, and (iii) Asia. The Company conducted its annual goodwill impairment test in the fourth quarter of 2015 which resulted in no goodwill impairment. Given the challenges facing the Company in certain businesses, primarily in dermatology and GI, management, under the direction of the Company's new Chief Executive Officer, performed a review of the Company's current forecast for fiscal year 2016 (the “2016 forecast”), which resulted in a reduction in the 2016 forecast. The Company considered this reduction in its 2016 forecast to constitute a triggering event requiring the performance of an updated goodwill impairment analysis as of March 31, 2016. The Company estimated the fair values of its reporting units using a discounted cash flow analysis approach. These calculations contain uncertainties as they require management to make assumptions about future cash flows and the appropriate discount rate to reflect the risk inherent in the future cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on the Company's results of operations. As a result of this goodwill impairment analysis, despite a decline in the estimated fair value of the U.S. reporting unit, the Company determined that none of the goodwill associated with its reporting units was impaired as of March 31, 2016. The estimated fair values of each reporting unit exceeded their carrying values at the date of testing. The Company applied a hypothetical 15% decrease to the fair values of each reporting unit, which at such date, would not have triggered additional impairment testing and analysis.

24


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)


9.
LONG-TERM DEBT
A summary of the Company’s consolidated long-term debt as of March 31, 2016 and December 31, 2015 is outlined in the table below:
 
 
Maturity
Date
 
As of
March 31,
2016
 
As of
December 31,
2015
Revolving Credit Facility(1)
 
April 2018
 
$
1,450.0

 
$
250.0

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

 
140.4

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

 
137.3

Series A-3 Tranche A Term Loan Facility(1)
 
October 2018
 
1,780.6

 
1,881.5

Series A-4 Tranche A Term Loan Facility(1)
 
April 2020
 
939.4

 
951.3

Series D-2 Tranche B Term Loan Facility(1)
 
February 2019
 
1,089.2

 
1,087.5

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