NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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DESCRIPTION OF BUSINESS
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Valeant Pharmaceuticals International, Inc. (the “Company”) is a multinational, specialty pharmaceutical and medical device company 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
90
countries.
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2.
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SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation and Use of Estimates
The accompanying 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 notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements prepared in accordance with U.S. GAAP that are contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
, filed with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators. 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,
2017
, except for the new accounting guidance adopted during the period. 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. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
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.
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.
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of the Company and those of its subsidiaries and any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Effective in the first quarter of 2018, revenues and profits from the U.S. Solta business included in the U.S. Diversified Products segment in prior periods and revenues and profits from the international Solta business included in the Bausch + Lomb/International segment in prior periods are presented in the Branded Rx segment. Prior period presentations of segment revenues, segment profits and segment assets have been recast to conform to the current segment reporting structure.
See
Note 19, "SEGMENT INFORMATION"
for additional information.
Adoption of New Accounting Guidance
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 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. The guidance is effective for annual reporting periods beginning after December 15, 2017. Entities had the option of using either a full retrospective or a modified retrospective approach to adopt the guidance.
The Company completed its detailed assessment and training program for its personnel. Pursuant to the detailed assessment program, the Company reviewed its revenue arrangements and assessed the differences in accounting for such contracts under the new guidance as compared with prior revenue accounting guidance. Based upon review of current customer contracts, the Company concluded the implementation of the new guidance did not have a material quantitative impact on its consolidated financial statements as the timing of revenue recognition for product sales did not significantly change.
The Company adopted this guidance effective January 1, 2018 using the modified retrospective approach. Accordingly, the amounts reported in the prior period have not been restated. The new guidance did however result in additional qualitative disclosures as to the nature, amounts, and concentrations of revenue. See
Note 3, "REVENUE RECOGNITION"
and
Note 19, "SEGMENT INFORMATION"
for additional details on the application of this guidance.
In October 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. This guidance was effective for the Company January 1, 2018 and was applied using a modified retrospective approach through a cumulative-effect adjustment to accumulated deficit and deferred income taxes as of the effective date. The Company recorded a net cumulative-effect adjustment of
$1,209 million
to increase deferred income tax assets and decrease the opening balance of Accumulated deficit for the income tax consequences deferred from past intra-entity transfers involving assets other than inventory.
In January 2017, the FASB issued guidance which clarifies the definition of a business with the objective of assisting with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company prospectively applied the new definition to all transactions effective January 1, 2018.
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, goodwill impairment will be measured as the amount by which a reporting unit's carrying value exceeds its fair value. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Company has elected to adopt this guidance effective January 1, 2018.
The Company tested goodwill for impairment upon adopting this guidance and recognized impairment charges of
$2,213 million
, related to its Salix reporting unit and
Ortho Dermatologics
reporting unit at January 1, 2018. See
Note 8, "INTANGIBLE ASSETS AND GOODWILL"
.
Recently Issued Accounting Standards, Not Adopted as of
March 31, 2018
In February 2016, the FASB issued guidance on leases. This 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 U.S. GAAP. Operating leases will be accounted for (both in the statement of operations and statement of cash flows) in a manner consistent with operating leases under existing U.S. 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. In 2018, the Company has initiated its project plan for adopting this guidance, which includes a detailed assessment program and a training program for its personnel.
The new guidance is effective for annual reporting periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In June 2016, the FASB issued 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 cash flows.
The Company’s revenues are primarily generated from product sales that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices). Other revenues include alliance and service revenue from the licensing of products and contract service revenue primarily in the areas of dermatology and topical medication.
Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. See
Note 19, "SEGMENT INFORMATION"
for the disaggregation of revenue which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by the economic factors of each category of customer contracts.
Product Sales
The Company recognizes revenue when the customer obtains control of promised goods or services and in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, the Company applies the five-step revenue model to contracts within its scope: (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.
A contract with the Company’s customers exists for each product sale. Where a contract with a customer contains more than one performance obligation, the Company allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The transaction price is adjusted for variable consideration which is discussed further below. The Company generally recognizes revenue for product sales at a point in time, when the customer obtains control of the products.
Product Sales Provisions
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. Provisions for variable consideration are established to reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future period.
Provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as rebates and returns, which can be paid to direct and indirect customers. Returns provision balances and volume discounts to direct customers are included in Accrued and other current liabilities. All other provisions related to direct customers are included in Trade receivables, net, while provision balances related to indirect customers are included in Accrued and other current liabilities.
The following table presents the activity and ending balances of the Company’s variable consideration provisions for the
three months ended March 31, 2018
.
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Three Months Ended March 31, 2018
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(in millions)
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Discounts
and
Allowances
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Returns
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Rebates
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Chargebacks
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Distribution
Fees
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Total
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Reserve balance, January 1, 2018
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$
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167
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$
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863
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$
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1,094
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$
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274
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$
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148
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$
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2,546
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Current year provision
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184
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88
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635
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477
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48
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1,432
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Payments or credits
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(199
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)
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(75
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)
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(620
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)
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(474
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)
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(81
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)
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(1,449
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)
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Reserve balance, March 31, 2018
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$
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152
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$
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876
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$
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1,109
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$
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277
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$
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115
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$
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2,529
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The Company continually monitors its variable consideration provisions and evaluates the estimates used as additional information becomes available. Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. The Company is required to make subjective judgments based primarily on its evaluation of current market conditions and trade inventory levels related to the Company's products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or an adjustment related to past sales, or both. If the actual amounts paid vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variance becomes known. The Company applies this method consistently for contracts with similar characteristics. The following describes the major sources of variable consideration in the Company’s customer arrangements and the methodology, estimates and judgments applied to estimate each type of variable consideration.
Cash Discounts and Allowances
Cash discounts are offered for prompt payment and allowances for volume purchases. Provisions for cash discounts are estimated at the time of sale and recorded as direct reductions to trade receivables and revenue. Management estimates the provisions for cash discounts and allowances based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts and allowances have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience and the fact that these amounts are generally settled within
one month
of incurring the liability.
Returns
Consistent with industry practice, customers are generally allowed to return product within a specified period of time before and after its expiration date, excluding European businesses which generally do not carry a right of return. The returns provision is estimated utilizing historical sales and return rates over the period during which customers have a right of return, taking into account available information on competitive products and contract changes. The information utilized to estimate the returns provision includes: (i) historical return and exchange levels, (ii) external data with respect to inventory levels in the wholesale distribution channel, (iii) external data with respect to prescription demand for products, (iv) remaining shelf lives of products at the date of sale and (v) estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
In determining the estimate for returns, management is required to make certain assumptions regarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, certain assumptions with respect to the extent and pattern of decline associated with generic competition are necessary. These assumptions are formulated using market data for similar products, past experience and other available information. These assumptions are continually reassessed, and changes to the estimates and assumptions are made as new information becomes available. A change of 1% in the estimated return rates would have impacted the Company’s pre-tax earnings by approximately
$21 million
for the three months ended March 31, 2018.
The estimate for returns may be impacted by a number of factors, but the principal factor relates to the inventory levels in the distribution channel. When management becomes aware of an increase in such inventory levels, it considers whether the increase may be temporary or other-than-temporary. Temporary increases in wholesaler inventory levels will not differ from original estimates of provision for returns. Other-than-temporary increases in wholesaler inventory levels, however, may be an indication that future product returns could be higher than originally anticipated, and, as a result, estimates for returns may need to be adjusted. Factors that suggest increases in wholesaler inventory levels are temporary include: (i) recently
implemented or announced price increases for certain products; (ii) new product launches or expanded indications for existing products; and (iii) timing of purchases by wholesale customers. Conversely, factors that suggest increases in wholesaler inventory levels are other-than-temporary include: (i) declining sales trends based on prescription demand; (ii) introduction of new products or generic competition; (iii) increasing price competition from generic competitors; and (iv) recent changes to the U.S. National Drug Codes (“NDC”) of products. Changes in the NDC of products could result in a period of higher returns related to products with the old NDC, as U.S. customers generally permit only one NDC per product for identification and tracking within their inventory systems.
Rebates and Chargebacks
Product sales made under governmental and managed-care pricing programs in the U.S. are subject to rebates. The Company participates in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby rebates are provided to participating government entities. Medicaid rebates are generally billed 45 days after the quarter, but can be billed up to 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, the Medicaid rebate reserve includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed and/or paid, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. The calculation of the Medicaid rebate reserve also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. A change of 1% in the volume of product sold through to Medicaid plan participants would have impacted the Company’s pre-tax earnings by approximately
$22 million
for the three months ended March 31, 2018. Quarterly, the Medicaid rebate reserve is adjusted based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of that reserve for several periods.
Managed Care rebates relate to contractual agreements to sell products to managed care organizations and pharmacy benefit managers at contractual rebate percentages in exchange for volume and/or market share.
Chargebacks relate to contractual agreements to sell products to government agencies, group purchasing organizations and other indirect customers at contractual prices that are lower than the list prices the Company charges wholesalers. When these group purchasing organizations or other indirect customers purchase products through wholesalers at these reduced prices, the wholesaler charges the Company for the difference between the prices they paid the Company and the prices at which they sold the products to the indirect customers.
In estimating provisions for rebates and chargebacks, management considers relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. Management estimates the amount of product sales subject to these programs based on historical utilization levels. Changes in the level of utilization of products through private or public benefit plans and group purchasing organizations will affect the amount of rebates and chargebacks that the Company is obligated to pay. Management continually updates these factors based on new contractual or statutory requirements, and any significant changes in sales trends that may impact the percentage of products subject to rebates or chargebacks.
The amount of Managed Care, Medicaid and other rebates and chargebacks has become more significant as a result of a combination of deeper discounts due to the price increases implemented in each of the last three years, changes in the Company’s product portfolio due to recent acquisitions and increased Medicaid utilization due to expansion of government funding for these programs. Management’s estimate for rebates and chargebacks may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel.
Rebate provisions are based on factors such as timing and terms of plans under contract, time to process rebates, product pricing, sales volumes, amount of inventory in the distribution channel and prescription trends. Accordingly, the Company generally assumes that adjustments made to rebate provisions relate to sales made in the prior years due to the delay in billing. However, the Company assumes that adjustments made to chargebacks are generally related to sales made in the current year, as these amounts are settled within a few months of original sale. Adjustments to actual for the three months ended March 31, 2018 and 2017 were not material to the Company’s revenues or earnings.
Patient Co-Pay Assistance programs, Consumer Rebates and Loyalty Programs are rebates offered on many of the Company’s products. Patient Co-Pay Assistance Programs are patient discount programs offered in the form of coupon cards or point of sale discounts which patients receive certain discounts off their prescription at participating pharmacies, as defined by the specific product program. An accrual for these programs is established, equal to management’s estimate of the discount, rebate and loyalty incentives attributable to a sale. That estimate is based on historical experience and other relevant factors. The
accrual is adjusted throughout each quarter based on actual experience and changes in other factors, if any, to ensure the balance is fairly stated.
Distribution Fees
The Company sells product primarily to wholesalers, and in some instances to large pharmacy chains such as CVS and Wal-Mart. The Company has Distribution Services Agreements ("DSAs") with several large wholesale customers such as McKesson Corporation, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Specialty. Under the DSAs, the wholesalers agree to provide services, and the Company pays the contracted DSA distribution service fees for these services based on product volumes.
Additionally, price appreciation credits are generated when the Company increases a product’s wholesaler acquisition cost (“WAC”) under contracts with certain wholesalers. Under such contracts, the Company is entitled to credits from such wholesalers for the impact of that WAC increase on inventory currently on hand at the wholesalers. Such credits are offset against the total distribution service fees paid to each such wholesaler. The variable consideration associated with price appreciation credits is reflected in the transaction price of products sold when it is determined to be probable that a significant reversal will not occur.
Net revenue from price appreciation credits for the
three months ended March 31, 2018
was
$15 million
and is included as a deduction to distribution fees in the table above of the Company's variable consideration provisions.
Contract Assets and Contract Liabilities
There are no contract assets for any period presented. Contract liabilities consist of deferred revenue, the balance of which is not material to any period presented.
Sales Commissions
The Company expenses sales commissions when incurred because the amortization period would have been less than one year. Sales commissions are included in selling, general and administrative expenses.
Financing Component
The Company has elected not to adjust consideration for the effects of a significant financing component when the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. The Company's global payment terms are generally between
thirty
to
ninety
days.
In 2017, the Company divested certain businesses and assets, which, in each case, were not aligned with its core business objectives.
CeraVe
®
, AcneFree™ and AMBI
®
skincare brands
On March 3, 2017, the Company completed the sale of its interests in the CeraVe
®
, AcneFree™ and AMBI
®
skincare brands for
$1,300 million
in cash (the “Skincare Sale”), subject to the finalization of certain working capital provisions. The CeraVe
®
, AcneFree™ and AMBI
®
skincare business was part of the Bausch + Lomb/International segment and was reclassified as held for sale as of December 31, 2016. Included in
Other expense (income), net
for the
three months ended March 31, 2017
is the Gain on the Skincare Sale of
$319 million
. The working capital provisions were finalized during 2017 and the Gain on the Skincare Sale was adjusted to
$309 million
.
Dendreon Pharmaceuticals LLC
On June 28, 2017, the Company completed the sale of all outstanding equity interests in Dendreon Pharmaceuticals LLC (formerly Dendreon Pharmaceuticals, Inc.) (“Dendreon”) for
$845 million
in cash (the “Dendreon Sale”), as adjusted. Dendreon was part of the Branded Rx segment and was reclassified as held for sale as of December 31, 2016. Included in Other (income) expense, net is the Gain on the Dendreon Sale of
$97 million
, as adjusted, in the three months ended June 30, 2017 consolidated statement of operations.
iNova Pharmaceuticals
On
September 29, 2017
, the Company completed the sale of its Australian-based iNova Pharmaceuticals (“iNova”) business for
$938 million
in cash (the “iNova Sale”), as adjusted, and subject to the finalization of certain working capital provisions.
iNova markets a diversified portfolio of weight management, pain management, cardiology and cough and cold prescription and OTC products in more than
15
countries, with leading market positions in Australia and South Africa, as well as an established platform in Asia. The Company will continue to operate in these geographies through the Bausch + Lomb franchise. The iNova business was part of the Bausch + Lomb/International segment and was reclassified as held for sale as of December 31, 2016. Included in
Other expense (income), net
is the Gain on the iNova Sale of
$309 million
, as adjusted, in the three months ended September 30, 2017 consolidated statement of operations.
Obagi Medical Products, Inc.
On
November 9, 2017
, certain of the Company's affiliates completed the sale of its Obagi Medical Products, Inc. (“Obagi”) business for
$190 million
in cash (the “Obagi Sale”). Obagi is a global specialty skin care pharmaceutical business with products focused on premature skin aging, skin damage, hyperpigmentation, acne and sun damage which are primarily available through dermatologists, plastic surgeons and other skin care professionals. The Obagi business was part of the U.S. Diversified Products segment and was reclassified as held for sale as of March 31, 2017. The carrying value of the Obagi business, including associated goodwill, was adjusted to its estimated fair value less costs to sell and an impairment of
$103 million
was recognized in Asset impairments in the year ended December 31, 2017 consolidated statement of operations. Included in Other (income) expense, net is a
$13 million
loss related to this transaction in the 2017 consolidated statement of operations.
Sprout Pharmaceuticals, Inc.
On
December 20, 2017
, the Company completed the sale of all outstanding equity interests in Sprout Pharmaceuticals, Inc. ("Sprout") to a buyer affiliated with certain former shareholders of Sprout (the “Sprout Sale”), in exchange for a
6%
royalty on global sales of Addyi® (flibanserin 100 mg) beginning June 2019. In connection with the completion of the Sprout Sale, the terms of the October 2015 merger agreement relating to the Company's acquisition of Sprout were amended to terminate the Company's ongoing obligation to make future royalty payments associated with the Addyi
®
product, as well as certain related provisions (including the obligation to make certain marketing and other expenditures). In connection with the completion of the Sprout Sale, the litigation against the Company, initiated on behalf of the former shareholders of Sprout, which disputed the Company's compliance with certain contractual terms of that same merger agreement with respect to the use of certain diligent efforts to develop and commercialize the Addyi® product (including a disputed contractual term with respect to the spend of no less than
$200 million
in certain expenditures), was dismissed with prejudice. In connection with the completion of the Sprout Sale, the Company issued the buyer a
five
-year
$25 million
loan for initial operating expenses. Addyi
®
, a once-daily, non-hormonal tablet approved for the treatment of acquired, generalized hypoactive sexual desire disorder in premenopausal women, was Sprout's only approved and commercialized product. Sprout was part of the Branded Rx segment and was reclassified as held for sale as of September 30, 2017. The carrying value of the Sprout business, including associated goodwill, was adjusted to its estimated fair value less costs to sell and a
$352 million
impairment was recognized in Asset impairments in the year ended December 31, 2017 consolidated statement of operations. Upon consummation of the transaction, a loss of
$98 million
was recognized in Other (income) expense, net in the 2017 consolidated statement of operations. The Company will recognize the agreed upon
6%
royalty of global sales of Addyi
®
beginning in June 2019 as these royalties become due, as the Company does not recognize contingent payments until such amounts are realizable.
Assets Held For Sale
At
March 31, 2018
, included in Prepaid expenses and other current assets and Other non-current assets are assets held for sale of
$12 million
and
$10 million
, and included in Accrued and other current liabilities and Other non-current liabilities are liabilities held for sale of
$3 million
and
$1 million
, respectively. At December 31, 2017, included in Other non-current assets are assets held for sale of
$12 million
.
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5.
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RESTRUCTURING AND INTEGRATION COSTS
|
In connection with acquisitions prior to 2016, the Company implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings. These measures included: (i) workforce reductions company-wide and other organizational changes, (ii) closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities, (iii) leveraging research and development spend and (iv) procurement savings. The remaining liability associated with these Restructuring and integration costs
as of March 31, 2018
was
$38 million
.
During the
three months ended March 31, 2018
, the Company incurred
$6 million
of
Restructuring and integration costs
. These costs included: (i)
$4 million
of severance costs and (ii)
$2 million
of facility closure costs. The Company made payments of
$6 million
for the
three months ended March 31, 2018
.
During the
three months ended March 31, 2017
, the Company incurred
$18 million
of
Restructuring and integration costs
. These costs included: (i)
$12 million
of integration consulting, duplicate labor, transition service, and other costs, (ii)
$4 million
of severance costs and (iii)
$2 million
of facility closure costs. These costs primarily related to restructuring and integration costs for other smaller acquisitions. The Company made payments of
$28 million
for the
three months ended March 31, 2017
.
The Company continues to evaluate opportunities to improve its operating results and may initiate additional cost savings programs to streamline its operations and eliminate redundant processes and expenses. The expenses associated with the implementation of these cost savings programs could be material and may include, but are not limited to, expenses associated with: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives.
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6.
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FAIR VALUE MEASUREMENTS
|
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
|
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•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
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•
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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
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•
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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
March 31, 2018
and
December 31, 2017
:
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|
|
March 31, 2018
|
|
December 31, 2017
|
(in millions)
|
|
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
|
|
$
|
361
|
|
|
$
|
326
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
265
|
|
|
$
|
230
|
|
|
$
|
35
|
|
|
$
|
—
|
|
Restricted cash
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration
|
|
$
|
(378
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(378
|
)
|
|
$
|
(387
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(387
|
)
|
Cash and cash equivalents consist of highly liquid investments with maturities of
three
months or less when purchased, primarily including money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
Restricted cash of
$77 million
as of December 31, 2017 was deposited with a bank as collateral to secure a bank guarantee. On January 9, 2018, the cash collateral of
$77 million
of Restricted cash was returned to the Company in exchange for a
$77 million
letter of credit.
There were
no
transfers between Level 1, Level 2, or Level 3 during the
three months ended March 31, 2018
.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis or Monte Carlo Simulation, using unobservable (Level 3) inputs. These inputs may include: (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows; and (iv) volatility of projected performance (Monte Carlo Simulation). Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the
three months ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
Balance, January 1, 2018
|
|
|
|
$
|
387
|
|
Adjustments to Acquisition-related contingent consideration:
|
|
|
|
|
Accretion for the time value of money
|
|
$
|
6
|
|
|
|
Fair value adjustments due to changes in estimates of future payments
|
|
(4
|
)
|
|
|
Acquisition-related contingent consideration
|
|
|
|
2
|
|
Foreign currency translation adjustment included in other comprehensive loss
|
|
|
|
1
|
|
Payments
|
|
|
|
(12
|
)
|
Balance, March 31, 2018
|
|
|
|
378
|
|
Current portion included in Accrued and other current liabilities
|
|
|
|
58
|
|
Non-current portion
|
|
|
|
$
|
320
|
|
Fair Value of Long-term Debt
The fair value of long-term debt as of
March 31, 2018
and
December 31, 2017
was
$24,471 million
and
$25,385 million
, respectively, and was estimated using the quoted market prices for the same or similar debt issuances (Level 2)
.
The components of inventories, net of allowances for obsolescence were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31,
2018
|
|
December 31,
2017
|
Raw materials
|
|
$
|
290
|
|
|
$
|
276
|
|
Work in process
|
|
134
|
|
|
146
|
|
Finished goods
|
|
618
|
|
|
626
|
|
|
|
$
|
1,042
|
|
|
$
|
1,048
|
|
|
|
8.
|
INTANGIBLE ASSETS AND GOODWILL
|
Intangible Assets
The major components of intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(in millions)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and
Impairments
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and
Impairments
|
|
Net
Carrying
Amount
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product brands
|
|
$
|
20,973
|
|
|
$
|
(9,984
|
)
|
|
$
|
10,989
|
|
|
$
|
20,913
|
|
|
$
|
(9,281
|
)
|
|
$
|
11,632
|
|
Corporate brands
|
|
938
|
|
|
(212
|
)
|
|
726
|
|
|
933
|
|
|
(179
|
)
|
|
754
|
|
Product rights/patents
|
|
3,307
|
|
|
(2,396
|
)
|
|
911
|
|
|
3,310
|
|
|
(2,346
|
)
|
|
964
|
|
Partner relationships
|
|
183
|
|
|
(176
|
)
|
|
7
|
|
|
179
|
|
|
(169
|
)
|
|
10
|
|
Technology and other
|
|
214
|
|
|
(165
|
)
|
|
49
|
|
|
214
|
|
|
(147
|
)
|
|
67
|
|
Total finite-lived intangible assets
|
|
25,615
|
|
|
(12,933
|
)
|
|
12,682
|
|
|
25,549
|
|
|
(12,122
|
)
|
|
13,427
|
|
Acquired IPR&D not in service
|
|
84
|
|
|
—
|
|
|
84
|
|
|
86
|
|
|
—
|
|
|
86
|
|
Bausch + Lomb Trademark
|
|
1,698
|
|
|
—
|
|
|
1,698
|
|
|
1,698
|
|
|
—
|
|
|
1,698
|
|
|
|
$
|
27,397
|
|
|
$
|
(12,933
|
)
|
|
$
|
14,464
|
|
|
$
|
27,333
|
|
|
$
|
(12,122
|
)
|
|
$
|
15,211
|
|
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company continues to monitor the recoverability of its finite-lived intangible assets and tests the intangible assets for impairment if indicators of impairment are present.
Asset impairments for the
three months ended March 31, 2018
include: (i) an impairment of
$34 million
reflecting decreases in forecasted sales for a certain product line due to generic competition, (ii) impairments of
$6 million
, in aggregate, related to certain product/patent assets associated with the discontinuance of specific product lines not aligned with the focus of the Company's core businesses and revisions to forecasted sales and (iii)
$4 million
related to assets being classified as held for sale.
Asset impairments for the three months ended March 31, 2017 include (i) impairments of
$96 million
to assets classified as held for sale and (ii) impairments of
$36 million
to certain product/patent assets associated with the discontinuance of a specific product line not aligned with the focus of the Company's core businesses.
The impairments to assets classified as held for sale were measured as the difference of the carrying value of these assets as compared to the estimated fair value of these assets less costs to sell determined using a discounted cash flow analysis which utilized unobservable inputs (Level 3). The other impairments and adjustments to finite-lived intangible assets were measured as the difference of the carrying value of these finite-lived assets as compared to the fair value as determined using a discounted cash flow analysis using unobservable inputs (Level 3).
In connection with an ongoing litigation matter between the Company and potential generic competitors to the branded drug Uceris
®
Tablet, the Company performed an impairment test of its Uceris
®
Tablet related intangible assets. As the undiscounted expected cash flows from the Uceris
®
Tablet exceed the carrying value of the Uceris
®
Tablet related intangible assets,
no
impairment exists
as of March 31, 2018
. However, if market conditions or legal outcomes differ from the Company’s assumptions, or if the Company is unable to execute its strategies, it may be necessary to record an impairment charge equal to the difference between the fair value and carrying value of the Uceris
®
Tablet related intangible assets.
As of March 31, 2018
, the carrying value of Uceris
®
Tablet related intangible assets was
$506 million
.
Estimated amortization expense, for the remainder of 2018 and each of the
five
succeeding years ending
December 31
and thereafter is as follows:
|
|
|
|
|
|
(in millions)
|
|
|
April through December 2018
|
|
$
|
2,173
|
|
2019
|
|
2,672
|
|
2020
|
|
2,331
|
|
2021
|
|
2,012
|
|
2022
|
|
1,840
|
|
2023
|
|
638
|
|
Thereafter
|
|
1,016
|
|
Total
|
|
$
|
12,682
|
|
Goodwill
The changes in the carrying amounts of goodwill during the
three months ended March 31, 2018
and the year ended
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Bausch + Lomb/ International
|
|
Branded Rx
|
|
U.S. Diversified Products
|
|
Total
|
Balance, December 31, 2016
|
|
$
|
5,499
|
|
|
$
|
7,265
|
|
|
$
|
3,030
|
|
|
$
|
15,794
|
|
Realignment of segment goodwill
|
|
264
|
|
|
(264
|
)
|
|
—
|
|
|
—
|
|
Balance, January 1, 2017
|
|
5,763
|
|
|
7,001
|
|
|
3,030
|
|
|
15,794
|
|
Goodwill reclassified to assets held for sale and subsequently disposed
|
|
(30
|
)
|
|
(61
|
)
|
|
(84
|
)
|
|
(175
|
)
|
Impairment
|
|
—
|
|
|
(312
|
)
|
|
—
|
|
|
(312
|
)
|
Foreign exchange and other
|
|
283
|
|
|
3
|
|
|
—
|
|
|
286
|
|
Balance, December 31, 2017
|
|
6,016
|
|
|
6,631
|
|
|
2,946
|
|
|
15,593
|
|
Impairment
|
|
—
|
|
|
(2,213
|
)
|
|
—
|
|
|
(2,213
|
)
|
Realignment of Global Solta reporting unit goodwill
|
|
(82
|
)
|
|
115
|
|
|
(33
|
)
|
|
—
|
|
Goodwill reclassified to assets held for sale
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Foreign exchange and other
|
|
54
|
|
|
—
|
|
|
—
|
|
|
54
|
|
Balance, March 31, 2018
|
|
$
|
5,986
|
|
|
$
|
4,533
|
|
|
$
|
2,913
|
|
|
$
|
13,432
|
|
Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs.
The discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the forecasted cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. To estimate cash flows beyond the final year of its model, the Company estimates a terminal value by applying an in perpetuity growth assumption and discount factor to determine the reporting unit's terminal value.
The Company forecasts cash flows for each reporting unit and takes into consideration economic conditions and trends, estimated future operating results, management's and a market participant's view of growth rates and product lives, and anticipates future economic conditions. Revenue growth rates inherent in these forecasts were based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product life-cycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected loss of exclusivity to the Company's product portfolio, changes in government legislation, product life-cycles,
industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future.
2017
2017 Realignment of Segment Structure
Effective for the first quarter of 2017, the revenues and profits from the Company's operations in Canada were reclassified. In connection with this change, the prior-period presentation of segment goodwill has been recast to conform to the current reporting structure, of which
$264 million
of goodwill as of December 31, 2016 was reclassified from the Branded Rx segment to the Bausch + Lomb/International segment. No facts or circumstances were then identified in connection with this change in alignment that would suggest an impairment exists.
2017 Impairment
On
December 20, 2017
, the Company completed the sale of Sprout to a buyer affiliated with certain former shareholders of Sprout. Sprout was part of the Branded Rx segment and was reclassified as held for sale as of September 30, 2017. As the Sprout business represented only a portion of a Branded Rx reporting unit, the Company assessed the remaining reporting unit for impairment and determined the carrying value of the remaining reporting unit exceeded its fair value. After completing step two of the impairment testing, the Company determined and recorded a goodwill impairment charge of
$312 million
during the three months ended September 30, 2017.
2018
Adoption of New Accounting Guidance for Goodwill Impairment Testing
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, goodwill impairment will be measured as the amount by which a reporting unit's carrying value exceeds its fair value. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Company has elected to adopt this guidance effective January 1, 2018.
Upon adopting the new guidance, the Company tested goodwill for impairment and determined that the carrying value of the Salix reporting unit exceeded its fair value. As a result of the adoption of new accounting guidance, the Company recognized a goodwill impairment of
$1,970 million
associated with the Salix reporting unit.
As of October 1, 2017, the date of the 2017 annual impairment test, the fair value of the Ortho Dermatologics reporting unit exceeded its carrying value. However, at January 1, 2018, the carrying value of the Ortho Dermatologics reporting unit exceeded its fair value. Unforeseen changes in the business dynamics of the Ortho Dermatologics reporting unit, such as: (i) changes in the dermatology sector, (ii) increased pricing pressures from third-party payors, (iii) additional risks to the exclusivity of certain products and (iv) an expected longer launch cycle for a new product, were factors that negatively impacted the reporting unit's operating results beyond management's expectations as of October 1, 2017, when the Company performed its annual goodwill impairment test. In response to these adverse business indicators, the Company reduced its near and long term financial projections for the Ortho Dermatologics reporting unit.
As a result of the reductions in the near and long term financial projections, the carrying value of the Ortho Dermatologics reporting unit exceeded its fair value at January 1, 2018 and the Company recognized a goodwill impairment of
$243 million
.
As of January 1, 2018, the fair value of all other reporting units exceeded their respective carrying value by more than 15%.
2018 Realignment of Solta Business
Effective March 1, 2018, revenues and profits from the U.S. Solta business included in the U.S. Diversified Products segment in prior periods and revenues and profits from the international Solta business included in the Bausch + Lomb/International segment in prior periods, are reported in new Global Solta reporting unit as part of the Branded Rx segment. As a result of the realignment,
$115 million
of goodwill was reallocated to the new Global Solta reporting unit and the Company assessed the impact on the fair values of each of the reporting units affected. After considering, among other matters: (i) the limited period of time between last impairment test (January 1, 2018) and the realignment (March 1, 2018), (ii) the results of the last
impairment test and (iii) the amount of goodwill reallocated to the new Global Solta reporting unit, the Company did not identify any indicators of impairment as result of the realignment.
No additional events occurred or circumstances changed during the period January 1, 2018 (the date goodwill was last tested for impairment) through March 31, 2018 that would indicate that the fair value of any reporting unit might be below its carrying value. As no additional events occurred or circumstances changed since the January 1, 2018 impairment test, management concluded that the fair value of the Salix and Ortho Dermatologics reporting units continue to only marginally exceed their carrying values. Therefore, the Company will perform qualitative interim assessments of the respective carrying values and fair values of the Salix and Ortho Dermatologics reporting units during the current year to determine if impairment testing of goodwill will be warranted. If market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future and those charges can be material.
|
|
9.
|
ACCRUED AND OTHER CURRENT LIABILITIES
|
Accrued and other current liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2018
|
|
December 31, 2017
|
Product rebates
|
|
$
|
1,109
|
|
|
$
|
1,094
|
|
Product returns
|
|
876
|
|
|
863
|
|
Interest
|
|
366
|
|
|
324
|
|
Employee compensation and benefit costs
|
|
231
|
|
|
259
|
|
Income taxes payable
|
|
190
|
|
|
202
|
|
Other
|
|
788
|
|
|
952
|
|
|
|
$
|
3,560
|
|
|
$
|
3,694
|
|
|
|
10.
|
FINANCING ARRANGEMENTS
|
Principal amounts of debt obligations and principal amounts of debt obligations net of discounts and issuance costs consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(in millions)
|
|
Maturity
|
|
Principal Amount
|
|
Net of Discounts and Issuance Costs
|
|
Principal Amount
|
|
Net of Discounts and Issuance Costs
|
Senior Secured Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
April 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Revolving Credit Facility
|
|
April 2020
|
|
250
|
|
|
250
|
|
|
250
|
|
|
250
|
|
Series F Tranche B Term Loan Facility
|
|
April 2022
|
|
3,315
|
|
|
3,225
|
|
|
3,521
|
|
|
3,420
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
6.50% Secured Notes
|
|
March 2022
|
|
1,250
|
|
|
1,236
|
|
|
1,250
|
|
|
1,235
|
|
7.00% Secured Notes
|
|
March 2024
|
|
2,000
|
|
|
1,976
|
|
|
2,000
|
|
|
1,975
|
|
5.50% Secured Notes
|
|
November 2025
|
|
1,750
|
|
|
1,729
|
|
|
1,750
|
|
|
1,729
|
|
Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
5.375%
|
|
March 2020
|
|
691
|
|
|
688
|
|
|
1,708
|
|
|
1,699
|
|
7.00%
|
|
October 2020
|
|
—
|
|
|
—
|
|
|
71
|
|
|
71
|
|
6.375%
|
|
October 2020
|
|
296
|
|
|
294
|
|
|
661
|
|
|
656
|
|
7.50%
|
|
July 2021
|
|
1,625
|
|
|
1,616
|
|
|
1,625
|
|
|
1,615
|
|
6.75%
|
|
August 2021
|
|
578
|
|
|
575
|
|
|
650
|
|
|
648
|
|
5.625%
|
|
December 2021
|
|
900
|
|
|
896
|
|
|
900
|
|
|
896
|
|
7.25%
|
|
July 2022
|
|
550
|
|
|
545
|
|
|
550
|
|
|
545
|
|
5.50%
|
|
March 2023
|
|
1,000
|
|
|
994
|
|
|
1,000
|
|
|
993
|
|
5.875%
|
|
May 2023
|
|
3,250
|
|
|
3,226
|
|
|
3,250
|
|
|
3,224
|
|
4.50% euro-denominated debt
|
|
May 2023
|
|
1,848
|
|
|
1,835
|
|
|
1,801
|
|
|
1,787
|
|
6.125%
|
|
April 2025
|
|
3,250
|
|
|
3,223
|
|
|
3,250
|
|
|
3,222
|
|
9.00%
|
|
December 2025
|
|
1,500
|
|
|
1,466
|
|
|
1,500
|
|
|
1,464
|
|
9.25%
|
|
April 2026
|
|
1,500
|
|
|
1,480
|
|
|
—
|
|
|
—
|
|
Other
|
|
Various
|
|
14
|
|
|
14
|
|
|
15
|
|
|
15
|
|
Total long-term debt and other
|
|
|
|
$
|
25,567
|
|
|
25,268
|
|
|
$
|
25,752
|
|
|
25,444
|
|
Less: Current portion of long-term debt and other
|
|
|
|
2
|
|
|
|
|
|
209
|
|
Non-current portion of long-term debt
|
|
|
|
|
|
$
|
25,266
|
|
|
|
|
|
$
|
25,235
|
|
Covenant Compliance
The Senior Secured Credit Facilities (as defined below) and the indentures governing the Company’s Senior Secured Notes and Senior Unsecured Notes contain customary affirmative and negative covenants and specified events of default. These affirmative and negative covenants include, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates. The Revolving Credit Facility also contains specified financial maintenance covenants (consisting of a secured leverage ratio and an interest coverage ratio).
As of March 31, 2018
, the Company was in compliance with all financial maintenance covenants related to its outstanding debt. The Company, based on its current forecast for the next twelve months from the date of issuance of these financial statements and the amendments that have been executed, expects to remain in compliance with its financial maintenance covenants and meet its debt service obligations over that same period.
The Company continues to take steps to improve its operating results to ensure continual compliance with its financial maintenance covenants and may take other actions to reduce its debt levels to align with the Company’s long term strategy, including divesting other businesses and refinancing debt as deemed appropriate.
Senior Secured Credit Facilities
On February 13, 2012, the Company and certain of its subsidiaries as guarantors entered into the “Senior Secured Credit Facilities” under the Company’s Third Amended and Restated Credit and Guaranty Agreement, as amended (the “Credit Agreement”) with a syndicate of financial institutions and investors, as lenders. As of January 1, 2017, the Credit Agreement provided for: (i) a
$1,500 million
Revolving Credit Facility maturing on April 20, 2018, which included a sublimit for the issuance of standby and commercial letters of credit and a sublimit for swing line loans and (ii) a series of term loans maturing during the years 2016 through 2022.
On March 21, 2017, the Company entered into Amendment No. 14 to the Credit Agreement (“Amendment No. 14”), which: (i) provided additional financing from an incremental term loan under the Company's Series F Tranche B Term Loan Facility of
$3,060 million
(the “Series F-3 Tranche B Term Loan”), (ii) amended the financial covenants contained in the Credit Agreement, (iii) increased the amortization rate for the Series F Tranche B Term Loan Facility from
0.25%
per quarter (
1%
per annum) to
1.25%
per quarter (
5%
per annum), with quarterly repayments starting March 31, 2017, (iv) amended certain financial definitions, including the definition of Consolidated Adjusted EBITDA and (v) provided additional ability for the Company to, among other things, incur indebtedness and liens, consummate acquisitions and make other investments, including relaxing certain limitations imposed by prior amendments. The proceeds from the additional financing, combined with the proceeds from the issuance of the Senior Secured Notes described below and cash on hand, were used to: (i) repay all outstanding balances under the Company’s Series A-3 Tranche A Term Loan Facility, Series A-4 Tranche A Term Loan Facility, Series D-2 Tranche B Term Loan Facility, Series C-2 Tranche B Term Loan Facility, and Series E-1 Tranche B Term Loan Facility (collectively the “Refinanced Debt”), (ii) repurchase
$1,100 million
in principal amount of
6.75%
Senior Unsecured Notes due August 2018 (the “
August 2018 Unsecured Notes
”), (iii) repay
$350 million
of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses (collectively, the “March 2017 Refinancing Transactions”).
Amendments to the covenants made as part of Amendment No. 14 include: (i) removed the financial maintenance covenants with respect to the Series F Tranche B Term Loan Facility, (ii) reduced the interest coverage ratio maintenance covenant to
1.50
:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping up to
1.75
:1.00 thereafter) and (iii) increased the secured leverage ratio maintenance covenant to
3.00
:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping down to
2.75
:1.00 thereafter). These financial maintenance covenants apply only with respect to the Revolving Credit Facility and can be waived or amended without the consent of the term loan lenders under the Credit Agreement.
Modifications to Consolidated Adjusted EBITDA from Amendment No. 14 included, among other things: (i) modifications to permit the Company to add back extraordinary, unusual or non-recurring expenses or charges (including certain costs of, and payments of, litigation expenses, actual or prospective legal settlements, fines, judgments or orders, subject to a cap of
$500 million
in any twelve month period, of which no more than
$250 million
may pertain to any costs, payments, expenses, settlements, fines, judgments or orders, in each case, arising out of any actual or potential claim, investigation, litigation or other proceeding that the Company did not publicly disclose on or prior to the effectiveness of Amendment No. 14, and subject to other customary limitations) and (ii) modifications to allow the Company to add back expenses, charges or losses actually reimbursed or for which the Company reasonably expects to be reimbursed by third parties within 365 days, subject to customary limitations.
Amendment No. 14 was accounted for as a modification of debt to the extent the Refinanced Debt was replaced with the incremental Series F-3 Tranche B Term Loan issued to the same creditor and an extinguishment of debt to the extent the Refinanced Debt was replaced with Series F-3 Tranche B Term Loan issued to a different creditor. The Refinanced Debt that was replaced with the proceeds of the newly issued Senior Secured Notes was accounted for as an extinguishment of debt. For amounts accounted for as an extinguishment of debt, the Company incurred a Loss on extinguishment of debt of
$27 million
representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value (the stated principal amount net of unamortized discount and debt issuance costs). Payments made to the lenders of
$38 million
associated with the issuance of the new Series F-3 Tranche B Term Loan were capitalized and are being amortized as interest expense over the remaining term of the Series F Tranche B Term Loan Facility. Third party expenses of
$3 million
associated with the modification of debt were expensed as incurred and included in Interest expense.
On March 28, 2017, the Company entered into Amendment No. 15 to the Credit Agreement (“Amendment No. 15”) which provided for the extension of the maturity date of
$1,190 million
of revolving credit commitments under the Revolving Credit Facility from April 20, 2018 to the earlier of: (i) April 20, 2020 and (ii) the date that is 91 calendar days prior to the scheduled maturity of any series or tranche of term loans under the Credit Agreement, certain Senior Secured Notes or Senior Unsecured Notes and any other indebtedness for borrowed money in excess of
$750 million
(the "Extended Revolving Maturity Date"). Amendment No. 15 was accounted for in part as a debt modification, whereby the fees paid to lenders agreeing to extend their commitment through April 20, 2020 and the fees paid to lenders providing additional commitments were recognized as additional debt issuance costs and are being amortized over the remaining term of the Revolving Credit Facility. Amendment No. 15 was accounted for in part as an extinguishment of debt and the Company incurred a Loss on extinguishment of debt of
$1 million
representing the unamortized debt issuance costs associated with the commitments canceled by lenders in the amendment. On April 19, 2018, the Company entered into Amendment No. 17 to the Credit Agreement which provided for the extension of the maturity date of an additional
$60 million
of revolving credit commitments under the Revolving Credit Facility from April 20, 2018 to the Extended Revolving Maturity Date consistent with the terms of Amendment No. 15 outlined above. The remaining
$250 million
of revolving credit commitments under the Revolving Credit Facility matured on April 20, 2018.
In April 2017, using the net proceeds from the Skincare Sale and the proceeds from the divestiture of a manufacturing facility in Brazil, the Company repaid
$220 million
of its Series F Tranche B Term Loan Facility. On July 3, 2017, using the net proceeds from the Dendreon Sale, the Company repaid
$811 million
of its Series F Tranche B Term Loan Facility. On October 5, 2017, using the net proceeds from the iNova Sale, the Company repaid
$923 million
of its Series F Tranche B Term Loan Facility. On November 10, 2017, using the net proceeds from the Obagi Sale, the Company repaid
$181 million
of its Series F Tranche B Term Loan Facility. On November 21, 2017, using the proceeds from the November 2017 Refinancing Transactions (as defined below), the Company repaid
$750 million
of its Series F Tranche B Term Loan Facility.
On November 21, 2017, the Company entered into Amendment No. 16 to the Credit Agreement (“Amendment No. 16”) to reprice the Series F Tranche B Term Loan Facility. The applicable margins for borrowings under the Series F Tranche B Term Loan Facility, as modified by the repricing, are
2.50%
with respect to base rate borrowings and
3.50%
with respect to LIBO rate borrowings. Any prepayment of the Series F Tranche B Term Loan Facility in connection with certain refinancings prior to May 21, 2018 will require a prepayment premium of
1.0%
of such loans prepaid. Amendment No. 16 also increases the letter of credit facility sublimit under the Credit Agreement to
$300 million
and makes certain other amendments to provide the Company with additional flexibility to enter into certain cash management transactions.
As of
March 31, 2018
, the Company had
$250 million
of outstanding borrowings,
$169 million
of issued and outstanding letters of credit, and remaining availability of
$1,081 million
under its Revolving Credit Facility.
Current Description of Senior Secured Credit Facilities
Borrowings under the Senior Secured Credit Facilities bear interest at a rate per annum equal to, at the Company's option from time to time, either: (i) a base rate determined by reference to the higher of: (a) the prime rate (as defined in the Credit Agreement) and (b) the federal funds effective rate plus 1/2 of
1%
or (ii) a LIBO rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. With respect to the Revolving Credit Facility, these applicable margins have been subject to increase or decrease quarterly based on the secured leverage ratio beginning with the quarter ended June 30, 2017. Based on its calculation of the Company’s secured leverage ratio, management does not anticipate any such increase or decrease to the current applicable margins for the next applicable period.
The applicable interest rate margins for borrowings under the Revolving Credit Facility are
2.25%
-
2.75%
with respect to base rate borrowings and
3.25%
-
3.75%
with respect to LIBO rate borrowings.
As of March 31, 2018
, the stated rate of interest on the Revolving Credit Facility was
6.02%
per annum. In addition, the Company is required to pay commitment fees of
0.50%
per annum with respect to the unutilized commitments under the Revolving Credit Facility, payable quarterly in arrears. The Company also is required to pay: (i) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBO rate borrowings under the Revolving Credit Facility on a per annum basis, payable quarterly in arrears, (ii) customary fronting fees for the issuance of letters of credit and (iii) agency fees.
The applicable interest rate margins for the Series F Tranche B Term Loan Facility are
2.50%
with respect to base rate borrowings and
3.50%
with respect to LIBO rate borrowings, subject to a
0.75%
LIBO rate floor.
As of March 31, 2018
, the stated rate of interest on the Company’s borrowings under the Series F Tranche B Term Loan Facility was
5.24%
per annum.
As of March 31, 2018
, there were no quarterly amortization repayments for the Senior Secured Credit Facilities.
Senior Secured Notes
The Senior Secured Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor under the Credit Agreement and existing Senior Unsecured Notes (together, the “Note Guarantors”). The Senior Secured Notes and the guarantees related thereto are senior obligations and are secured, subject to permitted liens and certain other exceptions, by the same first priority liens that secure the Company’s obligations under the Credit Agreement under the terms of the indenture governing the Senior Secured Notes.
The Senior Secured Notes and the guarantees rank equally in right of repayment with all of the Company’s and Note Guarantors’ respective existing and future unsubordinated indebtedness and senior to the Company’s and Note Guarantors’ respective future subordinated indebtedness. The Senior Secured Notes and the guarantees related thereto are effectively
pari passu
with the Company’s and the Note Guarantors’ respective existing and future indebtedness secured by a first priority lien on the collateral securing the Senior Secured Notes and effectively senior to the Company’s and the Note Guarantors’ respective existing and future indebtedness that is unsecured, including the existing Senior Unsecured Notes, or that is secured by junior liens, in each case to the extent of the value of the collateral. In addition, the Senior Secured Notes are structurally subordinated to: (i) all liabilities of any of the Company’s subsidiaries that do not guarantee the Senior Secured Notes and (ii) any of the Company’s debt that is secured by assets that are not collateral.
Upon the occurrence of a change in control (as defined in the indentures governing the Senior Secured Notes), unless the Company has exercised its right to redeem all of the notes of a series, holders of the Senior Secured Notes may require the Company to repurchase such holder’s notes, in whole or in part, at a purchase price equal to
101%
of the principal amount thereof plus accrued and unpaid interest.
6.50%
Senior Secured Notes due 2022 and
7.00%
Senior Secured Notes due 2024 - March 2017 Refinancing Transactions
As part of the March 2017 Refinancing Transactions, the Company issued
$1,250 million
aggregate principal amount of
6.50%
senior secured notes due March 15, 2022 (the “
March 2022 Secured Notes
”) and
$2,000 million
aggregate principal amount of
7.00%
senior secured notes due March 15, 2024 (the “
March 2024 Secured Notes
”), in a private placement, the proceeds of which, when combined with the proceeds from the Series F-3 Tranche B Term Loan and cash on hand, were used to: (i) repay the Refinanced Debt, (ii) repurchase
$1,100 million
in principal amount of August 2018 Senior Unsecured Notes, (iii) repay
$350 million
of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses. Interest on these notes is payable semi-annually in arrears on each March 15 and September 15.
5.50%
Senior Secured Notes due 2025 - October 2017 Refinancing Transactions and November 2017 Refinancing Transactions
On October 17, 2017, the Company issued
$1,000 million
aggregate principal amount of
5.50%
Senior Secured Notes due November 2025 (the “
November 2025 Secured Notes
”), in a private placement, the proceeds of which were used to: (i) repurchase
$569 million
in principal amount of the
6.375%
October 2020 Unsecured Notes (as defined below) and (ii) repurchase
$431 million
in principal amount of the
7.00%
October 2020 Unsecured Notes (as defined below) (collectively, the “October 2017 Refinancing Transactions”). The related fees and expenses were paid using cash on hand. Interest on these notes is payable semi-annually in arrears on each May 1 and November 1.
On November 21, 2017, the Company issued
$750 million
aggregate principal amount of the
November 2025 Secured Notes
, in a private placement. These are additional notes and form part of the same series as the Company’s existing
November 2025 Secured Notes
. The proceeds were used to prepay its Series F Tranche B Term Loan Facility. The related fees and expenses were paid using cash on hand (collectively, the “November 2017 Refinancing Transactions”).
Senior Unsecured Notes
The Senior Unsecured Notes issued by the Company are the Company’s senior unsecured obligations and are jointly and severally guaranteed on a senior unsecured basis by each of its subsidiaries that is a guarantor under the Senior Secured Credit Facilities. The Senior Unsecured Notes issued by the Company’s subsidiary, Valeant Pharmaceuticals International (“Valeant”) are senior unsecured obligations of Valeant and are jointly and severally guaranteed on a senior unsecured basis by the Company and each of its subsidiaries (other than Valeant) that is a guarantor under the Senior Secured Credit Facilities. Future subsidiaries of the Company and Valeant, if any, may be required to guarantee the Senior Unsecured Notes.
If the Company experiences a change in control, the Company may be required to make an offer to repurchase each series of Senior Unsecured Notes, in whole or in part, at a purchase price equal to
101%
of the aggregate principal amount of the Senior Unsecured Notes repurchased, plus accrued and unpaid interest.
6.75%
Senior Unsecured Notes due 2018
As part of the March 2017 Refinancing Transactions, the Company completed a tender offer to repurchase
$1,100 million
in aggregate principal amount of the
6.75%
Senior Unsecured Notes due August 2018 (the “
August 2018 Unsecured Notes
”) for total consideration of approximately
$1,132 million
plus accrued and unpaid interest through March 20, 2017. Loss on extinguishment of debt during the three months ended March 31, 2017 associated with the repurchase of the
August 2018 Unsecured Notes
was
$36 million
representing the difference between the amount paid to settle the debt and the debt’s carrying value.
On August 15, 2017, the Company repurchased the remaining
$500 million
of outstanding
August 2018 Unsecured Notes
using cash on hand, plus accrued and unpaid interest.
7.00%
Senior Unsecured Notes due 2020,
6.375%
Senior Unsecured Notes due 2020,
5.375%
Senior Unsecured Notes due 2020 and
6.75%
Senior Unsecured Notes due 2021
On October 17, 2017, as part of the October 2017 Refinancing Transactions, the Company repaid
$431 million
and
$569 million
in principal amount of the
7.00%
Senior Unsecured Notes due 2020 (the “
7.00%
October 2020 Unsecured Notes
”) and
6.375%
Senior Unsecured Notes due 2020 (the “
6.375%
October 2020 Unsecured Notes
”), respectively.
On December 18, 2017, as part of the December 2017 Refinancing Transactions (as defined below), the Company repaid
$188 million
,
$1,021 million
and
$291 million
principal amount of the
7.00%
October 2020 Unsecured Notes
,
6.375%
October 2020 Unsecured Notes
and
5.375%
Senior Unsecured Notes due 2020 (the "March 2020 Unsecured Notes"), respectively.
On March 26, 2018, as part of the March 2018 Refinancing Transactions (as defined below), the Company repaid
$1,017 million
,
$365 million
and
$72 million
of the March 2020 Unsecured Notes,
6.375%
October 2020 Unsecured Notes
and the
6.75%
Senior Unsecured Notes due 2021(the "August 2021 Unsecured Notes"), respectively.
9.00%
Senior Unsecured Notes due 2025 - December 2017 Refinancing Transactions
On December 18, 2017, the Company issued
$1,500 million
aggregate principal amount of
9.00%
Senior Unsecured Notes due 2025 (the “
December 2025 Unsecured Notes
”) in a private placement, the proceeds of which were used to: (i) repurchase
$1,021 million
in principal amount of the
6.375%
October 2020 Unsecured Notes
, (ii) repurchase
$291 million
in principal amount of the March 2020 Unsecured Notes and (iii) repurchase
$188 million
in principal amount of the
7.00%
October 2020 Unsecured Notes
(collectively, the “December 2017 Refinancing Transactions”). The related fees and expenses were paid using cash on hand. The
December 2025 Unsecured Notes
accrue interest at the rate of
9.00%
per year, payable semi-annually in arrears on each of June 15 and December 15.
9.25%
Senior Unsecured Notes due 2026 - March 2018 Refinancing Transactions
On March 26, 2018, Valeant issued
$1,500 million
in aggregate principal amount of
9.25%
Senior Unsecured Notes due 2026 (the “April 2026 Unsecured Notes”) in a private placement, a portion of the proceeds of which were used to repurchase
$1,454 million
in aggregate principal amount of unsecured notes which consisted of: (i)
$1,017 million
in principal amount of the March 2020 Unsecured Notes, (ii)
$365 million
in principal amount of the
6.375%
October 2020 Unsecured Notes and (iii)
$72 million
in principal amount of the August 2021 Unsecured Notes. All fees and expenses associated with these transactions were paid with cash on hand. On
April 12, 2018
, Valeant issued a
30
-day notice to redeem an additional
$150 million
in principal amount of
6.375%
October 2020 Unsecured Notes using cash on hand. The April 2026 Unsecured Notes accrue interest at the rate of
9.25%
per year, payable semi-annually in arrears on each of April 1 and October 1.
Valeant may redeem all or a portion of the April 2026 Unsecured Notes at any time prior to April 1, 2022, at a price equal to
100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to April 1, 2021, Valeant may redeem up to
40%
of the aggregate principal amount of the outstanding April 2026 Unsecured Notes with the net proceeds of certain equity offerings at the redemption price set forth in the April 2026 Unsecured Notes indenture. On or after April 1, 2022, Valeant may redeem all or a portion of the April 2026 Unsecured Notes at the applicable redemption prices set forth in the April 2026 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
Weighted Average Stated Rate of Interest
The weighted average stated rate of interest as of
March 31, 2018
and
December 31, 2017
was
6.32%
and
6.07%
, respectively.
Maturities
Maturities of debt obligations for the period
April through December 2018
, the five succeeding years ending December 31 and thereafter are as follows:
|
|
|
|
|
(in millions)
|
|
April through December 2018
|
$
|
2
|
|
2019
|
—
|
|
2020
|
1,237
|
|
2021
|
3,103
|
|
2022
|
5,115
|
|
2023
|
6,098
|
|
Thereafter
|
10,012
|
|
Total gross maturities
|
25,567
|
|
Unamortized discounts
|
(299
|
)
|
Total long-term debt and other
|
$
|
25,268
|
|
During the
three months ended March 31, 2018
, the Company made aggregate repayments of long-term debt of
$1,731 million
, which consisted of: (i)
$206 million
of repayments of term loans under its Senior Secured Credit Facilities and (ii)
$1,525 million
of Senior Unsecured Notes outstanding. During the
three months ended March 31, 2018
, the Company incurred
$1,500 million
of principal amount long-term debt, consisting of Senior Unsecured Notes.
|
|
11.
|
PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS
|
The Company sponsors defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers certain U.S. employees and employees in certain other countries. The following table provides the components of net periodic (benefit) cost for the Company’s defined benefit pension plans and postretirement benefit plan for the
three months ended March 31, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefit Plans
|
|
Postretirement
Benefit
Plan
|
|
U.S. Plan
|
|
Non-U.S. Plans
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
2
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Expected return on plan assets
|
|
(4
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Net periodic (benefit) cost
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During the
three months ended March 31, 2018
, the Company contributed
$1 million
,
$2 million
, and
$1 million
to the U.S. pension benefit plans, the non-U.S. pension benefit plans, and the postretirement benefit plan, respectively. The Company expects to contribute
$5 million
,
$7 million
, and
$6 million
in
2018
to the U.S. pension benefit plans, the non-U.S. pension benefit plans, and the postretirement benefit plan, respectively, inclusive of amounts contributed during the
three months ended March 31, 2018
.
|
|
12.
|
SHARE-BASED COMPENSATION
|
In May 2014, the shareholders approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”) which replaced the Company’s 2011 Omnibus Incentive Plan (the "2011 Plan") for future equity awards granted by the Company. The maximum number of common shares that may be issued to participants under the 2014 Plan is equal to
18,000,000
common shares, plus the number of common shares under the 2011 Plan reserved but unissued and not underlying outstanding awards and the number of common shares becoming available for reuse after awards are terminated, forfeited, cancelled, exchanged or surrendered under the 2011 Plan and the Company’s 2007 Equity Compensation Plan. The Company registered, in the aggregate,
20,000,000
common shares of common stock for issuance under the 2014 Plan. Approximately
1,968,000
common shares were available for future grants as of
March 31, 2018
. The Company uses reserved and unissued common shares to satisfy its obligations under its share-based compensation plans.
During the three months ended March 31, 2017, the Company introduced a new long-term incentive program with the objective to re-align the share-based awards granted to senior management with the Company’s focus on improving its tangible capital usage and allocation while maintaining focus on improving total shareholder return over the long-term. The share-based awards granted under this long-term incentive program consist of time-based stock options, time-based restricted share units (“RSUs”) and performance-based RSUs. Performance-based RSUs are comprised of awards that vest upon achievement of certain share price appreciation conditions that are based on total shareholder return (“TSR”) and awards that vest upon attainment of certain performance targets that are based on the Company’s return on tangible capital (“ROTC”).
The following table summarizes the components and classification of share-based compensation expense related to stock options and RSUs for the
three months ended March 31, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2018
|
|
2017
|
Stock options
|
|
$
|
5
|
|
|
$
|
5
|
|
RSUs
|
|
16
|
|
|
23
|
|
|
|
$
|
21
|
|
|
$
|
28
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
2
|
|
|
$
|
2
|
|
Selling, general and administrative expenses
|
|
19
|
|
|
26
|
|
|
|
$
|
21
|
|
|
$
|
28
|
|
During the
three months ended March 31, 2018 and 2017
, the Company granted approximately
2,065,000
stock options with a weighted-average exercise price of
$15.32
per option and approximately
1,451,000
stock options with a weighted-average exercise price of
$14.38
per option, respectively. The weighted-average fair values of all stock options granted to employees during the
three months ended March 31, 2018 and 2017
were
$7.82
and
$5.97
, respectively.
During the
three months ended March 31, 2018 and 2017
, the Company granted approximately
2,449,000
time-based RSUs with a weighted-average grant date fair value of
$16.75
per RSU and approximately
3,072,000
time-based RSUs with a weighted-average grant date fair value of
$11.69
per RSU, respectively.
During the
three months ended March 31, 2018 and 2017
, the Company granted approximately
877,000
and
409,000
performance-based RSUs, consisting of approximately
469,000
and
205,000
units of TSR performance-based RSUs with an average grant date fair value of
$29.35
and
$16.41
per RSU and approximately
408,000
and
204,000
units of ROTC performance-based RSUs with a weighted-average grant date fair value of
$18.80
and
$15.82
per RSU, respectively.
The granted stock options, time-based RSUs and performance-based RSUs for the
three months ended March 31, 2018
, includes long-term incentive awards granted to the Company’s Chief Executive Officer ("CEO") which had an aggregate value of
$10 million
. In connection with his award, approximately
933,000
performance-based RSUs received by the CEO upon his hire in 2016 were cancelled, and the shares underlying those performance-based RSUs were permanently retired and are not available for future grants under the 2014 Plan. The CEO's long-term incentive award is accounted for as an award modification whereby the Company continues to recognize the unamortized compensation associated with the original award plus the incremental fair value of the new award measured at the date of grant, over the vesting period of the new award.
As of
March 31, 2018
, the remaining unrecognized compensation expense related to all outstanding non-vested stock options, time-based RSUs and performance-based RSUs amounted to
$149 million
, which will be amortized over a weighted-average period of
2.29
years.
|
|
13.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31,
2018
|
|
December 31,
2017
|
Foreign currency translation adjustments
|
|
$
|
(1,833
|
)
|
|
$
|
(1,877
|
)
|
Pension and postretirement benefit plan adjustments, net of tax
|
|
(19
|
)
|
|
(19
|
)
|
|
|
$
|
(1,852
|
)
|
|
$
|
(1,896
|
)
|
Income taxes are not provided for foreign currency translation adjustments arising on the translation of the Company’s operations having a functional currency other than the U.S. dollar, except to the extent of translation adjustments related to the Company’s retained earnings for foreign jurisdictions in which the Company is not considered to be permanently reinvested.
|
|
14.
|
RESEARCH AND DEVELOPMENT
|
Included in
Research and development
are costs related to product development and quality assurance programs. Quality assurance are the costs incurred to meet evolving customer and regulatory standards.
Research and development
costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2018
|
|
2017
|
Product related research and development
|
|
$
|
83
|
|
|
$
|
86
|
|
Quality assurance
|
|
9
|
|
|
10
|
|
|
|
$
|
92
|
|
|
$
|
96
|
|
|
|
15.
|
OTHER EXPENSE (INCOME), NET
|
Other expense (income), net
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2018
|
|
2017
|
Gain on the Skincare Sale (Note 4)
|
|
$
|
—
|
|
|
$
|
(319
|
)
|
Net gain on other sales of assets
|
|
—
|
|
|
2
|
|
Litigation and other matters
|
|
11
|
|
|
76
|
|
Other, net
|
|
—
|
|
|
1
|
|
|
|
$
|
11
|
|
|
$
|
(240
|
)
|
For interim financial statement purposes, U.S. GAAP income tax expense/benefit related to ordinary income is determined by applying an estimated annual effective income tax rate against the Company's ordinary income. Income tax expense/benefit related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company's annual effective income tax rate requires the use of management forecasts and other estimates, a projection of jurisdictional taxable income and losses, application of statutory income tax rates, and an evaluation of valuation allowances. The estimate of tax expense in 2018 includes an estimate of the effects of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) including both GILTI and BEAT (further discussed below). The Company's estimated annual effective income tax rate may be revised, if necessary, in each interim period.
Benefit from
income taxes for the
three months ended March 31, 2018
was
$3 million
and included: (i)
$7 million
of income tax benefit for the Company's ordinary loss during the
three months ended March 31, 2018
and (ii)
$4 million
of net income tax expense for discrete items. The net income tax expense for discrete items includes: (i) a
$3 million
tax charge related to internal restructurings and (ii) a
$2 million
tax benefit related to changes in uncertain tax positions.
Benefit from
income taxes for the
three months ended March 31, 2017
was
$924 million
and included: (i)
$35 million
of income tax benefit for the Company's ordinary loss for the
three months ended March 31, 2017
and (ii)
$889 million
of net income tax benefit for discrete items. The net income tax benefit for discrete items includes: (i) a
$1,543 million
benefit related to for the establishment of a deferred tax asset on the outside basis difference between members of the Company’s U.S. consolidated tax group that is expected to be realized, (ii) a
$635 million
charge for the impact of internal restructuring transactions, (iii) a
$76 million
charge for the Company’s divestitures and (iv) a benefit relating to the litigation matters accrual recorded during the three months ended
March 31, 2017
.
The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was
$2,108 million
and
$2,001 million
as of
March 31, 2018
and
December 31, 2017
, respectively. The increase was primarily due to continued losses in Canada. The Company will continue to assess the need for a valuation allowance on a go-forward basis.
As of March 31, 2018
and
December 31, 2017
, the Company had
$612 million
and
$598 million
of unrecognized tax benefits, which included
$42 million
and
$41 million
of interest and penalties, respectively. Of the total unrecognized tax benefits as of
March 31, 2018
,
$284 million
would reduce the Company’s effective tax rate, if recognized. The Company anticipates that unrecognized tax benefits resolved within the next 12 months will not be material.
On December 22, 2017, the Tax Act was signed into law and includes a number of changes in the U.S. tax law, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Tax Act also implements a modified territorial tax system that includes a one-time transition tax on the accumulated previously untaxed earnings of foreign subsidiaries (the “Transition Toll Tax”) equal to 15.5% (reinvested in liquid assets) or 8% (reinvested in non-liquid assets). At the taxpayer's election, the Transition Toll Tax can be paid over an eight-year period without interest, starting in 2018.
The Tax Act also includes two new U.S. tax base erosion provisions: (i) the base-erosion and anti-abuse tax (“BEAT”) and (ii) the global intangible low-taxed income (“GILTI”). BEAT provides a minimum tax on U.S. tax deductible payments made to related foreign parties after December 31, 2017. GILTI requires an entity to include in its U.S. taxable income the earnings of its foreign subsidiaries in excess of an allowable return on each foreign subsidiary’s depreciable tangible assets. Accounting guidance provides that the impacts of this provision can be included in the consolidated financial statements either by recording the impacts in the period in which GILTI has been incurred or by adjusting deferred tax assets or liabilities in the period of enactment related to basis differences expected to reverse as a result of the GILTI provisions in future years. The Company has provisionally elected to provide for the GILTI tax in the period in which it is incurred and, therefore, the 2017 benefit for income taxes did not include a provision for GILTI. The estimate of tax expense in 2018 includes an estimate of the effects of the Tax Act including both GILTI and BEAT.
As part of the Tax Act, the Company’s U.S. interest expense is subject to limitation rules which limit U.S. interest expense to
30%
of adjusted taxable income, defined similar to EBITDA (through 2021) and then EBIT thereafter. Disallowed interest can be carried forward indefinitely and any unused interest deduction assessed for recoverability. The Company considered
such provisions in the 2018 annual estimated effective rate assessment and expects to fully utilize any interest carry forwards in future periods.
The Company has provided for income taxes, including the impacts of the Tax Act, in accordance with the accounting guidance issued through the date of the issuance of these consolidated financial statements. In accordance with accounting guidance, the Company has provisionally provided for the income tax effects of the Tax Act as of
December 31, 2017
and will finalize the provisional amounts associated with the Tax Act within one year of its enactment, December 22, 2018.
The Company’s income tax benefit for the year 2017 included provisional net tax benefits of
$975 million
attributable to the Tax Act which included: (i) the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future of
$774 million
, (ii) the one-time Transition Toll Tax of
$88 million
and (iii) the decrease in deferred tax assets attributable to certain legal accruals, the deductibility of which is uncertain for U.S. federal income tax purposes, of
$10 million
. The Company has provisionally utilized net operating losses (“NOLs”) to offset the provisionally determined
$88 million
Transition Toll Tax and therefore no amount is recorded as payable. The Company has previously provided for residual U.S. federal income tax on its outside basis differences in certain foreign subsidiaries; however, as the Company's residual U.S. federal tax liability was
$299 million
prior to the law change, the Company recognized a deferred tax benefit of
$299 million
in the fourth quarter of 2017.
The provisional amounts included in the Company's Benefit from income taxes for the year 2017, including the Transition Toll Tax, will be finalized once a full assessment can be completed. Differences between the provisional net income tax benefit as provided in 2017 and the benefit or provision for income taxes when finalized, will be recognized in the period finalized as additional income tax provision or benefit. The effects of the Tax Act were recorded as provisional estimates, in part, because of expected future guidance from the SEC, the U.S. Internal Revenue Service, and various state and local governments. During the three months ended March 31, 2018, the Company has not made any material revisions to the provisional amounts as it continues its assessment and expects future guidance from the accounting regulatory bodies, the U.S. Internal Revenue Service and various state and local governments. Differences between the provisional benefit from income taxes as provided in 2017 and the benefit or provision for income taxes when those provisional amounts are finalized in 2018 are expected, and those differences could be material.
The Company continues to be under examination by the Canada Revenue Agency. The Company’s position with regard to proposed audit adjustments has not changed as of
March 31, 2018
and the total proposed adjustment continues to result in a loss of tax attributes which are subject to a full valuation allowance.
The Internal Revenue Service completed its examinations of the Company’s U.S. consolidated federal income tax returns for the years 2013 and 2014. There were no material adjustments to the Company's taxable income as a result of these examinations. The Company has filed tax returns which used a capital loss generated in 2017 to offset capital gains generated in 2014. As these tax returns were filed subsequent to the commencement of the examination by the Internal Revenue Service, the Company’s 2014 tax year cannot be closed commensurate with the examination’s conclusion. The Company's U.S. affiliates remain under examination for various state tax audits in the U.S. for years 2002 to 2016.
The Company’s subsidiaries in Australia are under audit by the Australian Tax Office for various years beginning in 2010. On August 8, 2017, the Australian Taxation Office issued a notice of assessment for the tax years 2011 through 2017 in the aggregate amount of
$117 million
, which includes penalties and interest. The Company disagrees with the assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws. The Company intends to defend its tax position in this matter vigorously and has filed a holding objection against the assessment by the Australian Taxation Office and has secured a bank guarantee to cover any potential cash outlays regarding this assessment.
Certain affiliates of the Company in regions outside of Canada, the U.S. and Australia are currently under examination by relevant taxing authorities, and all necessary accruals have been recorded, including uncertain tax benefits. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's consolidated financial statements.
|
|
17.
|
(LOSS) EARNINGS PER SHARE
|
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc. were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions, except per share amounts)
|
|
2018
|
|
2017
|
Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
|
|
$
|
(2,693
|
)
|
|
$
|
628
|
|
|
|
|
|
|
Basic weighted-average number of common shares outstanding
|
|
350.7
|
|
|
349.8
|
|
Diluted effect of stock options, RSUs and other
|
|
—
|
|
|
0.7
|
|
Diluted weighted-average number of common shares outstanding
|
|
350.7
|
|
|
350.5
|
|
|
|
|
|
|
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
|
|
|
|
|
Basic
|
|
$
|
(7.68
|
)
|
|
$
|
1.80
|
|
Diluted
|
|
$
|
(7.68
|
)
|
|
$
|
1.79
|
|
During the
three months ended March 31, 2018
, all potential common shares issuable for stock options and RSUs were excluded from the calculation of diluted loss per share, as the effect of including them would have been anti-dilutive. The dilutive effect of potential common shares issuable for stock options and RSUs on the weighted-average number of common shares outstanding would have been as follows:
|
|
|
|
(in millions)
|
|
Basic weighted-average number of common shares outstanding
|
350.7
|
|
Diluted effect of stock options, RSUs and other
|
2.5
|
|
Diluted weighted-average number of common shares outstanding
|
353.2
|
|
During the
three months ended March 31, 2018 and 2017
, time-based RSUs, performance-based RSUs and stock options to purchase approximately
4,830,000
and
9,805,000
common shares, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive under the treasury stock method.
From time to time, the Company becomes involved in various legal and administrative proceedings, which include product liability, intellectual property, commercial, antitrust, governmental and regulatory investigations, related private litigation and ordinary course employment-related issues. From time to time, the Company also initiates actions or files counterclaims. The Company could be subject to counterclaims or other suits in response to actions it may initiate. The Company believes that the prosecution of these actions and counterclaims is important to preserve and protect the Company, its reputation and its assets. Certain of these proceedings and actions are described below.
On a quarterly basis, the Company evaluates developments in legal proceedings, potential settlements and other matters that could increase or decrease the amount of the liability accrued.
As of March 31, 2018
, the Company's consolidated balance sheet includes accrued current loss contingencies of
$81 million
and non-current loss contingencies of
$27 million
related to matters which are both probable and reasonably estimable. For all other matters, unless otherwise indicated, the Company cannot reasonably predict the outcome of these legal proceedings, nor can it estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An adverse outcome in certain of these proceedings could have a material adverse effect on the Company’s business, financial condition and results of operations, and could cause the market value of its common shares and/or debt securities to decline.
Governmental and Regulatory Inquiries
Investigation by the U.S. Attorney's Office for the District of Massachusetts
In October 2015, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts, and, in June 2016, the Company received a follow up subpoena. The materials requested, pursuant to the subpoenas and follow-up requests, include documents and witness interviews with respect to the Company’s patient assistance programs and
contributions to patient assistance organizations that provide financial assistance to Medicare patients taking products sold by the Company, and the Company’s pricing of its products. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigation by the U.S. Attorney's Office for the Southern District of New York
In October 2015, the Company received a subpoena from the U.S. Attorney's Office for the Southern District of New York. The materials requested, pursuant to the subpoena and follow-up requests, include documents and witness interviews with respect to the Company’s patient assistance programs; its former relationship with Philidor and other pharmacies; the Company’s accounting treatment for sales by specialty pharmacies; information provided to the Centers for Medicare and Medicaid Services; the Company’s pricing (including discounts and rebates), marketing and distribution of its products; the Company’s compliance program; and employee compensation. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
SEC Investigation
Beginning in November 2015, the Company has received from the staff of the Los Angeles Regional Office of the SEC subpoenas for documents, as well as various document, testimony and interview requests, related to its investigation of the Company, including requests concerning the Company's former relationship with Philidor, its accounting practices and policies, its public disclosures and other matters. The Company is cooperating with the SEC in this matter. The Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of the SEC investigation.
Request for Information from the AMF
On April 12, 2016, the Company received a request letter from the Autorité des marchés financiers (the “AMF”) requesting documents concerning the work of the Company’s ad hoc committee of independent directors (the “Ad Hoc Committee”) (established to review certain allegations regarding the Company’s former relationship with Philidor and related matters), the Company’s former relationship with Philidor, the Company's accounting practices and policies and other matters. The Company is cooperating with the AMF in this matter. The Company has not received any notice of investigation from the AMF, and the Company cannot predict whether any investigation will be commenced by the AMF or, if commenced, whether any enforcement action against the Company would result from any such investigation.
Securities and RICO Class Actions
Valeant U.S. Securities Litigation
From October 22, 2015 to October 30, 2015,
four
putative securities class actions were filed in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors. Those
four
actions, captioned Potter v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7658), Chen v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7679), Yang v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7746), and Fein v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7809), all asserted securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of putative classes of persons who purchased or otherwise acquired the Company’s stock during various time periods between February 28, 2014 and October 21, 2015. The allegations relate to, among other things, allegedly false and misleading statements and/or failures to disclose information about the Company’s business and prospects, including relating to drug pricing, the Company’s use of specialty pharmacies, and the Company’s relationship with Philidor.
On May 31, 2016, the Court entered an order consolidating the
four
actions under the caption In re Valeant Pharmaceuticals International, Inc. Securities Litigation, Case No. 3:15-cv-07658, and appointing a lead plaintiff and lead plaintiff’s counsel. On June 24, 2016, the lead plaintiff filed a consolidated complaint naming additional defendants and asserting additional claims based on allegations of false and misleading statements and/or omissions similar to those in the initial complaints. Specifically, the consolidated complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act against the Company, and certain current or former officers and directors, as well as claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) against the Company, certain current or former officers and directors, and certain other parties. The lead plaintiff seeks to bring these claims on behalf of a putative class of persons who purchased the Company’s equity securities and senior notes in the United States between January 4, 2013 and March 15, 2016, including
all those who purchased the Company’s securities in the United States in the Company’s debt and stock offerings between July 2013 to March 2015. On September 13, 2016, the Company and the other defendants moved to dismiss the consolidated complaint. Briefing on the Company's motion was completed on January 13, 2017. On April 28, 2017, the Court dismissed certain claims arising out of the Company's private placement offerings and otherwise denied the motions to dismiss. Defendants' answers to the consolidated complaint were filed on August 18, 2017.
In addition to the consolidated putative class action,
twenty-seven
groups of individual investors in the Company’s stock and debt securities at this point have chosen to opt out of the consolidated putative class action and filed securities actions in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors and other such proceedings may be initiated or asserted. These actions are captioned: T. Rowe Price Growth Stock Fund, Inc. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-5034); Equity Trustees Limited as Responsible Entity for T. Rowe Price Global Equity Fund v. Valeant Pharmaceuticals International Inc. (Case No. 16-cv-6127); Principal Funds, Inc. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-6128); BloombergSen Partners Fund LP v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7212); Discovery Global Citizens Master Fund, Ltd. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7321); MSD Torchlight Partners, L.P. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7324); BlueMountain Foinaven Master Fund, L.P. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7328); Incline Global Master LP v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7494); VALIC Company I v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7496); Janus Aspen Series v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7497) (“Janus Aspen”); Okumus Opportunistic Value Fund, LTD v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-6513) (“Okumus”); Lord Abbett Investment Trust- Lord Abbett Short Duration Income Fund, v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-6365) (“Lord Abbett”); Pentwater Equity Opportunities Master Fund LTD v. Valeant Pharmaceuticals International, Inc., et al. (Case No. 17-cv-7552), Public Employees’ Retirement System of Mississippi v. Valeant Pharmaceuticals International Inc. (Case No. 17-cv-7625) (“Mississippi”);
The Boeing Company Employee Retirement Plans Master Trust v. Valeant Pharmaceuticals International Inc., et al., (Case No. 17-cv-7636) (“Boeing”); State Board of Administration of Florida v. Valeant Pharmaceuticals International Inc. (Case No. 17-cv-12808); The Regents of the University of California v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-13488); GMO Trust v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0089); Första AP Fonden v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-12088); New York City Employees’ Retirement System v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0032) (“NYCERS”); Blackrock Global Allocation Fund, Inc. v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0343) (“Blackrock”); Colonial First State Investments Limited As Responsible Entity for Commonwealth Global Shares Fund 1 v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0383); Bharat Ahuja v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0846); Brahman Capital Corp. v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0893); The Prudential Insurance Company of America v. Valeant Pharmaceuticals International, Inc. (Case No. 3:18-cv-01223) (“Prudential”); Senzar Healthcare Master Fund LP v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-02286) ("Senzar"); and 2012 Dynasty UC LLC v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-08595) ("2012 Dynasty"). In addition, one group of individual investors in the Company’s stock securities chose to opt out of the consolidated putative class action and filed a securities action in the U.S. District Court for the Southern District of New York against the Company and certain current or former officers and directors. This action was captioned: Hound Partners Offshore Fund, LP v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0076) (“Hound Partners”).
Defendants filed a motion to transfer the Hound Partners case to the District of New Jersey on February 2, 2018. On April 24, 2018, the Court granted Defendants' motion and the case was transferred to the District of New Jersey on May 1, 2018 (Case No. 3:18-cv-08705). These individual shareholder actions assert claims under Sections 10(b), 18, and 20(a) of the Exchange Act, Sections 11, 12(a)(2), and 15 of the Securities Act, common law fraud, and negligent misrepresentation under state law, based on alleged purchases of Company stock, options, and/or debt at various times between January 3, 2013 and August 10, 2016. Plaintiffs in the Lord Abbett, Boeing, Mississippi, NYCERS, Hound Partners and 2012 Dynasty cases additionally assert claims under the New Jersey Racketeer Influenced and Corrupt Organizations Act. The allegations in the complaints are similar to those made by plaintiffs in the putative class action.
Plaintiffs in the Janus Aspen action amended the complaint on April 28, 2017. Defendants filed motions for partial dismissal in
ten
individual actions in the U.S. District Court for the District of New Jersey on June 16, 2017. Briefing of those motions was completed on August 25, 2017. On January 12, 2018, the Court dismissed the negligent misrepresentation claims and otherwise denied the motions for partial dismissal.
On October 19, 2017, the U.S. District Court for the District of New Jersey entered an order requesting briefs from the parties regarding whether the Court should stay the putative securities class action and the individual securities law actions filed in
the District of New Jersey until after the resolution of criminal proceedings against Andrew Davenport and Gary Tanner. The Court's order immediately stayed all deadlines, briefing schedules, and discovery in securities actions pending completion of the briefing and the Court’s decision. The Court directed the parties to file briefs either supporting or opposing the stay, with such briefs to be concluded by November 8, 2017. On November 29, 2017, the Court entered an order staying all proceedings and discovery, except for a document production in the putative securities class action and the briefing and resolution of any motions to dismiss, in the putative securities class action and all current and subsequent related individual securities law actions filed in the District of New Jersey.
Defendants filed motions for partial dismissal in the Lord Abbett, Mississippi, and Boeing cases on December 6, 2017. Briefing on those motions was completed on March 15, 2018. Defendants filed actions for partial dismissal in the Okumus case in December 18, 2017. On February 1, 2018, the parties filed a stipulation and proposed order in the Okumus case that would withdraw Defendants’ motions for partial dismissal, and dismiss Okumus’ state-law claims. The Court entered that stipulation on February 2, 2018. Defendants filed a motion for partial dismissal in the Pentwater case on February 13, 2018. Briefing on that motion was completed on March 27, 2018. Defendants filed motions for partial dismissal in the NYCERS and Blackrock cases on February 23, 2018. Briefing on those motions was completed on April 30, 2018. Defendants filed a motion for partial dismissal in the Senzar case on May 4, 2018. Briefing on this motion will be completed by June 18, 2018.
The Company believes the individual complaints and the consolidated putative class action are without merit and intends to defend itself vigorously.
Canadian Securities Litigation
In 2015,
six
putative class actions were filed and served against the Company in Canada in the provinces of British Columbia, Ontario and Quebec. These actions are captioned: (a) Alladina v. Valeant, et al. (Case No. S-1594B6) (Supreme Court of British Columbia) (filed November 17, 2015); (b) Kowalyshyn v. Valeant, et al. (CV-15-540593-00CP) (Ontario Superior Court) (filed November 16, 2015); (c) Kowalyshyn et al. v. Valeant, et al. (CV-15-541082-00CP (Ontario Superior Court) (filed November 23, 2015); (d) O’Brien v. Valeant et al. (CV-15-543678-00CP) (Ontario Superior Court) (filed December 30, 2015); (e) Catucci v. Valeant, et al. (Court File No. 540-17-011743159) (Quebec Superior Court) (filed October 26, 2015); and (f) Rousseau-Godbout v. Valeant, et al. (Court File No. 500-06-000770-152) (Quebec Superior Court) (filed October 27, 2015). The Alladina, Kowalyshyn, O’Brien, Catucci and Rousseau-Godbout actions also name, among others, certain current or former directors and officers of the Company. The Rosseau-Godbout action was subsequently stayed by the Quebec Superior Court by consent order.
Each of the
five
remaining actions alleges violations of Canadian provincial securities legislation on behalf of putative classes of persons who purchased or otherwise acquired securities of the Company for periods commencing as early as January 1, 2013 and ending as late as November 16, 2015. The alleged violations relate to, among other things, alleged misrepresentations and/or failures to disclose material information about the Company’s business and prospects, relating to drug pricing, the Company’s policies and accounting practices, the Company’s use of specialty pharmacies and, in particular, the Company’s relationship with Philidor. The Alladina, Kowalyshyn and O’Brien actions also assert common law claims for negligent misrepresentation, and the Alladina claim additionally asserts common law negligence, conspiracy, and claims under the British Columbia Business Corporations Act, including the statutory oppression remedies in that legislation. The Catucci action asserts claims under the Quebec Civil Code, alleging the Company breached its duty of care under the civil standard of liability contemplated by the Code.
The Company is aware of
two
additional putative class actions that have been filed with the applicable court but which have not yet been served on the Company. These actions are captioned: (i) Okeley v. Valeant, et al. (Case No. S-159991) (Supreme Court of British Columbia) (filed December 2, 2015); and (ii) Sukenaga v Valeant et al. (CV-15-540567-00CP) (Ontario Superior Court) (filed November 16, 2015), and the factual allegations made in these actions are substantially similar to those outlined above. The Company has been advised that the plaintiffs in these actions do not intend to pursue the actions.
On June 10, 2016, the Ontario Superior Court of Justice rendered its decision on carriage motions (motions held to determine who will have carriage of the class action) heard on April 8, 2016, provisionally staying the O'Brien action, in favor of the Kowalyshyn action. On September 15, 2016, in response to an arrangement between the plaintiffs in the Kowalyshyn action and the O’Brien action, the court ordered both that the Kowalyshyn action be consolidated with the O’Brien action and that the consolidated action be stayed in favor of the Catucci action pending either the further order of the Ontario court or the determination of the motion for leave in the Catucci action.
In the Catucci action, motions for leave under the Quebec Securities Act and for authorization as a class proceeding were heard the week of April 24, 2017, with the motion judge reserving her decision. Prior to that hearing, the parties resolved applications by the defendants concerning jurisdiction and class composition, with the plaintiffs agreeing to revise the definition of the proposed class to exclude claims in respect of Company securities purchased in the United States. On August 29, 2017, the judge released her reasons for judgment granting the plaintiffs leave to proceed with their claims under the Quebec Securities Act and authorizing the class proceeding. On October 12, 2017, the Company and the other defendants filed applications for leave to appeal from certain aspects of the decision authorizing the class proceeding. The applications for leave to appeal were heard on November 22, 2017 and were dismissed on November 30, 2017. On October 26, 2017, the plaintiffs issued their Judicial Application Originating Class Proceedings. A timetable for certain pre-trial procedural matters in the action has been set and the notice of certification is being disseminated to class members.
In addition to the class proceedings described above, on April 12, 2018, an application for leave to pursue an action under the Quebec Securities Act was commenced in the Quebec Superior Court of Justice against the Company and certain current or former officers and directors. This action is captioned BlackRock Asset Management Canada Limited et al. v. Valeant, et al. (Court File No. 500-11-054155-185). The allegations in the proceeding are similar to those made by plaintiffs in the Catucci class action.
The Company believes that it has viable defenses in each of these actions. In each case, the Company intends to defend itself vigorously.
Insurance Coverage Lawsuit
On December 7, 2017, the Company filed a lawsuit against its insurance companies that issued insurance policies covering claims made against the Company, its subsidiaries, and its directors and officers during
two
distinct policy periods, (i) 2013-14 and (ii) 2015-16. The lawsuit is currently pending in the United States District Court for the District of New Jersey (Valeant Pharmaceuticals International, Inc., et al. v. AIG Insurance Company of Canada, et al.; 3:18-CV-00493). In the lawsuit, the Company seeks coverage for (1) the costs of defending and resolving claims brought by former shareholders and debtholders of Allergan, Inc. in In re Allergan, Inc. Proxy Violation Securities Litigation and Timber Hill LLC, individually and on behalf of all others similarly situated v. Pershing Square Capital Management, L.P., et al. (under the 2013-2014 coverage period), and (2) costs incurred and to be incurred in connection with the securities class actions and opt-out cases described in this section and certain of the investigations described above (under the 2015-2016 coverage period).
RICO Class Actions
Between May 27, 2016 and September 16, 2016,
three
virtually identical actions were filed in the U.S. District Court for the District of New Jersey against the Company and various third parties, alleging claims under the federal Racketeer Influenced Corrupt Organizations Act (“RICO”) on behalf of a putative class of certain third party payors that paid claims submitted by Philidor for certain Valeant branded drugs between January 2, 2013 and November 9, 2015 (Airconditioning and Refrigeration Industry Health and Welfare Trust Fund et al. v. Valeant Pharmaceuticals International. Inc. et al., No. 3:16-cv-03087, Plumbers Local Union No. 1 Welfare Fund v. Valeant Pharmaceuticals International Inc. et al., No. 3:16-cv-3885 and N.Y. Hotel Trades Council et al v. Valeant Pharmaceuticals International. Inc. et al., No. 3:16-cv-05663). On November 30, 2016, the Court entered an order consolidating the
three
actions under the caption
In re Valeant Pharmaceuticals International, Inc. Third-Party Payor Litigation
, No. 3:16-cv-03087. A consolidated class action complaint was filed on December 14, 2016. The consolidated complaint alleges, among other things, that the Defendants committed predicate acts of mail and wire fraud by submitting or causing to be submitted prescription reimbursement requests that misstated or omitted facts regarding (1) the identity and licensing status of the dispensing pharmacy; (2) the resubmission of previously denied claims; (3) patient co-pay waivers; (4) the availability of generic alternatives; and (5) the insured’s consent to renew the prescription. The complaint further alleges that these acts constitute a pattern of racketeering or a racketeering conspiracy in violation of the RICO statute and caused plaintiffs and the putative class unspecified damages, which may be trebled under the RICO statute. The Company moved to dismiss the consolidated complaint on February 13, 2017. Briefing of the motion was completed on May 17, 2017. On March 14, 2017, other defendants filed a motion to stay the RICO class action pending the resolution of criminal proceedings against Andrew Davenport and Gary Tanner. The Company did not oppose the motion to stay. On August 9, 2017, the Court granted the motion to stay and entered an order staying all proceedings in the case and accordingly terminating other pending motions.
The Company believes these claims are without merit and intends to defend itself vigorously.
Antitrust
Contact Lens Antitrust Class Actions
Beginning in March 2015, a number of civil antitrust class action suits were filed by purchasers of contact lenses against Bausch & Lomb Incorporated ("B&L Inc."),
three
other contact lens manufacturers, and a contact lens distributor, alleging that the defendants engaged in an anticompetitive scheme to eliminate price competition on certain contact lens lines through the use of unilateral pricing policies. The plaintiffs in such suits alleged violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and of various state antitrust and consumer protection laws, and further alleged that the defendants have been unjustly enriched through their alleged conduct. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, punitive and/or other damages, including attorneys’ fees. By order dated June 8, 2015, the JPML centralized the suits in the Middle District of Florida, under the caption In re Disposable Contact Lens Antitrust Litigation, Case No. 3:15-md-02626-HES-JRK, before U.S. District Judge Harvey E. Schlesinger. After the Class Plaintiffs filed a corrected consolidated class action complaint on December 16, 2015, the defendants jointly moved to dismiss those complaints. On June 16, 2016, the Court granted the Defendants' motion to dismiss with respect to claims brought under the Maryland Consumer Protection Act, but denied the motion to dismiss with respect to claims brought under Sherman Act, Section 1 and other state laws. The actions are currently in discovery. On March 3, 2017, the Class Plaintiffs filed their motion for class certification. On June 15, 2017, defendants filed a motion to oppose the plaintiffs' class certification motion, as well as motions to exclude plaintiffs' expert reports. An evidentiary hearing is scheduled before Judge Schlesinger for August 1 and 2, 2018. The Company intends to vigorously defend all of these actions.
Intellectual Property
Patent Litigation/Paragraph IV Matters
The Company (and/or certain of its affiliates) is also party to certain patent infringement proceedings in the United States and Canada, including as arising from claims filed by the Company (or that the Company anticipates filing within the required time periods) in connection with Notices of Paragraph IV Certification (in the United States) and Notices of Allegation (in Canada) received from third party generic manufacturers respecting their pending applications for generic versions of certain products sold by or on behalf of the Company, including Onexton
®
, Relistor
®
, Apriso
®
, Uceris
®
, Carac
®
, Cardizem
®
and Prolensa
®
in the United States and Wellbutrin
®
XL and Glumetza
®
in Canada, or other similar suits. These matters are proceeding in the ordinary course. In addition, patents covering the Company's branded pharmaceutical products may be challenged in proceedings other than court proceedings, including inter partes review (IPR) at the US Patent & Trademark Office. The proceedings operate under different standards from district court proceedings, and are often completed within 18 months of institution. IPR challenges have been brought against patents covering the Company's branded pharmaceutical products for which the Company has not yet received a Notice of Paragraph IV Certification. For example, following Acrux DDS’s IPR petition, the US Patent and Trial Appeal Board, in May 2017, instituted inter partes review for an Orange Book-listed patent covering Jublia
®
. This matter is proceeding in the ordinary course.
In addition, on or about February 16, 2016, the Company received a Notice of Paragraph IV Certification dated February 11, 2016, from Actavis Laboratories FL, Inc. (“Actavis”), in which Actavis asserted that the following U.S. patents, each of which is listed in the FDA’s Orange Book for Salix Pharmaceuticals, Inc.’s (“Salix Inc.”) Xifaxan
®
tablets, 550 mg, are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Actavis’ generic rifaximin tablets, 550 mg, for which an Abbreviated New Drug Application (“ANDA”) has been filed by Actavis: U.S. Patent No. 8,309,569 (the “‘569 patent”), U.S. Patent No. 8,642,573 (the “‘573 patent”), U.S. Patent No. 8,829,017 (the “‘017 patent”), U.S. Patent No. 8,946,252 (the “‘252 patent”), U.S. Patent No. 8,969,398 (the “‘398 patent”), U.S. Patent No. 7,045,620 (the “‘620 patent”), U.S. Patent No. 7,612,199 (the “‘199 patent”), U.S. Patent No. 7,902,206 (the “‘206 patent”), U.S. Patent No. 7,906,542 (the “‘542 patent”), U.S. Patent No. 7,915,275 (the “‘275 patent”), U.S. Patent No. 8,158,644 (the “‘644 patent”), U.S. Patent No. 8,158,781 (the “‘781 patent”), U.S. Patent No. 8,193,196 (the “‘196 patent”), U.S. Patent No. 8,518,949 (the “‘949 patent”), U.S. Patent No. 8,741,904 (the “‘904 patent”), U.S. Patent No. 8,835,452 (the “‘452 patent”), U.S. Patent No. 8,853,231 (the “‘231 patent”), U.S. Patent No. 6,861,053 (the “‘053 patent”), U.S. Patent No. 7,452,857 (the “‘857 patent”), U.S. Patent No. 7,605,240 (the “‘240 patent”), U.S. Patent No. 7,718,608 (the “‘608 patent”) and U.S. Patent No. 7,935,799 (the “‘799 patent”) (collectively, the “Xifaxan
®
Patents”). Salix Inc. holds the NDA for Xifaxan
®
and its affiliate, Salix Pharmaceuticals, Ltd. (“Salix Ltd.”), is the owner of the ‘569 patent, the ‘573 patent, the ‘017 patent, the ‘252 patent and the ‘398 patent. Alfa Wassermann S.p.A. (“Alfa Wassermann”) is the owner of the ‘620 patent, the ‘199 patent, the ‘206 patent, the ‘542 patent, the ‘275 patent, the ‘644 patent, the ‘781 patent, the ‘196 patent, the ‘949 patent, the ‘904 patent, the ‘452 patent and the ‘231 patent, each of which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Pharmaceuticals Luxembourg S.à
r.l. (“Valeant Luxembourg”) to market Xifaxan
®
tablets, 550 mg. Cedars-Sinai Medical Center (“Cedars-Sinai”) is the owner of the ‘053 patent, the ‘857 patent, the ‘240 patent, the ‘608 patent and the ‘799 patent, each of which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Luxembourg, to market Xifaxan
®
tablets, 550 mg. On March 23, 2016, Salix Inc. and its affiliates, Salix Ltd. and Valeant Luxembourg, Alfa Wassermann and Cedars-Sinai (the “Plaintiffs”) filed suit against Actavis in the U.S. District Court for the District of Delaware (Case No. 1:16-cv-00188), pursuant to the Hatch-Waxman Act, alleging infringement by Actavis of one or more claims of each of the Xifaxan
®
Patents, thereby triggering a 30-month stay of the approval of Actavis’ ANDA for rifaximin tablets, 550 mg. On May 24, 2016, Actavis filed its answer in this matter. On June 14, 2016, the Plaintiffs filed an amended complaint adding US patent 9,271,968 (the “‘968 patent”) to this suit. Alfa Wassermann is the owner of the ‘968 patent, which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Luxembourg to market Xifaxan
®
tablets, 550 mg. On December 6, 2016, the Plaintiffs filed an amended complaint adding US patent 9,421,195 (the “‘195 patent”) to this suit. Salix Ltd. is the owner of the ‘195 patent. A seven-day trial was scheduled to commence on January 29, 2018, but has been indefinitely removed from the Court's schedule.
On May 17, 2017, the Company and Actavis announced that, at Actavis' request, the parties had agreed to stay this litigation and extend the 30-month stay regarding Actavis’ ANDA for its generic version of Xifaxan
®
(rifaximin) 550 mg tablets and, on April 27, 2018, the Company and Actavis agreed to further extend the stay of this litigation and further extend the 30-month stay regarding Actavis’ ANDA for its generic version of Xifaxan
®
(rifaximin) 550 mg tablets. This action is stayed at least through July 30, 2018 and Actavis' 30-month regulatory stay is extended until no earlier than October 28, 2019. All scheduled litigation activities, including the trial date, have been indefinitely removed from the Court docket. The Company remains confident in the strength of the Xifaxan
®
Patents and believes it will prevail in this matter should it move forward. The Company also continues to believe the allegations raised in Actavis’ notice are without merit and will defend its intellectual property vigorously.
Product Liability
Shower to Shower Products Liability Litigation
The Company has been named in over one hundred and fifty lawsuits involving the Shower to Shower body powder product acquired in September 2012 from Johnson & Johnson. The Company has been successful in obtaining a number of dismissals as to the Company and/or its subsidiary, Valeant Pharmaceuticals North America LLC (“VPNA”), in some of these cases. The Company continues to seek dismissals in these cases and to pursue agreements from plaintiffs to not oppose the Company’s motions for summary judgment.
These lawsuits include
one
case originally filed on December 30, 2016 in the
In re Johnson & Johnson Talcum Powder Litigation
, Multidistrict Litigation 2738, pending in the United States District Court for the District of New Jersey. The Company and VPNA were first named in a lawsuit filed directly into the MDL alleging that the use of the Shower to Shower product caused the plaintiff to develop ovarian cancer. On March 24, 2017, the plaintiff agreed to a dismissal of all claims against the Company and VPNA without prejudice. The Company has been named in
one
additional lawsuit, originally filed in the District of Puerto Rico and subsequently transferred into the MDL, but has not been served in that case. The Company was also named in
one
additional lawsuit filed directly into the MDL that has also not yet been served.
These lawsuits also include a number of matters filed in the Superior Court of Delaware and
four
cases recently filed in the Superior Court of New Jersey alleging that the use of Shower to Shower caused the plaintiffs to develop ovarian cancer. The Company has been voluntarily dismissed from nearly all of these cases, with claims against VPNA only remaining in most of these cases. These lawsuits also include allegations against Johnson & Johnson, directed primarily to its marketing of and warnings for the Shower to Shower product prior to the Company’s acquisition of the product in September 2012. The allegations in these cases specifically directed to VPNA include failure to warn, design defect, negligence, gross negligence, breach of express and implied warranties, civil conspiracy concert in action, negligent misrepresentation, wrongful death, and punitive damages. Plaintiffs seek compensatory damages including medical expenses, pain and suffering, mental anguish anxiety and discomfort, physical impairment, loss of enjoyment of life. Plaintiffs also seek pre- and post-judgment interest, exemplary and punitive damages, treble damages, and attorneys’ fees.
These lawsuits also include a number of cases filed in certain state courts in the United States (including the California Superior Courts, the Superior Courts of Delaware, the New Jersey Superior Courts, the District Court of Louisiana, the Supreme Court of New York (Niagara County), the District Court of Oklahoma City, Oklahoma, the Tennessee Chancery Court (Hamilton County), the South Carolina Court of Common Pleas (Richland County) and the District Court of Nueces County, Texas (with a transfer to the asbestos MDL docket in the District Court of Harris County, Texas for pre-trial purposes) alleging use of Shower to Shower and other products resulted in the plaintiffs developing mesothelioma. The Company has been successful
in obtaining voluntarily dismissals in some of these cases or the plaintiffs have not opposed summary judgment. The allegations in these cases generally include design defect, manufacturing defect, failure to warn, negligence, and punitive damages, and in some cases breach of express and implied warranties, misrepresentation, and loss of consortium. The plaintiffs seek compensatory damages for loss of services, economic loss, pain and suffering, and, in some cases, lost wages or earning capacity and loss of consortium, in addition to punitive damages, interest, litigation costs, and attorneys’ fees.
Finally,
two
proposed class actions have been filed in Canada against the Company and various Johnson & Johnson entities (
one
in the Supreme Court of British Columbia and
one
in the Superior Court of Quebec). The Company also acquired the rights to the Shower to Shower product in Canada from Johnson & Johnson in September 2012. In the British Columbia matter, the plaintiff seeks to certify a proposed class action on behalf of persons in British Columbia and Canada who have purchased or used Johnson & Johnson’s Baby Powder or Shower to Shower, including their estates, executors and personal representatives, and is alleging that the use of this product increases certain health risks. A certification hearing in the British Columbia matter is scheduled to be heard on November 4, 2018. In the Quebec matter, the plaintiff sought to certify a proposed class action on behalf of persons in Quebec who have used Johnson & Johnson’s Baby Powder or Shower to Shower, as well as their family members, assigns and heirs, and is alleging negligence in failing to properly test, failing to warn of health risks, and failing to remove the products from the market in a timely manner. A certification (also known as authorization) hearing in the Quebec matter was held on January 11, 2018. On May 2, 2018, the Court certified (or as stated under Quebec law, authorized) the bringing of a class action by a representative plaintiff on behalf of people in Quebec who have used Johnson & Johnson's Baby Powder and/or Shower to Shower in their perineal area and have been diagnosed with ovarian cancer and/or family members, assigns and heirs. The plaintiffs in these actions are seeking awards of general, special, compensatory and punitive damages.
The Company intends to defend itself vigorously in each of the remaining actions that are not voluntarily dismissed or subject to a grant of summary judgment. The Company believes that its potential liability (including its attorneys’ fees and costs) arising out of the Shower to Shower lawsuits filed against the Company is subject to certain indemnification obligations of Johnson & Johnson owed to the Company, and legal fees and costs have been and are currently being reimbursed by Johnson & Johnson. The Company has provided Johnson & Johnson with notice that the lawsuits filed against the Company relating to Shower to Shower are subject to indemnification by Johnson & Johnson.
General Civil Actions
Mississippi Attorney General Consumer Protection Action
The Company and VPNA are named in an action brought by James Hood, Attorney General of Mississippi, in the Chancery Court of the First Judicial District of Hinds County, Mississippi (Hood ex rel. State of Mississippi, Civil Action No. G2014-1207013, filed on August 22, 2014), alleging consumer protection claims against Johnson & Johnson, Johnson and Johnson Consumer Companies, Inc., the Company and VPNA related to the Shower to Shower body powder product and its alleged causal link to ovarian cancer. As indicated above, the Company acquired the Shower to Shower body powder product in September 2012 from Johnson & Johnson. The State seeks compensatory damages, punitive damages, injunctive relief requiring warnings for talc-containing products, removal from the market of products that fail to warn, and to prevent the continued violation of the Mississippi Consumer Protection Act (“MCPA”). The State also seeks disgorgement of profits from the sale of the product and civil penalties. In October 2017, Plaintiffs dismissed certain claims under the MCPA related to advertising/marketing that did not appear on the label and/or packaging of Shower to Shower. The State has not made specific allegations as to the Company or VPNA. The Company intends to defend itself vigorously in this action, which the Company believes will also fall, in whole or in part, within the indemnification obligations of Johnson & Johnson owed to the Company, as indicated above.
Arbitration with Alfasigma S.p.A. (“Alfasigma”) (formerly Alfa Wasserman S.p.A.)
On or about July 21, 2016, Alfasigma commenced arbitration against the Company and its subsidiary, Salix Inc. under the Rules of Arbitration of the International Chamber of Commerce (No. 22132/GR, Alfa Wasserman S.p.A. v. Salix Pharmaceuticals, Inc. et al.), pursuant to the terms of the Amended and Restated License Agreement between Alfasigma and Salix Inc. (the “ARLA”). In the arbitration, Alfasigma has made certain allegations respecting a development project for a formulation of the rifaximin compound (a different formulation to the current formulation, not the Xifaxan
®
product) that is being conducted under the terms of the ARLA, including allegations that Salix Inc. has failed to use the required efforts with respect to this development and that the Company’s acquisition of Salix Ltd. resulted in a change of control under the ARLA, which entitled Alfasigma to assume control of this development. Alfasigma is seeking, among other things, a declaration that
the provisions of the ARLA relating to the development product and the rights relating to the rifaximin formulation being developed have been terminated and such development and rights shall be returned to Alfasigma, an order requiring the Company and Salix Inc. to pay for the costs of such development (in an amount of at least
$80 million
), and alleged damages in the amount of approximately
$285 million
plus arbitration costs and attorney fees. The parties have submitted their respective Statement of Claim and Statement of Defense in this matter. A hearing on liability issues is scheduled for October 2018. The Company is vigorously defending this matter.
The Company’s Xifaxan
®
products (and Salix Inc.'s rights thereto under the ARLA) are not the subject of any of the relief sought in this arbitration.
Mimetogen Litigation
In November 2014, B&L Inc. filed a lawsuit against Mimetogen Pharmaceuticals Inc. (“MPI”) in the United States District Court for the Western District of New York (
Bausch & Lomb Incorporated v. Mimetogen Pharmaceuticals Inc.
, Case No. 6:14-06640 (FPG-JWF) (W.D.N.Y.)) relating to the Development Collaboration and Exclusive Option Agreement between B&L Inc. and MPI dated July 17, 2013 (the “MIM-D3 Agreement”) for MIM-D3, a compound created by MPI to treat dry eye syndrome. In particular, B&L Inc. sought a declaratory judgment that the Initial Phase III Trial regarding the safety and efficacy of MIM-D3 conducted pursuant to the MIM-D3 Agreement was “Not Successful” as defined in the MIM-D3 Agreement and, as a result, B&L Inc. had no further obligation to MPI when B&L Inc. elected not to exercise or extend its option to obtain an exclusive license to the MIM-D3 Technology to develop and commercialize certain products pursuant to the MIM-D3 Agreement before the end of the applicable option period. MPI filed a counterclaim against B&L Inc., in which it contended that the result of the clinical trial did not meet the definition of “Not Successful” under the MIM-D3 Agreement and that, as a result, a
$20 million
termination fee was due by B&L Inc. to MPI under the terms of the MIM-D3 Agreement and that B&L Inc. had breached the MIM-D3 Agreement by failing to pay this termination fee. MPI also contended that B&L Inc. acted intentionally and consequently was entitled to additional damages. MPI also brought certain third-party claims against the Company, alleging that the Company intentionally interfered with the MIM-D3 Agreement with the intent to harm MPI. MPI also asserted a claim against the Company for unfair and deceptive acts under Massachusetts law, and sought recovery of the
$20 million
fee, as well as additional damages related to this claimed delay and injury to the value of its developmental product. On March 12, 2015, the Company moved to dismiss all of the claims against the Company and the claims for extra-contractual damages. In May 2016, the Court dismissed all claims against the Company, other than the claim for tortious interference, and declined to dismiss the claims against B&L Inc. and the Company for extra-contractual damages. On August 19, 2016, MPI filed a motion for summary judgment on its contract claim against B&L Inc. On September 22, 2016, B&L Inc. responded to MPI’s motion for summary judgment, and, along with the Company, filed a cross-motion for judgment in their favor, dismissing the contract claims against B&L Inc., as well as the remaining third-party claim against the Company for tortious interference. On June 30, 2017, the Court issued a Decision and Order granting MPI’s motion for partial summary judgment, awarding MPI the amount of
$20 million
(based on a finding that the termination fee was due based on the outcome of the clinical trial) and denying the cross-motion for summary judgment filed by B&L Inc. and the Company. On February 5, 2018, MPI filed a motion for final judgment, seeking entry of a final judgment on the Court’s June 30, 2017 Decision and Order, and saying that upon entry of final judgment in accordance with the Decision and Order, MPI seeks to dismiss its remaining claims against B&L Inc. and the Company. On February 21, 2018, the parties filed a stipulation dismissing with prejudice MPI’s claims for extra-contractual damages against B&L Inc. and MPI’s third-party claim against the Company, and providing for final judgment to be entered against B&L Inc. for
$20 million
plus pre-judgment interest. On March 1, 2018, final judgment was entered against B&L Inc. in the amount of
$26 million
. On March 30, 2018, B&L Inc. filed its appeal of the final judgment and all prior decisions in the case, including the Court’s June 30, 2017 Decision and Order granting MPI partial summary judgment. On April 3, 2018, the Court so-ordered the parties’ stipulation staying enforcement of the final judgment pending resolution of the appeal. The Company is vigorously defending this matter.
Doctors Allergy Formula Lawsuit
In April 2018, Doctors Allergy Formula, LLC (“Doctors Allergy”), filed a lawsuit against Valeant Pharmaceuticals International (“Valeant”) in the Supreme Court of the State of New York, County of New York, Index No. 651597/2018. Doctors Allergy asserts breach of contract and related claims under a 2015 Asset Purchase Agreement, which purports to include milestone payments that Doctors Allergy alleges should have been paid by Valeant. Doctors Allergy claims its damages are not less than
$23 million
. Valeant disputes the claims and intends to vigorously defend this matter.
Salix Legal Proceedings
The Salix legal proceeding matter set out below was commenced prior to the Company’s acquisition of Salix Pharmaceuticals, Ltd. (the “Salix Acquisition”). The estimated fair values of the potential losses regarding this matter, along with other matters, are included as part of contingent liabilities assumed in the Salix Acquisition and updated regularly as needed.
Salix SEC Investigation
In the fourth quarter of 2014, the SEC commenced a formal investigation into possible securities law violations by Salix Ltd. relating to disclosures by Salix Ltd. of inventory amounts in the distribution channel and related issues in press releases, on analyst calls and in Salix Ltd.’s various SEC filings, as well as related accounting issues. In April 2017, the SEC staff indicated that it had substantially completed its investigation and will be making recommendations to the Commission in the near future. Salix Ltd. continues to cooperate with the SEC staff. The Company cannot predict the outcome of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on Salix Ltd. or the Company arising out of the SEC investigation.
Completed or Inactive Matters
The following matters have concluded, have settled, are the subject of an agreement to settle or have otherwise been closed since January 1, 2018, have been inactive from the Company’s perspective for several quarters or the Company anticipates that no further material activity will take place with respect thereto. Due to the closure, settlement, inactivity or change in status of the matters referenced below, these matters will no longer appear in the Company's next public reports and disclosures, unless required. With respect to inactive matters, to the extent material activity takes place in subsequent quarters with respect thereto, the Company will provide updates as required or as deemed appropriate.
Allergan Shareholder Class Actions
On December 16, 2014, Anthony Basile, an alleged shareholder of Allergan filed a lawsuit on behalf of a putative class of Allergan shareholders against the Company, Valeant, AGMS, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman in the U.S. District Court for the Central District of California (Basile v. Valeant Pharmaceuticals International, Inc., et al., Case No. 14-cv-02004-DOC). On June 26, 2015, lead plaintiffs the State Teachers Retirement System of Ohio, the Iowa Public Employees Retirement System and Patrick T. Johnson filed an amended complaint against the Company, Valeant, J. Michael Pearson, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman. The amended complaint alleged claims on behalf of a putative class of sellers of Allergan securities between February 25, 2014 and April 21, 2014, against all defendants contending that various purchases of Allergan securities by PS Fund were made while in possession of material, non-public information concerning a potential tender offer by the Company for Allergan stock, and asserting violations of Section 14(e) of the Exchange Act and rules promulgated by the SEC thereunder and Section 20A of the Exchange Act. The amended complaint also alleged violations of Section 20(a) of the Exchange Act against Pershing Square, various Pershing Square affiliates, William A. Ackman and J. Michael Pearson. The amended complaint sought, among other relief, money damages, equitable relief, and attorneys’ fees and costs. On March 15, 2017, the Court entered an order certifying a plaintiff class comprised of persons who sold Allergan common stock contemporaneously with purchases of Allergan common stock made or caused by defendants during the period February 25, 2014 through April 21, 2014.
On June 28, 2017, Timber Hill LLC, a Connecticut limited liability company that allegedly traded in Allergan derivative instruments, filed a lawsuit on behalf of a putative class of derivative traders against the Company, Valeant, AGMS, Michael Pearson, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman in the U.S. District Court for the Central District of California (Timber Hill LLC v. Pershing Square Capital Management, L.P., et al., Case No. 17-cv-04776-DOC). The complaint alleged claims on behalf of a putative class of investors who sold Allergan call options, purchased Allergan put options and/or sold Allergan equity forward contracts between February 25, 2014 and April 21, 2014, against all defendants contending that various purchases of Allergan securities by PS Fund were made while in possession of material, non-public information concerning a potential tender offer by the Company for Allergan stock, and asserting violations of Section 14(e) of the Exchange Act and rules promulgated by the SEC thereunder and Section 20A of the Exchange Act. The complaint also alleged violations of Section 20(a) of the Exchange Act against Pershing Square, various Pershing Square affiliates, William A. Ackman and Michael Pearson. The complaint sought, among other relief, money damages, equitable relief, and attorneys’ fees and costs. On July 25, 2017, the Court decided not to consolidate this lawsuit with the Basile action described above.
On December 28, 2017, all parties agreed to settle the ongoing, related Allergan shareholder class actions for a total of
$290 million
. As part of that proposed settlement, the Valeant parties are to pay
$96 million
, being
33%
of the settlement amount, while the Pershing Square parties are to pay
$195 million
, being
67%
of the settlement amount. The Court preliminarily approved the settlement on March 19, 2018. The final approval hearing is scheduled for May 30, 2018.
Solodyn
®
Antitrust Class Actions
Beginning in July 2013, a number of civil antitrust class action suits were filed against Medicis Pharmaceutical Corporation (“Medicis”), Valeant Pharmaceuticals International, Inc. (“VPII”) and various manufacturers of generic forms of Solodyn
®
, alleging that the defendants engaged in an anticompetitive scheme to exclude competition from the market for minocycline hydrochloride extended release tablets, a prescription drug for the treatment of acne marketed by Medicis under the brand name, Solodyn
®
. The plaintiffs in such suits alleged violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and of various state antitrust and consumer protection laws, and further alleged that the defendants have been unjustly enriched through their alleged conduct. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, multiple, punitive and/or other damages, including attorneys’ fees. By order dated February 25, 2014, the Judicial Panel for Multidistrict Litigation (‘‘JPML’’) centralized the suits in the District of Massachusetts, under the caption In re Solodyn (Minocycline Hydrochloride) Antitrust Litigation, Case No. 1:14-md-02503-DJC, before U.S. District Judge Denise Casper. After the Direct Purchaser Class Plaintiffs and the End-Payor Class Plaintiffs each filed a consolidated amended class action complaint on September 12, 2014, the defendants jointly moved to dismiss those complaints. On August 14, 2015, the Court granted the Defendants' motion to dismiss with respect to claims brought under Sherman Act, Section 2 and various state laws but denied the motion to dismiss with respect to claims brought under Sherman Act, Section 1 and other state laws. VPII was dismissed from the case, but the litigation continued against Medicis and the generic manufacturers as to the remaining claims.
On March 26, 2015, and on April 6, 2015, while the motion to dismiss the class action complaints was pending,
two
additional non-class action complaints were filed against Medicis by certain retail pharmacy and grocery chains ("Individual Plaintiffs") making similar allegations and seeking similar relief to that sought by Direct Purchaser Class Plaintiffs. Those suits were centralized with the class action suits in the District of Massachusetts. Following the Court's August 14, 2015 decision on the motion to dismiss, the Individual Plaintiffs each filed amended complaints on October 1, 2015, and Medicis answered on December 7, 2015. A third non-class action was filed by another retail pharmacy against Medicis on January 26, 2016, and Medicis answered on March 28, 2016.
Plaintiffs reached settlements with
two
of
three
generic manufacturer defendants prior to the close of discovery. On April 14, 2017, the Court granted the Direct Purchaser Plaintiffs' and End-Payor Plaintiffs' motions for preliminary approval of those settlements and granted final approval on November 27, 2017. For the remaining parties, following the close of fact discovery and expert discovery, the Court granted Direct Purchaser Plaintiffs' and End-Payor Plaintiffs' motions for class certification for the purposes of damages, but denied End-Payor Plaintiffs' motion for class certification for the purposes of injunctive and declaratory relief. The remaining defendants petitioned to appeal the certification of the End-Payor Class and this petition was denied. Plaintiffs and the remaining defendants each filed motions for summary judgment. The Court heard oral argument on the parties’ summary judgment motions on January 12, 2018. On January 25, 2018, the Court issued a Memorandum and Order denying the parties’ motions, except for partially allowing defendants’ motion on market power. In February 2018, Medicis agreed to resolve the class action litigation with the End Payor and Direct Payor classes for an amount of
$58 million
, subject to Court approval, and has resolved related litigation with opt-out retailers for additional consideration. In March 2018, plaintiffs reached settlements with the remaining generic manufacturer. The Court has granted preliminary approval of these settlements with the End-Payor and Direct Purchaser classes, and a fairness hearing for these settlements is scheduled for July 18, 2018.
GAF Realty Lawsuit
In January 2018, GAF Realty Advisors, Inc. filed a lawsuit against the Company (
GAF Realty Advisors, Inc. v. Valeant Pharmaceuticals International, Inc.
, Case No. 30-2018-00967586-CU-BC-CJC) in the Superior Court of the State of California (Orange County), alleging breach of contract and related claims with respect to a dispute over real estate commissions. In March 2018, the Company settled this matter, which included the payment of a
de minimus
amount by the Company.
Uceris
®
Arbitration
On or about December 5, 2016, Cosmo Technologies Ltd. and Cosmo Technologies III Ltd. (collectively, “Cosmo”), the licensor of certain intellectual property rights in, and supplier of, the Company’s Uceris
®
extended release tablets, commenced arbitration against certain affiliates of the Company, Santarus Inc. (“Santarus”) and Valeant Pharmaceuticals Ireland (“Valeant
Ireland”), under the Rules of Arbitration of the International Chamber of Commerce (No. 22453/GR,
Cosmo Technologies Ltd. et al. v. Santarus, Inc. et al.
). In the arbitration, Cosmo alleged breach of contract with respect to certain terms of the license agreement, including the obligations on Santarus to use certain commercially reasonable efforts to promote the Uceris
®
extended release tablets. Cosmo sought a declaration that both the license agreement and a supply agreement with Valeant Ireland have been terminated, plus audit and attorney fees. Santarus and Valeant Ireland submitted their Answer in the arbitration on January 10, 2017 denying each of Cosmo’s allegations and making certain counterclaims. A hearing on liability issues was conducted from October 5 to 8, 2017. On April 12, 2018, the Arbitral Tribunal issued a ruling rejecting Cosmo's claims; accordingly, both the license agreement and supply agreement remain in effect. Additionally, the Arbitral Tribunal ordered Cosmo to pay the entirety of the Company's legal costs of approximately
$3 million
. The parties have until June 1, 2018 to inform the Tribunal whether they intend to pursue additional claims against one another.
Afexa Class Action
On March 9, 2012, a Notice of Civil Claim was filed in the Supreme Court of British Columbia which sought an order certifying a proposed class proceeding against the Company and a predecessor, Afexa Life Sciences Inc. ("Afexa") (Case No. NEW-S-S-140954). The proposed claim asserted that Afexa and the Company made false representations respecting Cold-FX
®
to residents of British Columbia who purchased the product during the applicable period and that the proposed class has suffered damages as a result. On November 8, 2013, the Plaintiff served an amended notice of civil claim which sought to re-characterize the representation claims and broaden them from what was originally claimed. On December 8, 2014, the Company filed a motion to strike certain elements of the Plaintiff’s claim for failure to state a cause of action. In response, the Plaintiff proposed further amendments to its claim. The hearing on the motion to strike and the Plaintiff’s amended claim was held on February 4, 2015. The Court allowed certain additional subsequent amendments, while it struck others. The hearing to certify the class was held on April 4-8, 2016 and, on November 16, 2016, the Court issued a decision dismissing the plaintiff’s application for certification of this action as a class proceeding. On December 15, 2016, the plaintiff filed a notice of appeal in the British Columbia Court of Appeal appealing the decision to dismiss the application for certification. The plaintiff filed its appeal factum on March 15, 2017 and the Company filed its appeal factum on April 19, 2017. The appeal hearing was held on September 19, 2017 and, on April 30, 2018, the British Columbia Court of Appeal dismissed the appeal. The period for the plaintiff to file leave to appeal to the Supreme Court of Canada expires on or about June 30, 2018.
Investigation by the California Department of Insurance
On or about September 16, 2016, the Company received an investigative subpoena from the California Department of Insurance. The materials requested include documents concerning the Company’s former relationship with Philidor and certain California-based pharmacies, the marketing and distribution of its products in California, the billing of insurers for its products being used by California residents, and other matters. On May 1, 2018 , the Company and the California Department of Insurance signed an agreement to resolve this investigation, with the Company making a payment to the California Department of Insurance in the amount of
$1.875 million
, with no admission of facts or liability by the Company.
Letter from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania
The Company received a letter dated September 10, 2015 from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania stating that they were investigating potential violations of the False Claims Act arising out of Biovail Pharmaceuticals, Inc.'s treatment of certain service fees under agreements with wholesalers when calculating and reporting Average Manufacturer Prices in connection with the Medicaid Drug Rebate Program. The letter requested that the Company voluntarily produce documents and information relating to the investigation. The Company produced certain documents and clarifying information in response to the government’s request and has cooperated with the government’s investigation; although, for several quarters, there has been no material activity on the part of the Company with respect to this matter nor has the Company had contact from the government with respect to this matter. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of these investigations.
On October 12, 2017, the underlying qui tam complaint asserting claims under the federal and certain state False Claims Acts was unsealed in the Eastern District of Pennsylvania, after the United States and the states on whose behalf claims were asserted declined to intervene in the case. The complaint named Biovail Pharmaceuticals and three other pharmaceutical manufacturers as defendants. The complaint alleged that Biovail Pharmaceuticals and other manufacturers failed to accurately account for service fees in its calculation of Average Manufacturer Prices reported to the federal government, and as a result underpaid Medicaid rebates. On January 10, 2018, the Relator in this matter filed a voluntary dismissal in this matter, dismissing
Biovail Pharmaceuticals, Inc. and two of the other defendants, on a without prejudice basis. The United States and the states on whose behalf claims were asserted have consented to the voluntary dismissal on March 2, 2018.
Investigation by the State of North Carolina Department of Justice
In the beginning of March 2016, the Company received an investigative demand from the State of North Carolina Department of Justice. The materials requested relate to the Company's Nitropress
®
, Isuprel
®
and Cuprimine
®
products, including documents relating to the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, such products, as well as issues relating to the Company's pricing decisions for certain of its other products. The Company has cooperated with this investigation; although, for several quarters, there has been no material activity on the part of the Company with respect to this matter nor has the Company had contact from the State with respect to this matter. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigation by the State of Texas
On May 27, 2014, the State of Texas served B&L Inc. with a Civil Investigative Demand concerning various price reporting matters relating to the State's Medicaid program and the amounts the State paid in reimbursement for B&L products for the period from 1995 to the date of the Civil Investigative Demand. The Company and B&L Inc. have cooperated fully with the State's investigation and have produced all of the documents requested by the State. In April 2016, the State sent B&L Inc. a demand letter claiming damages in the amount of
$20 million
. The Company and B&L Inc. have evaluated the letter and disagree with the allegations and methodologies set forth in the letter. The Company and B&L Inc. have responded to the State and are awaiting further response from the State.
California Department of Insurance Investigation
On May 4, 2016, B&L International, Inc. (“B&L International”) received from the Office of the California Insurance Commissioner an administrative subpoena to produce books, records and documents. On September 1, 2016, a revised and corrected subpoena, issued to B&L Inc., was received naming that entity in place of B&L International and seeking additional books records and documents. The requested books, records and documents were requested in connection with an investigation by the California Department of Insurance and related to, among other things, consulting agreements and financial arrangements between Bausch & Lomb Holdings Incorporated and its subsidiaries (“B&L”) and health care professionals in California, the provision of ocular equipment, including the Victus
®
femtosecond laser platform, by B&L to health care professionals in California and prescribing data for prescriptions written by health care professionals in California for certain of B&L’s products, including the Crystalens
®
, Lotemax
®
, Besivance
®
and Prolensa
®
. B&L Inc. and the Company have cooperated with the investigation; although, for several quarters, there has been no material activity on the part of either B&L Inc. or the Company with respect to this matter nor has B&L Inc. or the Company had contact from the California Department of Insurance with respect to this matter. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Reportable Segments
The following is a brief description of the Company’s segments:
|
|
•
|
The Bausch + Lomb/International segment
consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology Rx products and (ii) with the exception of sales of Solta products, sales in Canada, Europe, Asia, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products, and Bausch + Lomb products.
|
|
|
•
|
The Branded Rx segment
consists of: (i) sales in the U.S. of Salix products (gastrointestinal products), (ii) sales in the U.S. of Ortho Dermatologics (dermatological products), (iii) global sales of Solta products and (iv) sales in the U.S. of dentistry products.
|
|
|
•
|
The U.S. Diversified Products segment
consists of sales in the U.S. of: (i) pharmaceutical products in the areas of neurology and certain other therapeutic classes and (ii) generic products.
|
Effective in the first quarter of 2018, revenues and profits from the U.S. Solta business included in the U.S. Diversified Products segment in prior periods and revenues and profits from the international Solta business included in the Bausch + Lomb/International segment in prior periods are presented in the Branded Rx segment. Prior period presentations of segment revenues, segment profits and segment assets have been recast to conform to the current segment reporting structure.
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as Amortization of intangible assets, Asset impairments, In-process research and development costs, Restructuring and integration costs, Acquisition-related contingent consideration costs and Other expense (income), net, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance.
Corporate includes the finance, treasury, certain research and development programs, tax and legal operations of the Company’s businesses and maintains and/or incurs certain assets, liabilities, expenses, gains and losses related to the overall management of the Company, which are not allocated to the other business segments. In addition, a portion of share-based compensation is considered a corporate cost, since the amount of such expense depends on Company-wide performance rather than the operating performance of any single segment.
Segment Revenues and Profits
Segment revenues and profits were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2018
|
|
2017
|
Revenues:
|
|
|
|
Bausch + Lomb/International
|
$
|
1,103
|
|
|
$
|
1,134
|
|
Branded Rx
|
593
|
|
|
629
|
|
U.S. Diversified Products
|
299
|
|
|
346
|
|
|
$
|
1,995
|
|
|
$
|
2,109
|
|
|
|
|
|
Segment profits:
|
|
|
|
Bausch + Lomb/International
|
$
|
297
|
|
|
$
|
326
|
|
Branded Rx
|
331
|
|
|
330
|
|
U.S. Diversified Products
|
225
|
|
|
267
|
|
|
853
|
|
|
923
|
|
Corporate
|
(114
|
)
|
|
(167
|
)
|
Amortization of intangible assets
|
(743
|
)
|
|
(635
|
)
|
Goodwill impairments
|
(2,213
|
)
|
|
—
|
|
Asset impairments
|
(44
|
)
|
|
(138
|
)
|
Restructuring and integration costs
|
(6
|
)
|
|
(18
|
)
|
Acquired in-process research and development costs
|
(1
|
)
|
|
(4
|
)
|
Acquisition-related contingent consideration
|
(2
|
)
|
|
10
|
|
Other (expense) income, net
|
(11
|
)
|
|
240
|
|
Operating (loss) income
|
(2,281
|
)
|
|
211
|
|
Interest income
|
3
|
|
|
3
|
|
Interest expense
|
(416
|
)
|
|
(474
|
)
|
Loss on extinguishment of debt
|
(27
|
)
|
|
(64
|
)
|
Foreign exchange and other
|
27
|
|
|
29
|
|
Loss before benefit from income taxes
|
$
|
(2,694
|
)
|
|
$
|
(295
|
)
|
Revenues by Segment and Product Category
Revenues by segment and product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
(in millions)
|
Bausch + Lomb/ International
|
|
Branded Rx
|
|
U.S. Diversified Products
|
|
Total
|
|
Bausch + Lomb/ International
|
|
Branded Rx
|
|
U.S. Diversified Products
|
|
Total
|
Pharmaceuticals
|
$
|
203
|
|
|
$
|
557
|
|
|
$
|
206
|
|
|
$
|
966
|
|
|
$
|
229
|
|
|
$
|
595
|
|
|
$
|
258
|
|
|
$
|
1,082
|
|
Devices
|
363
|
|
|
29
|
|
|
—
|
|
|
392
|
|
|
322
|
|
|
23
|
|
|
—
|
|
|
345
|
|
OTC
|
326
|
|
|
—
|
|
|
—
|
|
|
326
|
|
|
376
|
|
|
—
|
|
|
—
|
|
|
376
|
|
Branded and Other Generics
|
191
|
|
|
—
|
|
|
90
|
|
|
281
|
|
|
189
|
|
|
—
|
|
|
85
|
|
|
274
|
|
Other revenues
|
20
|
|
|
7
|
|
|
3
|
|
|
30
|
|
|
18
|
|
|
11
|
|
|
3
|
|
|
32
|
|
|
$
|
1,103
|
|
|
$
|
593
|
|
|
$
|
299
|
|
|
$
|
1,995
|
|
|
$
|
1,134
|
|
|
$
|
629
|
|
|
$
|
346
|
|
|
$
|
2,109
|
|
Geographic Information
Revenues are attributed to a geographic region based on the location of the customer were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2018
|
|
2017
|
U.S. and Puerto Rico
|
$
|
1,176
|
|
|
$
|
1,295
|
|
China
|
84
|
|
|
68
|
|
Canada
|
77
|
|
|
79
|
|
Poland
|
63
|
|
|
51
|
|
France
|
55
|
|
|
48
|
|
Japan
|
51
|
|
|
51
|
|
Germany
|
50
|
|
|
42
|
|
Egypt
|
45
|
|
|
32
|
|
Mexico
|
43
|
|
|
38
|
|
Russia
|
28
|
|
|
44
|
|
United Kingdom
|
27
|
|
|
25
|
|
Italy
|
22
|
|
|
18
|
|
Spain
|
21
|
|
|
17
|
|
Brazil
|
20
|
|
|
27
|
|
Other
|
233
|
|
|
274
|
|
|
$
|
1,995
|
|
|
$
|
2,109
|
|
Major Customers
Customers that accounted for 10% or more of total revenues were as follows:
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2018
|
|
2017
|
McKesson Corporation (including McKesson Specialty)
|
18%
|
|
20%
|
AmerisourceBergen Corporation
|
18%
|
|
13%
|
Cardinal Health, Inc.
|
11%
|
|
14%
|
Segment Assets
Total assets by segment were as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
March 31,
2018
|
|
December 31,
2017
(1)
|
Assets:
|
|
|
|
Bausch + Lomb/International
|
$
|
14,662
|
|
|
$
|
14,351
|
|
Branded Rx
|
15,506
|
|
|
17,761
|
|
U.S. Diversified Products
|
4,919
|
|
|
4,712
|
|
|
35,087
|
|
|
36,824
|
|
Corporate
|
711
|
|
|
673
|
|
Total assets
|
$
|
35,798
|
|
|
$
|
37,497
|
|
(1)
Assets, which belonged to the Bausch + Lomb/International segment were incorrectly included in the assets of the Branded Rx segment and U.S. Diversified Products segment in the Company's December 31, 2017 consolidated financial statements. The above disclosures for December 31, 2017 have been revised to properly reflect those balances.
Amended and Restated Omnibus Incentive Plan
Effective April 30, 2018, the Company amended and restated its 2014 Omnibus Incentive Plan (the “Amended and Restated 2014 Plan”). The Amended and Restated 2014 Plan includes the following amendments: (i) the number of Common Shares authorized for issuance under the Amended and Restated 2014 Plan has been increased by an additional
11,900,000
Common Shares, as approved by the requisite number of shareholders at the Company’s annual general meeting held on April 30, 2018, (ii) introduction of a
$750,000
aggregate fair market value limit on awards (in either equity, cash or other compensation) that can be granted in any calendar year to a participant who is a non-employee director; (iii) housekeeping changes to address recent changes to Section 162(m) of the Internal Revenue Code; (iv) awards are expressly subject to the Company’s clawback policy; and (v) awards not assumed or substituted in connection with a Change of Control (as defined in the Amended and Restated 2014 Plan) will only vest on a pro rata basis.
Realignment of the Company's Business Structure and Change in Corporate Name to Bausch Health Companies Inc.
On
May 8, 2018, the Company announced a realignment of the Company’s business structure, including changes to the Company’s operating and reportable segments. Pursuant to these changes, effective in the second quarter of 2018, the Company will operate in four operating and reportable segments: (i) Bausch + Lomb/International, (ii) Salix, (iii) Ortho Dermatologics and (iv) Diversified Products.
This realignment is consistent with how the Company’s CEO, who is the Company’s Chief Operating Decision Maker will: (i) regularly assess operating performance, (ii) make resource allocation decisions and (iii) designate responsibilities of his direct reports.
Additionally, on May 8, 2018, the Company announced that, effective in July 2018, the Company will change its corporate name from Valeant Pharmaceuticals International, Inc. to Bausch Health Companies Inc.