10-Q 1 valeantq32016.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 September 30, 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 — 347,669,858 shares outstanding as of November 3, 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 nine-month period ended September 30, 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 September 30, 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 SEPTEMBER 30, 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 SEPTEMBER 30, 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 September 30, 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 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; our ability to reduce debt levels; the impact of our distribution, fulfillment and other third party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meet the financial and other covenants contained in our Credit Agreement and 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 investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, pending investigations by the U.S. Senate Special Committee on Aging and the U.S. House Committee on Oversight and Government Reform, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the document subpoena from the New Jersey State Bureau of Securities, the pending investigation by the California Department of Insurance, a number of pending putative class action litigations in the U.S. and Canada and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted;

ii



our ability to manage the transition to our new management team (including our new Chairman and Chief Executive Officer, new Chief Financial Officer, new General Counsel, and new Controller and Chief Accounting Officer), the success of new management in assuming their new roles and the ability of new management to implement and achieve the strategies and goals of the Company as they develop;
our ability to manage the transition to our new Board of Directors and the success of these individuals in their new roles as members of the Board of Directors of the Company;
the impact of the changes in and reorganizations to our business structure, including changes to our operating and reportable segments;
the effect of the misstatements identified in, and the resultant restatement of, certain of our previously issued financial statements and results; the material weaknesses in our internal control over financial reporting identified by the Company; and any claims, investigations or proceedings (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity or reputational harm that has arisen or may arise as a result;
the effectiveness of the remediation measures and actions already implemented or currently being implemented 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 adjustments that may be sought or imposed (or that we may elect to implement) on our products as a result thereof (such as the decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products or the decision to take no pricing adjustments on our dermatology and ophthalmology products in 2016);
ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA"), and the results thereof, such as the recent inspections by the FDA of the Company's facilities in Tampa, Florida and Rochester, New York, and the results thereof, and the recently announced delay by the FDA of the Prescription Drug User Fee Act (“PDUFA”) date upon which it would announce its decision whether to approve our new drug application for our brodalumab product;
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 additional 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 in accordance with our stated intention;
any further downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances;

iii



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;
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, (i) a failure to meet the financial and/or other covenants contained in our Credit Agreement and/or senior note indentures, and/or (ii) impairment in the goodwill associated with certain of our reporting units (including our Salix reporting unit) or impairment charges related to certain of our products (in particular, our Addyi® product) or other intangible assets, which impairments could be material;
changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units (such as the Salix reporting unit of our Branded Rx operating segment) or impairment charges related to certain of our products (in particular, our Addyi® product) or other intangible assets;
the proposed or 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, and the impact of any such future divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant write-downs of goodwill, or any adverse tax consequences suffered as a result of such divestitures;
our shift in focus to minimal business development activity through acquisitions in 2016 and the foreseeable future as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by our Credit Agreement, including as contained in the April 2016 amendment 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, including subsequent to retention payments being paid out;
our ability to implement effective succession planning for our executives and key employees;
our implemented pricing actions, including the 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 to take no pricing adjustments in 2016 on its dermatology and ophthalmology products, and any future pricing actions we may take following review by our recently established Patient Access and Pricing Committee (which will be responsible for pricing of our drugs), 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;
our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Credit Agreement senior note indentures and the agreements governing our other indebtedness;
the success of our recent and future fulfillment and other arrangements with Walgreen Co. ("Walgreens"), including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, pharmacy benefit managers ("PBMs"), third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws, whether the anticipated increased volume across all distribution channels resulting from such arrangements will offset the impact of lower average selling prices associated with these arrangements and our ability to successfully negotiate improvements to our arrangements with Walgreens;

iv



the extent to which our products are reimbursed by government authorities, PBMs and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our former relationship with Philidor, any alleged wrongdoing by Philidor and our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries, including the impact on such matters of the proposals published by the Organization for Economic Co-operation and Development ("OECD") respecting base erosion and profit shifting ("BEPS");
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 and the need to comply with applicable anti-bribery and economic sanctions laws and regulations);
adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the current or recent instability in Brazil, Russia, Ukraine, Argentina, Egypt, certain other countries in Africa and the Middle East, the devaluation of the Egyptian pound, and the adverse economic impact and related uncertainty caused by the United Kingdom's decision to leave the European Union (Brexit));
our ability to reduce or maintain wholesaler inventory levels in certain countries such as Russia and Poland, in-line with our targeted levels for such markets;
our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property;
the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
once the additional limitations in our Credit Agreement (including as contained in the April 2016 amendment) 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 (including as contained in the April 2016 amendment) restricting our ability to make acquisitions are no longer applicable and to the extent we elect to resume business development activities through acquisitions, such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, the risks associated with the acquired companies, businesses and products and our ability to achieve the anticipated benefits and synergies from such acquisitions and integrations, including as a result of cost-rationalization and integration initiatives. Factors impacting the achievement of anticipated benefits and synergies may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions;
the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof;
our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays;

v



the disruption of delivery of our products and the routine flow of manufactured goods;
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
interest rate risks associated with our floating rate debt borrowings;
our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our recent arrangements with Walgreens;
our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements;
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market;
the mandatory or voluntary recall or withdrawal of our products from the market (such as the recent voluntary recall of our PeroxiClear® product in the U.S. and Canada) and the costs associated therewith;
the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as 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 economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate, including with respect to recent government inquiries on pricing;
the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products;
the impact of the current United States elections, including any healthcare reforms arising therefrom, including with respect to pricing controls;
potential ramifications, including legal sanctions and/or financial penalties, relating to the restatement by Salix Pharmaceuticals, Ltd. ("Salix") of its historical financial results prior to our acquisition of Salix in April 2015;
illegal distribution or sale of counterfeit versions of our products;

vi



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.
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
September 30,
2016
 
As of
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
658.5

 
$
597.3

Trade receivables, net
2,708.4

 
2,686.9

Inventories, net
1,300.1

 
1,256.6

Prepaid expenses and other current assets
1,006.8

 
966.4

Total current assets
5,673.8

 
5,507.2

Property, plant and equipment, net
1,462.0

 
1,441.8

Intangible assets, net
20,509.4

 
23,083.0

Goodwill
17,450.1

 
18,552.8

Deferred tax assets, net
452.3

 
156.0

Other long-term assets, net
213.6

 
223.7

Total assets
$
45,761.2

 
$
48,964.5

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
358.7

 
$
433.7

Accrued and other current liabilities
3,391.8

 
3,859.1

Acquisition-related contingent consideration
87.3

 
196.8

Current portion of long-term debt
59.0

 
823.0

Total current liabilities
3,896.8

 
5,312.6

Acquisition-related contingent consideration
898.0

 
959.1

Long-term debt
30,386.2

 
30,265.4

Pension and other benefit liabilities
190.3

 
190.4

Liabilities for uncertain tax positions
112.3

 
120.2

Deferred tax liabilities, net
5,839.0

 
5,902.4

Other long-term liabilities
165.0

 
184.6

Total liabilities
41,487.6

 
42,934.7

Commitments and contingencies (Note 17)


 


Equity
 
 
 
Common shares, no par value, unlimited shares authorized, 347,669,423 and
 
 
 
  342,926,531 issued and outstanding at September 30, 2016 and December 31, 2015, respectively
10,034.4

 
9,897.4

Additional paid-in capital
325.9

 
304.9

Accumulated deficit
(4,614.1
)
 
(2,749.7
)
Accumulated other comprehensive loss
(1,578.9
)
 
(1,541.6
)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity
4,167.3

 
5,911.0

Noncontrolling interest
106.3

 
118.8

Total equity
4,273.6

 
6,029.8

Total liabilities and equity
$
45,761.2

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
(restated)
Revenues
 
 
 
 
 
 
 
Product sales
$
2,443.6

 
$
2,748.2

 
$
7,168.4

 
$
7,569.3

Other revenues
36.0

 
38.6

 
103.0

 
120.0

 
2,479.6

 
2,786.8

 
7,271.4

 
7,689.3

Operating Expenses
 
 
 
 
 
 
 
Cost of goods sold (exclusive of amortization and impairments of
 
 
 
 
 
 
 
finite-lived intangible assets shown separately below)
649.2

 
634.6

 
1,916.7

 
1,812.4

Cost of other revenues
8.8

 
13.6

 
29.0

 
43.1

Selling, general and administrative
660.9

 
697.6

 
2,145.0

 
1,956.9

Research and development
100.8

 
101.6

 
328.2

 
238.5

Amortization and impairments of finite-lived intangible assets
807.1

 
679.2

 
2,389.2

 
1,629.8

Goodwill impairment
1,049.0

 

 
1,049.0

 

Restructuring and integration costs
20.7

 
75.6

 
78.2

 
274.0

In-process research and development impairments and other charges
36.0

 
95.8

 
53.9

 
108.1

Acquisition-related costs

 
7.0

 
1.8

 
30.4

Acquisition-related contingent consideration
9.0

 
3.8

 
18.3

 
22.6

Other expense (income)
1.1

 
30.2

 
(21.6
)
 
213.2

 
3,342.6

 
2,339.0

 
7,987.7

 
6,329.0

Operating (loss) income
(863.0
)
 
447.8

 
(716.3
)
 
1,360.3

Interest income
2.5

 
0.7

 
5.5

 
2.5

Interest expense
(469.6
)
 
(420.2
)
 
(1,368.7
)
 
(1,130.7
)
Loss on extinguishment of debt

 

 

 
(20.0
)
Foreign exchange (loss) gain and other
(2.3
)
 
(34.0
)
 
4.6

 
(99.5
)
(Loss) income before (recovery of) provision for income taxes
(1,332.4
)
 
(5.7
)
 
(2,074.9
)
 
112.6

(Recovery of) provision for income taxes
(113.3
)
 
(57.4
)
 
(178.9
)
 
14.0

Net (loss) income
(1,219.1
)
 
51.7

 
(1,896.0
)

98.6

Less: Net (loss) income attributable to noncontrolling interest
(0.7
)
 
2.2

 
(1.6
)
 
4.4

Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
$
(1,218.4
)
 
$
49.5

 
$
(1,894.4
)
 
$
94.2

 
 
 
 
 
 
 
 
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
Basic
$
(3.49
)
 
$
0.14

 
$
(5.47
)
 
$
0.28

Diluted
$
(3.49
)
 
$
0.14

 
$
(5.47
)
 
$
0.27

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in millions)
 
 
 
 
 
 
 
Basic
349.5

 
344.9

 
346.5

 
340.8

Diluted
349.5

 
351.0

 
346.5

 
347.2


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

2



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
(restated)
Net (loss) income
$
(1,219.1
)
 
$
51.7

 
$
(1,896.0
)
 
$
98.6

Other comprehensive loss
 
 
 
 
 
 
 
Foreign currency translation adjustment
(4.8
)
 
(173.2
)
 
(37.5
)
 
(548.3
)
Pension and postretirement benefit plan adjustments
(0.6
)
 
(0.5
)
 
(1.6
)
 
(1.4
)
Other comprehensive loss
(5.4
)
 
(173.7
)
 
(39.1
)
 
(549.7
)
Comprehensive loss
(1,224.5
)
 
(122.0
)
 
(1,935.1
)
 
(451.1
)
Less: Comprehensive (loss) income attributable to noncontrolling interest
(0.9
)
 
0.4

 
(3.4
)
 
2.2

Comprehensive loss attributable to Valeant Pharmaceuticals International, Inc.
$
(1,223.6
)
 
$
(122.4
)
 
$
(1,931.7
)
 
$
(453.3
)


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)
 
Nine Months Ended
September 30,
 
2016
 
2015
(restated)
Cash Flows From Operating Activities
 
 
 
Net (loss) income
$
(1,896.0
)
 
$
98.6

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, including impairments of finite-lived intangible assets
2,532.5

 
1,768.4

Amortization and write-off of debt discounts and debt issuance costs
89.2

 
123.7

In-process research and development impairments
20.0

 
108.1

Acquisition accounting adjustment on inventory sold
38.1

 
97.7

(Gain) loss on disposals of assets and businesses, net
(11.0
)
 
9.2

Acquisition-related contingent consideration
18.3

 
22.6

Allowances for losses on accounts receivable and inventories
95.9

 
46.4

Deferred income tax benefit
(310.3
)
 
(61.1
)
(Reductions) additions to accrued legal settlements
(32.1
)
 
31.9

Payments of accrued legal settlements
(67.8
)
 
(32.1
)
Goodwill impairment
1,049.0

 

Loss on deconsolidation
18.4

 

Share-based compensation
134.0

 
111.4

Foreign exchange (gain) loss
(14.6
)
 
96.6

Loss on extinguishment of debt

 
20.0

Payment of contingent consideration adjustments, including accretion
(26.6
)
 
(19.8
)
Other
(12.2
)
 
(13.6
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables
(30.9
)
 
(656.0
)
Inventories
(166.3
)
 
(184.9
)
Prepaid expenses and other current assets
117.7

 
(252.0
)
Accounts payable, accrued and other liabilities
29.2

 
344.7

Net cash provided by operating activities
1,574.5

 
1,659.8

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisition of businesses, net of cash acquired
(18.5
)
 
(14,001.7
)
Acquisition of intangible assets and other assets
(48.1
)
 
(58.1
)
Purchases of property, plant and equipment
(181.1
)
 
(163.7
)
Reduction of cash due to deconsolidation
(30.2
)
 

Proceeds from sales and maturities of short-term investments

 
50.2

Net settlement of assumed derivative contracts

 
184.6

Settlement of foreign currency forward exchange contracts

 
(26.3
)
Purchases of marketable securities
(1.4
)
 
(24.5
)
Proceeds from sale of marketable securities
16.5

 

Proceeds from sale of assets and businesses, net of costs to sell
131.4

 
2.8

Increase in restricted cash and cash equivalents

 
(5.2
)
Net cash used in investing activities
(131.4
)
 
(14,041.9
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of long-term debt, net of discount
1,219.9

 
16,925.8

Repayments of long-term debt
(1,917.1
)
 
(1,387.2
)
Short-term debt borrowings
2.7

 
6.9

Short-term debt repayments
(2.8
)
 
(7.1
)
Repayments of convertible notes assumed

 
(3,122.8
)
Issuance of common stock, net

 
1,433.7

Repurchases of common shares

 
(50.0
)
Proceeds from exercise of stock options
33.1

 
29.1

Payment of employee withholding tax upon vesting of share-based awards
(9.1
)
 
(85.8
)
Payments of contingent consideration
(93.9
)
 
(129.4
)
Payments of deferred consideration
(516.6
)
 

Payments of financing costs
(96.4
)
 
(101.7
)
Other
(8.1
)
 
(10.0
)
Net cash (used in) provided by financing activities
(1,388.3
)
 
13,501.5

Effect of exchange rate changes on cash and cash equivalents
6.4

 
(22.0
)
Net increase in cash and cash equivalents
61.2

 
1,097.4

Cash and cash equivalents, beginning of period
597.3

 
322.6

Cash and cash equivalents, end of period
$
658.5

 
$
1,420.0

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

 
$
(744.5
)
Acquisition of businesses, debt assumed

 
(3,129.2
)
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.
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 nine months ended September 30, 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. Due to the fact that the first quarter 2015 results are included within the financial statements for the six months ended June 30, 2015 and the financial statements for the nine months ended September 30, 2015, those financial statements have also been restated.
The following tables summarize the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the nine months ended September 30, 2015, as reported on the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on October 26, 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.
(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,

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)


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.
(d)
Philidor measurement period adjustments - Related to the consolidation of Philidor, the Company previously recorded certain measurement period adjustments during the second and third quarters of 2015 when known, which should be retroactively recorded as of the date Philidor was consolidated (December 2014). These measurement period adjustments primarily resulted in (1) an increase to acquisition-related contingent consideration as a result of further valuation analysis around the probability and timing of certain milestone payments; (2) increases in the fair value of certain intangible assets resulting from the higher sales forecast; and (3) a net increase in goodwill as a result of (1) and (2) above.  The measurement period adjustments were previously determined to be immaterial to the Company’s consolidated financial statements, but were recorded in the fourth quarter of 2014 in connection with the other restatement adjustments related to Philidor.

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)
 
Nine Months Ended September 30,
 
2015
(As Previously Reported)
 
Restatement
Adjustments
 
2015
(Restated)
 
Restatement
Ref
Revenues
 
 
 
 
 
 
 
Product sales
$
7,590.1

 
$
(20.8
)
 
$
7,569.3

 
(a)
Other revenues
120.0

 

 
120.0

 
 
 
7,710.1

 
(20.8
)
 
7,689.3

 
 
Expenses
 
 
 
 
 
 
 
Cost of goods sold (exclusive of amortization and impairments of finite-lived
 
 
 
 
 
 
 
  intangible assets shown separately below)
1,864.9

 
(52.5
)
 
1,812.4

 
(a)
Cost of other revenues
43.1

 

 
43.1

 
 
Selling, general and administrative
1,956.9

 

 
1,956.9

 
 
Research and development
238.5

 

 
238.5

 
 
Amortization and impairment of finite-lived intangible assets
1,629.8

 

 
1,629.8

 
 
Restructuring and integration costs
274.0

 

 
274.0

 
 
In-process research and development impairments and other changes
108.1

 

 
108.1

 
 
Acquisition-related costs
26.3

 
4.1

 
30.4

 
(b)
Acquisition-related contingent consideration
22.6

 

 
22.6

 
 
Other expense
213.2

 

 
213.2

 
 
 
6,377.4

 
(48.4
)
 
6,329.0

 
 
Operating income
1,332.7

 
27.6

 
1,360.3

 
 
Interest income
2.5

 

 
2.5

 
 
Interest expense
(1,130.7
)
 

 
(1,130.7
)
 
 
Loss on extinguishment of debt
(20.0
)
 

 
(20.0
)
 
 
Foreign exchange loss and other
(99.5
)
 

 
(99.5
)
 
 
Income before provision for income taxes
85.0

 
27.6

 
112.6

 
 
Provision for income taxes
10.4

 
3.6

 
14.0

 
(c)
Net income
74.6

 
24.0

 
98.6

 
 
Less: Net income attributable to noncontrolling interest
4.4

 

 
4.4

 
 
Net income attributable to Valeant Pharmaceuticals International, Inc.
$
70.2

 
$
24.0

 
$
94.2

 
 
 
 
 
 
 
 
 
 
Earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
Basic
$
0.21

 
$
0.07

 
$
0.28

 
 
Diluted
$
0.20

 
$
0.07

 
$
0.27

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares (in millions)
 
 
 
 
 
 
 
Basic
340.8

 
 
 
340.8

 
 
Diluted
347.2

 
 
 
347.2

 
 

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)
 
Nine Months Ended September 30,
 
2015
(As Previously Reported)
 
Restatement
Adjustments
 
2015
(Restated)
 
Restatement
Ref
Cash Flow From Operating Activities
 
 
 
 
 
 
 
Net income
$
74.6

 
$
24.0

 
$
98.6

 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization, including impairments of finite-lived intangible assets
1,768.4

 

 
1,768.4

 
 
Amortization and write-off of debt discounts and debt issuance costs
123.7

 

 
123.7

 
 
In-process research and development impairments
108.1

 

 
108.1

 
 
Acquisition accounting adjustment on inventory sold
97.7

 

 
97.7

 
 
Acquisition-related contingent consideration
22.6

 

 
22.6

 
 
Allowances for losses on accounts receivable and inventories
46.4

 

 
46.4

 
 
Deferred income taxes(1)
(64.7
)
 
3.6

 
(61.1
)
 
(c)
Loss on disposal of assets and liabilities
9.2

 

 
9.2

 
 
Additions to accrued legal settlements
31.9

 

 
31.9

 
 
Payments of accrued legal settlements
(32.1
)
 

 
(32.1
)
 
 
Share-based compensation
111.4

 

 
111.4

 
 
Foreign exchange loss
96.6

 

 
96.6

 
 
Loss on extinguishment of debt
20.0

 

 
20.0

 
 
Payment of contingent consideration adjustments, including accretion
(19.8
)
 

 
(19.8
)
 
 
Other
(13.6
)
 

 
(13.6
)
 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade receivables
(656.0
)
 

 
(656.0
)
 
 
Inventories
(132.4
)
 
(52.5
)
 
(184.9
)
 
(a)
Prepaid expenses and other current assets
(252.0
)
 

 
(252.0
)
 
 
Accounts payable, accrued and other liabilities(1)
319.8

 
24.9

 
344.7

 
(a), (b)
Net cash provided by operating activities
1,659.8

 

 
1,659.8

 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
(14,041.9
)
 

 
(14,041.9
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
13,501.5

 

 
13,501.5

 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(22.0
)
 

 
(22.0
)
 
 
Net increase in cash and cash equivalents
1,097.4

 

 
1,097.4

 
 
Cash and cash equivalents, beginning of period
322.6

 

 
322.6

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

 
$

 
$
1,420.0

 
 
 
 
 
 
 
 
 
 
Non- Cash Investing and Financing Activities
 
 
 
 
 
 
 
Acquisition of businesses, contingent consideration at fair value
$
(783.3
)
 
$
38.8

 
$
(744.5
)
 
(d)
Acquisition of businesses, debt assumed
(3,129.2
)
 

 
(3,129.2
)
 
 
________________________
(1)
As described in Note 3, the Consolidated Statement of Cash Flows reflects a reclassification of $14 million related to a change in income taxes payable which increased deferred income taxes and decreased accounts payable, accrued and other liabilities within the cash flow from operating activities.

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, except for those policies affected by the adoption of the new accounting guidance on employee share-based payment transactions as described below. 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.
During the third quarter of 2016, the Company changed its reportable segments to (i) Bausch + Lomb / International, (ii) Branded Rx, and (iii) U.S. Diversified Products. As a result, the prior period presentation has been recast to conform to the current segment reporting structure. Refer to Note 18 for additional information.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Such amounts include a reclassification of $14 million related to a change in income taxes payable that increased deferred income taxes and decreased accounts payable, accrued and other liabilities within changes in operating assets and liabilities within cash flow from operating activities of the Consolidated Statements of Cash Flows for the nine-month period ended September 30, 2015.
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 variable interest entities ("VIEs"), (iii) amends the guidance for assessing how relationships of related parties affect the consolidation analysis of VIEs, and (iv) reduces the number of VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds. The guidance 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.
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 include the accounting for 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 elected to early adopt this guidance in the third quarter of 2016 with January 1, 2016

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)


being the effective date of adoption pursuant to the transition requirement of this new guidance. The impact of the adoption of this guidance is as follows:
Excess tax benefits and tax deficiencies, representing the realized tax effect on the difference between share-based compensation costs deductible for tax purposes and for accounting purposes, are recognized prospectively in the provision for income taxes instead of additional paid-in capital. As a result of the adoption, a cumulative-effect adjustment of $30 million was recorded to deferred tax asset and accumulated deficit as of January 1, 2016 for the previously unrecognized excess tax benefits. The Company is required to apply this aspect of the guidance retrospectively as if the adoption is effective as of January 1, 2016. However, given the adoption impact for the six months ended June 30, 2016 was insignificant (less than $2 million for the three months ended March 31, 2016 and less than $1 million for the three months ended June 30, 2016), the Company recorded the cumulative adoption impact for the six months ended June 30, 2016 in the three months ended September 30, 2016;
Excess tax benefits are classified as operating cash flows instead of financing cash flows effective January 1, 2016 and the Company has elected to apply this requirement on a retrospective basis. As a result of the adoption, cash flows provided by operating activities decreased by $1 million for the three months ended March 31, 2016 and for the six months ended June 30, 2016 and cash flows provided by (used in) financing activities increased by $1 million for the three months ended March 31, 2016 and decreased by $1 million for the six months ended June 30, 2016. The adoption impact on the corresponding comparative periods in 2015 includes an increase in cash flows provided by operating activities of $18 million, $26 million and $22 million for three months ended March 31, 2015, for the six months ended June 30, 2015 and for the nine months ended September 30, 2015, respectively, with a corresponding decrease in cash flows provided by financing activities of the same amounts in the respective periods;
The calculation of diluted weighted-average number of common shares excludes excess tax benefits and tax deficiencies in the calculation of assumed proceeds under the treasury stock method prospectively effective January 1, 2016. Accordingly, the diluted weighted-average number of common shares outstanding increased by 0.6 million for the three months ended March 31, 2016, decreased by 0.1 million for the three months ended June 30, 2016, and increased by 0.2 million for the six months ended June 30, 2016. The adoption of this aspect of the guidance did not have an effect on the Company's previously reported diluted earnings per share for the three months ended March 31, 2016 and June 30, 2016 as well as for the six months ended June 30, 2016 given the Company reported a net loss for each of those periods; and
The Company elected to continue its current policy of estimating forfeitures rather than recognizing forfeitures when they occur.
Recently Issued Accounting Standards, Not Adopted as of September 30, 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 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.

10


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


In 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 Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and 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, the statement of cash flows and disclosures.
In June 2016, the FASB issued new guidance on the impairment of financial instruments requiring an impairment model based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and the statement of cash flows.
In August 2016, the FASB issued new guidance which adds or clarifies the classification of certain cash receipts and payments in the statement of cash flows (including debt prepayment or debt extinguishment costs, contingent consideration payment after a business combination, and distributions received from equity method investees). The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of adoption of this guidance on the statement of cash flows.
In October 2016, the FASB issued new guidance which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is

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)


permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations, the statement of cash flows and disclosures.
In October 2016, the FASB issued new guidance which amends consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations, the statement of cash flows and disclosures.
4.
ACQUISITIONS
The Company completed an immaterial business combination in the first quarter of 2016. No business combinations or asset acquisitions were completed in the second or third quarter of 2016.
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 $906 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 $59 million as of the acquisition date was determined using probability-weighted discounted cash flows. Refer to Note 7 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.

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)


 
 
Amounts
Recognized as of
Acquisition Date
(as previously
reported)(a)
 
Measurement
Period
Adjustments
 
Amounts
Recognized as of
September 30, 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

 
(7.8
)
 
520.2

Acquired IPR&D
 
18.5

 
1.0

 
19.5

Other non-current assets
 
0.1

 

 
0.1

Current liabilities
 
(30.8
)
 
(1.2
)
 
(32.0
)
Deferred tax liability, net(d)
 
(130.5
)
 
(0.4
)
 
(130.9
)
Other non-current liabilities
 
(11.2
)
 
4.0

 
(7.2
)
Total identifiable net assets
 
628.3

 
(5.4
)
 
622.9

Goodwill(e)
 
282.0

 
1.5

 
283.5

Total fair value of consideration transferred
 
$
910.3

 
$
(3.9
)
 
$
906.4

________________________
(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
September 30, 2016
(as adjusted)
Product brands
 
9
 
$
490.8

 
$
(11.0
)
 
$
479.8

Corporate brand
 
17
 
37.2

 
3.2

 
40.4

Total identifiable intangible assets acquired
 
10
 
$
528.0

 
$
(7.8
)
 
$
520.2

(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).
Goodwill has been allocated to the Company’s Bausch + Lomb / International 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 Pharmaceuticals International (“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.

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)


Sprout has focused solely on the delivery 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 to make or cause to be made expenditures of no less than $200 million with respect to Addyi® for selling, general and administrative, marketing and research and development expenses during the period commencing January 1, 2016 through to 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 7 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.
 
 
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.
(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).

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)


Goodwill has been allocated to the Company’s Branded Rx segment.
Salix
Description of the Transaction
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 (“Salix Merger Agreement”), among the Company, Valeant, Sun Merger Sub, Inc., a wholly owned subsidiary of Valeant (“Sun Merger Sub”), and Salix (the “Salix Acquisition”). 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:
(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


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)


___________________________________
(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® (as defined below) 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 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 subsequent periods.
(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:

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)


 
 
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, Relistor® tablets ("Oral Relistor®"), for the treatment of opioid-induced constipation in adult patients with chronic non-cancer pain, and Rifaximin soluble solid dispersion ("SSD") tablets, 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. On July 19, 2016, the FDA approved Oral Relistor® for the treatment of opioid-induced constipation in adults with chronic non-cancer pain. The associated IPR&D asset ($304 million as of the acquisition date) has been reclassified to an amortizable intangible as of the approval date and is being amortized over a period of 12 years. In the third quarter of 2015, the Company terminated the Rifaximin SSD IPR&D program and recognized an impairment charge as described in Note 9.
(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 17 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®), of which $50 million was paid in the third quarter of 2016 in connection with the FDA's approval of 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 7 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 which remains outstanding.
(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;

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)


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 Branded Rx 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 $186 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 7 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, the acquisition of 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 the Company issued such common shares 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.

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)


 
 
Amounts
Recognized as of
Acquisition Dates
(as previously reported)
 
Measurement
Period
Adjustments(a)
 
Amounts
Recognized as of
September 30, 2016
(as adjusted)
Cash
 
$
92.2

 
$

 
$
92.2

Accounts receivable(b)
 
49.5

 
(3.0
)
 
46.5

Inventories
 
142.9

 
(2.6
)
 
140.3

Other current assets
 
20.2

 
(0.5
)
 
19.7

Property, plant and equipment
 
94.6

 
(15.1
)
 
79.5

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

 
(43.2
)
 
1,078.4

Acquired IPR&D
 
57.5

 
(3.7
)
 
53.8

Other non-current assets
 
2.9

 

 
2.9

Deferred tax (liability) asset, net
 
(54.7
)
 
61.1

 
6.4

Current liabilities(d)
 
(123.9
)
 
(4.5
)
 
(128.4
)
Long-term debt
 
(6.1
)
 

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

 
(117.2
)
Total identifiable net assets
 
1,279.3

 
(11.3
)
 
1,268.0

Goodwill(e)
 
141.9

 
(3.1
)
 
138.8

Total fair value of consideration transferred
 
$
1,421.2

 
$
(14.4
)
 
$
1,406.8

________________________
(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
September 30, 2016
(as adjusted)
Product brands
 
7
 
$
741.2

 
$
(6.0
)
 
$
735.2

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

 
$
(43.2
)
 
$
1,078.4

(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 September 30, 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 $5 million and $32 million during the three-month and nine-month periods ended September 30, 2016, respectively.
(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.

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)


Goodwill has been allocated primarily to the Company’s Bausch + Lomb / International segment.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for the three-month and nine-month periods ended September 30, 2015, as if the 2015 acquisitions had occurred as of January 1, 2014.
 
Three Months Ended
September 30,
2015
 
Nine Months Ended
September 30,
 
 
2015
(restated)
Revenues
$
2,862.1

 
$
7,938.3

Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.
56.2

 
(243.7
)
 
 
 
 
Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
Basic
$
0.16

 
$
(0.71
)
Diluted
$
0.16

 
$
(0.71
)
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 nine-month period ended September 30, 2015, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the nine-month period ended September 30, 2015, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with those of the acquired businesses.
The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the 2015 acquisitions 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 from pro forma earnings in the three-month and nine-month periods ended September 30, 2015 of the acquisition accounting adjustments on these acquisitions’ inventories that were sold subsequent to the acquisition date of $25 million for the three-month periods ended September 30, 2015, $94 million for the nine-month period ended September 30, 2015, and the acquisition-related costs incurred for these acquisitions.
In addition, all of the above adjustments were adjusted for the applicable tax impact.
2015 Asset Acquisitions
On October 1, 2015, pursuant to a license 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 license agreement, the Company initially held 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 has assumed all remaining development obligations associated with the regulatory approval for brodalumab in its territory subsequent to the acquisition. Regulatory submission in the U.S. and European Union for brodalumab 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

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)


("BLA") for brodalumab and assigned a PDUFA action date of November 16, 2016.  On July 19, 2016, the Dermatologic and Ophthalmic Drug Advisory Committee appointed by the FDA voted by a margin of 18 to 0 for the approval of brodalumab injection, 210 mg., for adult patients with moderate-to-severe plaque psoriasis, with conditions related to product labeling and post-marketing / risk management obligations. The FDA has extended the PDUFA action date, upon which it would announce its decision whether to approve this brodalumab injection, to February 16, 2017.
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, under the terms of the license agreement, the Company may pay additional pre-launch milestones of up to $170 million (subsequently decreased to $150 million as described below) and sales-related milestone payments of up to $175 million following launch. Upon launch, AstraZeneca and the Company will share profits.  On June 30, 2016, the Company and AstraZeneca amended the original license agreement to terminate the Company's right to develop and commercialize brodalumab in Europe, in exchange for payments by AstraZeneca to the Company, which consist of an up-front payment and certain sales-based milestones, and a reduction of one of the pre-launch milestones payable by the Company under the license agreement. Concurrently, the Company and AstraZeneca entered into other agreements, amongst which include a settlement agreement to resolve certain disputed invoices related to transition services. The impact from these agreements did not have a material impact on the Company's Consolidated statements of loss for the three-month and nine-month periods ended September 30, 2016.
5.
DIVESTITURES
Ruconest®
On August 9, 2016, the Company entered into a definitive agreement to divest all North American commercialization rights to Ruconest® (recombinant human C1 esterase inhibitor) to Pharming Group N.V. ("Pharming"). These assets were included in the Company’s Branded Rx segment. Under the terms of the agreement, Pharming will pay Valeant aggregate consideration of up to $125 million, including an upfront fee of $60 million payable upon closing and certain sales-based milestone payments of up to $65 million. The transaction is subject to customary closing conditions, in addition to Pharming obtaining certain financing.  The carrying values of the assets being sold, including the associated goodwill, were written down to fair value less costs to sell and were classified as assets held for sale, within Prepaid expenses and other current assets in the Consolidated balance sheet, commencing June 30, 2016. A loss of $199 million was recorded in Amortization and impairments of finite-lived intangible assets for the three months ended June 30, 2016. Upon consummation of the divestiture, the Company expects to incur an additional loss of approximately $22 million, representing the estimated fair value of the contingent consideration, which is not included in the determination of gain or loss from divestiture pursuant to the Company's accounting policy, pursuant to which the Company does not recognize contingent payments until such amounts are realizable.
Portfolio of Neurology Medical Device Products
On April 1, 2016, the Company sold a portfolio of neurology medical device products, including product rights and related fixed assets, to Stryker Corporation for an upfront purchase price and certain future milestone payments. These assets were included in the Company’s Bausch + Lomb / International segment. As a result of this transaction, the Company recognized a nominal loss on sale in the second quarter of 2016, due in part to the Company's accounting policy to not recognize contingent payments until such amounts are realizable. The loss on sale was included within Other (income) expense in the Consolidated statement of (loss) income.
Other Divestitures
The Company has classified a number of small businesses as held for sale as of September 30, 2016 as it expects to consummate the divestiture of these businesses within the next twelve months. The assets related to these businesses were included in the Company’s Bausch + Lomb / International segment. As a result, the carrying values of the assets related to these businesses, including the associated goodwill, were written down to fair value less costs to sell and a loss of $88 million, in the aggregate, was recognized in Amortization and impairments of finite-lived intangible assets for the three months ended September 30, 2016. The assets and liabilities related to these businesses have been classified as held for sale and are presented in Prepaid expenses and other current assets and Accrued and other current liabilities, respectively, in the Consolidated balance sheet.
6.
RESTRUCTURING AND INTEGRATION COSTS

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 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 had estimated that it would incur total costs of approximately $300 million in connection with the cost-rationalization and integration initiatives relating to the Salix Acquisition, which were substantially completed by mid-2016. Since the acquisition date, total costs of $241 million have been incurred through September 30, 2016, including (i) $127 million of integration expenses, (ii) $99 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 September 30, 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(1)
 
$
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

Costs incurred and/or charged to expense
 
(1.2
)
 
0.9

 
(0.3
)
Cash payments
 
(10.2
)
 
(1.2
)
 
(11.4
)
Balance, June 30, 2016
 
$
13.2

 
$
7.7

 
$
20.9

Costs incurred and/or charged to expense
 
(1.6
)
 
0.9

 
(0.7
)
Cash payments
 
(4.6
)
 
(1.2
)
 
(5.8
)
Balance, September 30, 2016
 
$
7.0

 
$
7.4

 
$
14.4

___________________________________
(1)
In the nine-month period ended September 30, 2015, the Company recognized $88 million of restructuring charges and made payments of $47 million related to the Salix Acquisition.
Salix Integration Costs

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)


As mentioned above, the Company has incurred $127 million of integration costs related to the Salix Acquisition since the acquisition date. In the nine-month periods ended September 30, 2016 and 2015, the Company incurred $17 million and $79 million, respectively, of integration costs related to the Salix Acquisition, which related primarily to integration consulting, duplicate labor, transition service, and other costs. The Company made payments of $21 million and $63 million related to Salix integration costs during the nine-month periods ended September 30, 2016 and 2015, respectively.
Other Restructuring and Integration-Related Costs (Excluding Salix)
In the nine-month period ended September 30, 2016, in addition to the restructuring and integration costs associated with the Salix Acquisition described above, the Company incurred an additional $54 million of other restructuring and integration-related costs. These costs included (i) $37 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $8 million of facility closure costs, (iii) $8 million of severance costs, and (iv) $1 million of other costs. These costs primarily related to restructuring and integration costs for other smaller acquisitions. The Company made payments of $52 million during the nine-month period ended September 30, 2016 (in addition to the payments related to the Salix Acquisition described above).
In the nine-month period ended September 30, 2015, in addition to the restructuring and integration costs associated with the Salix Acquisition described above, the Company incurred an additional $106 million of other restructuring and integration-related costs. These costs included (i) $74 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $26 million of severance costs, (iii) $5 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 $150 million during the nine-month period ended September 30, 2015 (in addition to the payments related to the Salix Acquisition described above).
7.
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 on a recurring basis as of September 30, 2016 and December 31, 2015:
 
 
As of September 30, 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)
 
$
296.6

 
$
208.5

 
$
88.1

 
$

 
$
167.2

 
$
156.1

 
$
11.1

 
$

Liabilities:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration
 
$
(985.3
)
 
$

 
$

 
$
(985.3
)
 
$
(1,155.9
)
 
$

 
$

 
$
(1,155.9
)
___________________________________

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)


(1)
Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition, primarily including money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
In March 2015, the Company entered into foreign currency forward-exchange contracts to sell €1.53 billion and buy U.S. Dollars in order to reduce its exposure to the variability in expected cash inflows attributable to the changes in foreign exchange rates related to the €1.50 billion aggregate principal amount and related interest of 4.50% senior unsecured notes due 2023 (the "Euro Notes") issued on March 27, 2015, the proceeds of which were used to finance the Salix Acquisition. These derivative contracts were not designated as hedges for accounting purposes, and such contracts matured on April 1, 2015 (which coincided with the consummation of the Salix Acquisition). A foreign exchange loss of $26 million was recognized in Foreign exchange loss 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 $1 million and $16 million as of September 30, 2016 and December 31, 2015, respectively, related to these investments is classified within Prepaid expenses and other current assets in the Consolidated balance sheets. These investments are Level 2.
There were no transfers between Level 1 and Level 2 during the nine-month period ended September 30, 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 nine-month period ended September 30, 2016:
 
Balance,
January 1,
2016
 
Payments/
Settlements(a)
 
Net
Unrealized
Loss
 
Foreign
Exchange(b)
 
Adjustments(c)
 
Balance,
September 30,
2016
Acquisition-related contingent consideration
$
(1,155.9
)
 
$
144.8

 
$
(18.3
)
 
$
7.8

 
$
36.3

 
$
(985.3
)
____________________________________
(a)
Primarily relates to payments of acquisition-related contingent consideration related to Salix, the acquisition of certain assets of Marathon, 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 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 loss.
(c)
Primarily relates to $26 million of contingent consideration reclassified to a liability held for sale. See Note 5 for further detail.
There were no transfers into or out of Level 3 during the nine-month period ended September 30, 2016.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The following fair value hierarchy table presents the Company’s assets measured at fair value on a non-recurring basis as of September 30, 2016 and December 31, 2015:
 
 
As of September 30, 2016
 
As of December 31, 2015
 
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)