XNYS:VRX Valeant Pharmaceuticals International Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-14956
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Canada 
(State or other jurisdiction of
incorporation or organization)
98-0448205 
(I.R.S. Employer Identification No.)
4787 Levy Street, Montreal, Quebec 
(Address of principal executive offices)
H4R 2P9 
(Zip Code)
(514) 744-6792
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
(Do not check if a smaller 
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares, no par value — 303,844,212 shares issued and outstanding as of July 31, 2012.





VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
INDEX
Part I.
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


i



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
Introductory Note
On September 28, 2010, Biovail Corporation (“Biovail”) completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” (the “Company”).
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries, taken together, after giving effect to completion of the Merger; references to “Biovail” are to Biovail Corporation prior to the completion of the Merger and “Valeant” are to Valeant Pharmaceuticals International.
In this Form 10-Q, references to “$” and “US$” are to United States (“U.S.”) dollars, references to “C$” are to Canadian dollars, references to “€” are to Euros, references to “AUD$” are to Australian dollars, references to “R$” are to Brazilian real and references to “MXN$” are to Mexican peso.
Forward-Looking Statements
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:
To the extent any statements made in this Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, “forward-looking statements”).
These forward-looking statements relate to, among other things: the expected benefits of our acquisitions and other transactions, such as cost savings, operating synergies and growth potential of the Company; business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products; the impact of healthcare reform; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as certain litigation and regulatory proceedings; general market conditions; and our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity and income taxes.
Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-Q that contain forward-looking statements are qualified by these cautionary statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
the challenges and difficulties associated with managing the rapid growth of our Company and a large, complex business;
our ability to identify, acquire and integrate acquisition targets and to secure and maintain third-party research, development, manufacturing, marketing or distribution arrangements;

ii



our ability to close transactions on a timely basis or at all;
factors relating to the integration of the companies, businesses and products acquired by the Company, such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations, and the achievement of the anticipated benefits from such integrations;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
our future cash flow, our ability to service and repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected levels of operations, acquisition activity and general economic conditions;
the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing;
the difficulty in predicting: the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, the Canadian Therapeutic Products Directorate and European, Asian, Brazilian and Australian regulatory approvals; legal and regulatory proceedings and settlements thereof; the protection afforded by our patents and other intellectual and proprietary property; successful generic challenges to our products and infringement; or alleged infringement of the intellectual property of or by others;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products;
the results of continuing safety and efficacy studies by industry and government agencies;
our ability to obtain components, raw materials or bulk or finished products supplied by third parties;
the disruption of delivery of our products and the routine flow of manufactured goods;
the seasonality of sales of certain of our products;
the introduction of products that compete against our products that do not have patent or data exclusivity rights, which products represent a significant portion of our revenues;
the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets;
adverse global economic conditions and credit market uncertainty in European and other countries in which we do business;
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
our ability to retain, motivate and recruit executives and other key employees;
the outcome of legal proceedings, investigations and regulatory proceedings;
the risk that our products could cause, or be alleged to cause, personal injury, leading to withdrawals of products from the market;
the impacts of the Patient Protection and Affordable Care Act and the Food and Drug Administration Safety and Innovation Act in the U.S. and other legislative and regulatory reforms in the countries in which we operate; and
other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks

iii



associated with the foregoing.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and in the Company’s other filings with the SEC and CSA. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes.

iv



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All dollar amounts expressed in thousands of U.S. dollars)
(Unaudited)
 
As of
June 30,
2012
 
As of
December 31,
 2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
395,266

 
$
164,111

Marketable securities

 
6,338

Accounts receivable, net
611,204

 
569,268

Inventories, net
388,729

 
355,212

Prepaid expenses and other current assets
56,470

 
41,884

Assets held for sale
28,203

 
72,239

Deferred tax assets, net
150,362

 
148,454

Total current assets
1,630,234

 
1,357,506

Property, plant and equipment, net
409,399

 
414,242

Intangible assets, net
8,121,556

 
7,657,798

Goodwill
3,724,341

 
3,598,786

Deferred tax assets, net
36,181

 
54,681

Restricted cash
8,598

 

Other long-term assets, net
89,511

 
58,700

Total assets
$
14,019,820

 
$
13,141,713

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
156,178

 
$
157,620

Accrued liabilities and other current liabilities
600,657

 
527,583

Acquisition-related contingent consideration
67,115

 
100,263

Income taxes payable
15,537

 
10,335

Deferred revenue
7,031

 
12,783

Current portion of long-term debt
195,154

 
111,250

Deferred tax liabilities, net
7,525

 
4,438

Total current liabilities
1,049,197

 
924,272

Deferred revenue
37,901

 
38,153

Acquisition-related contingent consideration
433,271

 
319,821

Long-term debt
7,356,021

 
6,539,761

Liabilities for uncertain tax positions
95,945

 
91,098

Deferred tax liabilities, net
1,229,030

 
1,144,914

Other long-term liabilities
123,024

 
76,678

Total liabilities
10,324,389

 
9,134,697

 
 
 
 
Shareholders' Equity
 
 
 
Common shares, no par value, unlimited shares authorized, 302,052,589 and
 
 
 
  306,371,032 issued and outstanding at June 30, 2012 and December 31, 2011, respectively
5,885,225

 
5,963,621

Additional paid-in capital
283,061

 
276,117

Accumulated deficit
(2,245,886
)
 
(2,030,292
)
Accumulated other comprehensive loss
(226,969
)
 
(202,430
)
Total shareholders' equity
3,695,431

 
4,007,016

Total liabilities and shareholders' equity
$
14,019,820

 
$
13,141,713

Commitments and contingencies (note 19)
 
 
 

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


1



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(All dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)
 
 Three Months Ended
June 30,
 
 Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Product sales
$
748,742

 
$
530,035

 
$
1,506,334

 
$
1,030,456

Alliance and royalty
56,869

 
65,988

 
136,100

 
124,402

Service and other
14,479

 
13,364

 
33,759

 
19,555

 
820,090

 
609,387

 
1,676,193

 
1,174,413

Expenses
 
 
 
 
 
 
 
Cost of goods sold (exclusive of amortization of
 
 
 
 
 
 
 
intangible assets shown separately below)
197,284

 
169,912

 
426,725

 
339,199

Cost of alliance and service revenues
12,483

 
3,395

 
94,878

 
37,340

Selling, general and administrative
185,440

 
149,657

 
362,726

 
289,163

Research and development
17,711

 
17,764

 
39,717

 
31,434

Amortization of intangible assets
210,570

 
114,946

 
411,213

 
226,989

Restructuring, integration and other costs
30,004

 
27,626

 
92,341

 
45,165

Acquired in-process research and development
4,568

 
2,000

 
4,568

 
4,000

Acquisition-related costs
13,867

 
1,869

 
21,372

 
3,376

Legal settlements
53,624

 
2,000

 
56,779

 
2,400

Acquisition-related contingent consideration
7,729

 
1,752

 
17,568

 
2,138

 
733,280

 
490,921

 
1,527,887

 
981,204

Operating income
86,810

 
118,466

 
148,306

 
193,209

Interest income
1,020

 
1,086

 
2,143

 
1,889

Interest expense
(100,614
)
 
(83,073
)
 
(202,639
)
 
(151,824
)
Loss on extinguishment of debt

 
(14,748
)
 
(133
)
 
(23,010
)
Foreign exchange and other
(4,238
)
 
847

 
20,061

 
3,654

(Loss) gain on investments, net
(35
)
 
21,158

 
2,024

 
22,927

(Loss) income before provision for (recovery of) income taxes
(17,057
)
 
43,736

 
(30,238
)
 
46,845

Provision for (recovery of) income taxes
4,550

 
(12,624
)
 
4,290

 
(15,997
)
Net (loss) income
$
(21,607
)
 
$
56,360

 
$
(34,528
)
 
$
62,842

 
 
 
 
 
 
 
 
Basic (loss) earnings per share
$
(0.07
)
 
$
0.19

 
$
(0.11
)
 
$
0.21

Diluted (loss) earnings per share
$
(0.07
)
 
$
0.17

 
$
(0.11
)
 
$
0.19

 
 
 
 
 
 
 
 
Weighted-average common shares (000s)
 
 
 
 
 
 
 
Basic
304,816

 
303,426

 
306,296

 
303,587

Diluted
304,816

 
331,369

 
306,296

 
332,130


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

2




VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(All dollar amounts expressed in thousands of U.S. dollars)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net (loss) income
$
(21,607
)
 
$
56,360

 
$
(34,528
)
 
$
62,842

Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation adjustment
(197,584
)
 
84,360

 
(22,908
)
 
183,440

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

 
2,441

 

 
21,167

Reclassification to net (loss) income

 
(21,316
)
 
(1,634
)
 
(21,316
)
Net unrealized holding gain (loss) on available-for-sale debt securities:
 
 
 
 
 
 
 
 Arising in period
20

 
(70
)
 
7

 
(96
)
Reclassification to net (loss) income
197

 

 
197

 

Pension adjustment
(78
)
 
(102
)
 
(201
)
 
898

Other comprehensive (loss) income
(197,445
)
 
65,313

 
(24,539
)
 
184,093

Comprehensive (loss) income
$
(219,052
)
 
$
121,673

 
$
(59,067
)
 
$
246,935



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

3



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts expressed in thousands of U.S. dollars)
(Unaudited)
 
 Three Months Ended
 June 30,
 
 Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
 
 
 
 
Net (loss) income
$
(21,607
)
 
$
56,360

 
$
(34,528
)
 
$
62,842

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
221,866

 
122,276

 
437,448

 
249,278

Amortization of debt discounts and debt issuance costs
(391
)
 
2,414

 
5,356

 
6,348

Acquired in-process research and development
4,568

 
2,000

 
4,568

 
4,000

Acquisition accounting adjustment on inventory sold
10,294

 
16,262

 
43,392

 
46,171

Loss (Gain) on disposal of assets
1,024

 

 
10,551

 
(5,314
)
Acquisition-related contingent consideration
7,729

 
1,752

 
17,568

 
2,138

Allowances for losses on accounts receivable and inventories
1,720

 
2,091

 
6,103

 
2,472

Deferred income taxes
(5,850
)
 
(18,724
)
 
(20,709
)
 
(38,497
)
Additions to accrued legal settlements
53,624

 
2,000

 
56,779

 
2,400

Payments of accrued legal settlements
(1,752
)
 
(400
)
 
(1,812
)
 
(16,400
)
Share-based compensation
15,156

 
25,558

 
34,308

 
55,451

Tax benefits from stock options exercised
(2,882
)
 
(7,566
)
 
(3,475
)
 
(31,616
)
Foreign exchange loss (gain)
3,299

 
(1,100
)
 
(22,265
)
 
(4,273
)
Gain on sale of marketable securities

 
(21,316
)
 

 
(21,316
)
Payment of accreted interest on contingent consideration
(898
)
 

 
(898
)
 

Other
(25
)
 
12,623

 
(9,564
)
 
17,713

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
8,183

 
31,736

 
(6,603
)
 
(50,745
)
Inventories
(16,433
)
 
(8,217
)
 
(51,513
)
 
5,143

Prepaid expenses and other current assets
1,133

 
12,497

 
(3,133
)
 
5,627

Accounts payable, accrued liabilities and other liabilities
(9,035
)
 
(25,860
)
 
(26,195
)
 
157

Income taxes payable
(15,121
)
 
(13,730
)
 
(13,546
)
 
(14,593
)
Net cash provided by operating activities
254,602

 
190,656

 
421,832

 
276,986

 
 
 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
 
 
Acquisition of businesses, net of cash acquired
(454,020
)
 
(96,565
)
 
(726,832
)
 
(560,267
)
Acquisition of intangible assets
(695
)
 
(8,000
)
 
(2,560
)
 
(310,885
)
Purchases of property, plant and equipment
(13,601
)
 
(12,474
)
 
(24,717
)
 
(33,979
)
Proceeds from sales and maturities of marketable securities
1,048

 
83,865

 
9,412

 
86,639

Purchases of marketable securities and other investments

 
(29,326
)
 
(7,200
)
 
(69,342
)
Proceeds from sale of assets

 
36,000

 
66,250

 
36,000

Increase in restricted cash
(8,873
)
 

 
(8,873
)
 

Net cash used in investing activities
(476,141
)
 
(26,500
)
 
(694,520
)
 
(851,834
)
 
 
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
 
 
Issuance of long-term debt, net of discount
640,767

 
100,000

 
1,286,410

 
2,239,688

Repayments of long-term debt
(127,181
)
 

 
(429,993
)
 
(975,000
)
Short-term debt borrowings
12,236

 

 
19,600

 

Short-term debt repayments
(21,582
)
 

 
(21,582
)
 

Repurchases of convertible debt

 
(199,788
)
 
(3,975
)
 
(339,013
)
Repurchases of common shares
(172,000
)
 
(224,814
)
 
(280,724
)
 
(499,564
)
Proceeds from exercise of stock options
1,911

 
6,133

 
7,019

 
29,362

Tax benefits from stock options exercised
2,882

 
7,566

 
3,475

 
31,616

Payments of employee withholding tax upon vesting of share-based awards
(9,910
)
 
(15,200
)
 
(13,734
)
 
(54,678
)
Payments of contingent consideration
(33,518
)
 

 
(61,018
)
 

Payments of debt issuance costs
(1,107
)
 
(4,066
)
 
(2,542
)
 
(19,813
)
Net cash provided by (used in) financing activities
292,498

 
(330,169
)
 
502,936

 
412,598

 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(6,172
)
 
3,206

 
907

 
6,926

Net increase (decrease) in cash and cash equivalents
64,787

 
(162,807
)
 
231,155

 
(155,324
)
Cash and cash equivalents, beginning of period
330,479

 
401,752

 
164,111

 
394,269

Cash and cash equivalents, end of period
$
395,266

 
$
238,945

 
$
395,266

 
$
238,945

 
 
 
 
 
 
 
 
Non-Cash Investing and Financing Activities
 
 
 
 
 
 
 
Acquisition of businesses, contingent consideration at fair value
$
(108,284
)
 
$
(369,679
)
 
$
(126,028
)
 
$
(397,150
)
Settlement of convertible debt, equity issued

 
(892,000
)
 

 
(892,000
)
Acquisition of businesses, debt assumed
(46,336
)
 

 
(46,336
)
 

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

4



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)
1.
DESCRIPTION OF BUSINESS
On September 28, 2010 (the “Merger Date”), Biovail Corporation (“Biovail”) completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) through a wholly-owned subsidiary pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” (the “Company”). The Company is a multinational, specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of dermatology, neurology and branded generics.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements (the “unaudited consolidated financial statements”) have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these condensed notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). The unaudited consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2011. There have been no changes to the Company’s significant accounting policies since December 31, 2011, except as described below under “Adoption of New Accounting Standards”. The unaudited consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations for the interim periods presented.
Reclassifications and Revisions
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
The Company has revised the 2011 consolidated statement of cash flows for the presentation of the proceeds from the out-license of an intangible asset to conform to the current year presentation. The Company decreased Net cash used in investing activities with an offsetting decrease in Net cash provided by operating activities by $36.0 million for the three-month and six-month periods ended June 30, 2011. This revision did not have a material impact to the Company’s previously reported consolidated statement of cash flows. This change had no effect on the Company’s previously reported consolidated balance sheets, consolidated statements of (loss) income and consolidated statements of comprehensive (loss) income.
Use of Estimates
In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.

5

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


Adoption of New Accounting Standards
Effective January 1, 2012, the Company has adopted on a prospective basis the provisions of the following new accounting standards:
Guidance that results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments change some fair value measurement principles and disclosure requirements under U.S. GAAP. The adoption of this guidance did not have a significant impact on the Company’s financial position or results of operations.
Guidance requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. This guidance does not change the components of other comprehensive income or the calculation of earnings per share. The effective date for amendments to the presentation of reclassifications out of accumulated other comprehensive income has been deferred. As this guidance relates to presentation only, the adoption of this guidance did not impact the Company’s financial position or results of operations.
Guidance intended to simplify goodwill impairment testing, by allowing an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The adoption of this guidance did not have a significant impact on the Company’s financial position or results of operations.
In July 2012, the Financial Accounting Standards Board (“FASB”) issued guidance intended to simplify indefinite-lived intangible impairment testing, by allowing an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of an asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This guidance is effective for annual and interim tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance is not expected to have a significant impact on the Company’s financial position or results of operations.
3.
BUSINESS COMBINATIONS
The Company has focused its business on core geographies and therapeutic classes through selective acquisitions, dispositions and strategic partnerships with other pharmaceutical companies.
(a) Business combinations in 2012 include the following:
OraPharma
Description of the Transaction
On June 18, 2012, the Company acquired OraPharma Topco Holdings, Inc. (“OraPharma”), a specialty oral health company located in the U.S. that develops and commercializes products that improve and maintain oral health. The Company made an up-front payment of $289.7 million, and the Company may pay a series of contingent consideration payments of up to $114.0 million based on certain milestones, including certain revenue targets. The fair value of the contingent consideration was determined to be $99.2 million as of the acquisition date, for a total fair value of consideration transferred of $388.9 million. As of June 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. The Company also repaid at the closing $37.9 million of assumed debt.
OraPharma’s lead product is Arestin®, a locally administered antibiotic for the treatment of periodontitis that utilizes an advanced controlled-release delivery system and is indicated for use in conjunction with scaling and root planing for the treatment of adult periodontitis.

6

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


Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. Due to the timing of this acquisition, these amounts are provisional and subject to change. The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
 
Amounts
Recognized as of
Acquisition Date
Cash
$
14,119

Accounts receivable(a)
10,348

Inventories
3,222

Other current assets
4,063

Property and equipment
8,181

Identifiable intangible assets, excluding acquired IPR&D(b)
466,408

Acquired IPR&D(c)
15,464

Other non-current assets
1,862

Current liabilities
(9,675
)
Long-term debt, including current portion(d)
(37,868
)
Deferred income taxes, net
(173,907
)
Other non-current liabilities
(158
)
Total identifiable net assets
302,059

Goodwill(e)
86,802

Total fair value of consideration transferred
$
388,861

______________________
(a)
Both the fair value and gross contractual amount of trade accounts receivable acquired were $10.3 million, as the Company expects that the amount to be uncollectible is negligible.
(b)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
Weighted-
 Average
 Useful Lives
 (Years)
 
Amounts
Recognized as of
Acquisition Date
Product brands
12
 
$
446,958

Corporate brand
15
 
19,450

Total identifiable intangible assets acquired
12
 
$
466,408

(c)
The acquired in-process research and development (“IPR&D”) assets primarily relate to the development of Arestin Peri-Implantitis, which is indicated for anti-inflammatory and anti-bacterial use.
(d)
Effective June 18, 2012, the Company terminated the credit facility agreement, repaid the assumed debt outstanding and cancelled the undrawn credit facilities.
(e)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the provisional values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
cost savings, operating synergies and other benefits expected to result from combining the operations of OraPharma with those of the Company;

7

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


the value of the continuing operations of OraPharma’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, OraPharma’s assembled workforce).
The provisional amount of goodwill has been allocated to the Company’s U.S. Dermatology segment as indicated in note 10.
Acquisition-Related Costs
The Company has incurred to date $4.8 million of transaction costs directly related to the OraPharma acquisition, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.
Revenue and Net Loss of OraPharma
The revenues of OraPharma for the period from the acquisition date to June 30, 2012 were $3.9 million, and the net loss was $2.6 million. The net loss includes the effects of the acquisition accounting adjustments and acquisition-related costs.
University Medical, Atlantis Pharma, Gerot Lannach and Probiotica
Description of the Transactions
In the six-month period ended June 30, 2012, the Company acquired the following businesses for an aggregate purchase price of $410.4 million, which included contingent consideration obligations with an aggregate acquisition date fair value of $25.9 million.
On May 23, 2012, the Company acquired certain assets from University Medical Pharmaceuticals Corp. (“University Medical”), a specialty pharmaceutical company located in the U.S. focused on skincare products. The consideration includes up-front payments of $65.0 million, and the Company may pay a series of contingent consideration payments of up to $40.0 million if certain net sales milestones are achieved. The fair value of the contingent consideration was determined to be $1.5 million as of the acquisition date. As of June 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. University Medical’s main brand is AcneFree, a retail over-the-counter (“OTC”) acne treatment.
On May 2, 2012, the Company acquired certain assets from Atlantis Pharma (“Atlantis”), a branded generics pharmaceutical company located in Mexico, for up-front payments of $65.5 million (MXN$847.3 million), and the Company placed an additional $8.9 million (MXN$114.7 million) into an escrow account. The amounts in escrow will be paid to the sellers only if certain regulatory milestones are achieved and therefore such amounts were treated as contingent consideration. The fair value of the contingent consideration was determined to be $7.6 million as of the acquisition date. As of June 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. The amounts held in escrow as of June 30, 2012 totaled $8.6 million and were classified as Restricted cash in the Company’s consolidated balance sheets. Atlantis has a broad product portfolio, including products in gastro, analgesics and anti-inflammatory therapeutic categories.
On March 13, 2012, the Company acquired certain assets from Gerot Lannach, a branded generics pharmaceutical company based in Austria. The Company made an up-front payment of $164.0 million (€125.0 million), and the Company may pay a series of contingent consideration payments of up to $19.7 million (€15.0 million) if certain net sales milestones are achieved. The fair value of the contingent consideration was determined to be $16.8 million as of the acquisition date. As of June 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. As part of the transaction, the Company also entered into a ten-year exclusive supply agreement with Gerot Lannach for the acquired products. Approximately 90% of sales relating to the acquired assets are in Russia, with sales also made in certain Commonwealth of Independent States (CIS) countries including

8

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


Kazakhstan and Uzbekistan. Gerot Lannach’s largest product is acetylsalicylic acid, a low dose aspirin.
On February 1, 2012, the Company acquired Probiotica Laboratorios Ltda. (“Probiotica”), which markets OTC sports nutrition products and other food supplements in Brazil, for a purchase price of $85.9 million (R$150.0 million), as well as a preliminary working capital payment adjustment of $4.1 million (R$7.1 million).
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, in the aggregate, as of the acquisition dates. The following recognized amounts are provisional and subject to change:
amounts for intangible assets, property, plant and equipment and inventories, pending the finalization of valuation efforts;
amounts for non-current liabilities, and corresponding indemnification assets, pending finalization of the assessment of contingent liabilities; 
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in retrospective adjustments to the provisional amounts recognized at the acquisition dates. These changes could be significant. The Company will finalize these amounts no later than one year from the respective acquisition dates.
 
Amounts
Recognized as of
Acquisition Dates
 
Measurement
Period
Adjustments(a)
 
Amounts
Recognized
(as adjusted)
Cash and cash equivalents
$
1,125

 
$

 
$
1,125

Accounts receivable(b)
15,674

 

 
15,674

Assets held for sale(c)
15,566

 

 
15,566

Inventories
10,798

 

 
10,798

Other current assets
1,394

 

 
1,394

Property, plant and equipment
3,783

 

 
3,783

Deferred tax assets
996

 

 
996

Identifiable intangible assets, excluding acquired IPR&D(d)
318,265

 
3,725

 
321,990

Acquired IPR&D
400

 

 
400

Indemnification assets(e)
27,901

 

 
27,901

Current liabilities
(10,310
)
 
(580
)
 
(10,890
)
Liability for uncertain tax position
(6,682
)
 
6,682

 

Other non-current liabilities(e)
(27,901
)
 

 
(27,901
)
Total identifiable net assets
351,009

 
9,827

 
360,836

Goodwill(f)
59,968

 
(10,407
)
 
49,561

Total fair value of consideration transferred
$
410,977

 
$
(580
)
 
$
410,397

________________________
(a)
The measurement period adjustments relate to the Probiotica acquisition and primarily reflect: (i) the elimination of the liability for uncertain tax positions; (ii) the changes in the estimated fair value of the corporate brand intangible asset; and (iii) a decrease in the total fair value of consideration transferred due to a working capital adjustment. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and,

9

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


therefore, the Company has not retrospectively adjusted those financial statements.
(b)
The fair value of trade accounts receivable acquired was $15.7 million, with the gross contractual amount being $16.7 million, of which the Company expects that $1.0 million will be uncollectible.
(c)
Assets held for sale relate to a product brand acquired in the Atlantis acquisition which the Company expects to sell by early 2013.
(d)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
Weighted-
 Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
 
Measurement
Period
Adjustments
 
Amounts
Recognized
(as adjusted)
Product brands
9
 
$
265,789

 
$

 
$
265,789

Corporate brands
12
 
21,783

 
3,725

 
25,508

Partner relationships
5
 
30,693

 

 
30,693

Total identifiable intangible assets acquired
9
 
$
318,265

 
$
3,725

 
$
321,990

(e)
Other non-current liabilities, and the corresponding indemnification assets, primarily relate to certain asserted and unasserted claims against Probiotica, which include potential tax-related obligations that existed at the acquisition date. The Company is indemnified by the sellers in accordance with indemnification provisions under its contractual arrangements. Indemnification assets and contingent liabilities were recorded at the same amount and classified in the same manner, as components of the purchase price, representing our best estimates of these amounts at the acquisition date, in accordance with guidance for loss contingencies and uncertain tax positions. Under the Company’s contractual arrangement with Probiotica, there is no limitation on the amount or value of indemnity claims that can be made by the Company; however there is a time restriction of either two or five years, depending on the nature of the claim. Approximately $12.9 million (R$22.5 million) of the purchase price for the Probiotica transaction has been placed in escrow in accordance with the indemnification provisions. The escrow account will be maintained for two years, with 50% being released to the sellers after the first year, and the remaining balance released after the second year. The Company expects the total amount of such indemnification assets to be collectible from the sellers. The Company is continuing to gather and assess information with respect to the non-current liabilities and indemnification assets.
(f)
The goodwill relates primarily to the Probiotica acquisition. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the provisional values assigned to the assets acquired and liabilities assumed. The Company expects that the goodwill will be deductible for tax purposes. University Medical’s, Atlantis’ and Gerot Lannach’s goodwill recorded represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations of University Medical, Atlantis and Gerot Lannach with those of the Company. Probiotica’s goodwill recorded represents the following:
the Company’s expectation to develop and market new product brands and product lines in the future;
the value associated with the Company’s ability to develop relationships with new customers;
the value of the continuing operations of Probiotica’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, Probiotica’s assembled workforce).
The provisional amount of University Medical’s goodwill has been allocated to the Company’s U.S. Dermatology segment and the provisional amount of Atlantis’, Gerot Lannach’s and Probiotica’s goodwill has been allocated to the Company’s Emerging Markets segment as indicated in note 10.
Acquisition-Related Costs
The Company has incurred to date $5.1 million, in the aggregate, of transaction costs directly related to the University Medical, Atlantis, Gerot Lannach and Probiotica acquisitions, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.
Revenue and Net Loss of University Medical, Atlantis, Gerot Lannach and Probiotica
The revenues of University Medical, Atlantis, Gerot Lannach and Probiotica for the period from the respective acquisition dates to June 30, 2012 were $41.3 million, in the aggregate, and the net loss was $2.4 million, in the aggregate.

10

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


The net loss includes the effects of the acquisition accounting adjustments and acquisition-related costs.
Other
In the six-month period ended June 30, 2012, the Company also acquired the following:
On June 8, 2012, the Company acquired certain assets from Swiss Herbal Remedies Limited (“Swiss Herbal”), a nutraceutical company that manufactures and markets a broad range of scientifically formulated vitamins, minerals and supplements for a purchase price of $20.6 million. The fair value of the consideration transferred was assigned primarily to identifiable intangible assets ($9.5 million) and inventory ($6.5 million).
On April 11, 2012, the Company acquired Pedinol Pharmacal, Inc. (“Pedinol”), a podiatry-focused, privately-owned specialty pharmaceutical company based in the U.S. for a purchase price of $21.5 million. The fair value of the consideration transferred was assigned primarily to inventory ($12.9 million), identifiable intangible assets ($12.0 million) and loans payable ($(8.5) million).
On February 13, 2012, the Company acquired Eyetech Inc. (“Eyetech”), a privately-owned ophthalmic biotechnology company dedicated to the treatment of sight-threatening diseases of the retina, for an up-front purchase price of $22.3 million and potential milestone payments of up to $4.0 million based on sales of Macugen® in 2012 and 2013. The fair value of the up-front and contingent consideration was determined to be $23.2 million as of the acquisition date. The total fair value of the consideration transferred was assigned primarily to product rights intangible assets ($23.3 million), deferred income tax liability ($(9.8) million), receivables ($5.0 million) and inventory ($4.9 million).
These acquisitions are not material, individually, or in the aggregate, to the Company’s financial statements, and therefore the Company is not presenting actual or pro forma financial information.
(b) Business combinations in 2011 include the following:
iNova
Description of the Transaction
On December 21, 2011, the Company acquired iNova from Archer Capital, Ironbridge Capital and other minority management shareholders. The Company made up-front payments of $656.7 million (AUD$657.9 million) and the Company may pay a series of potential milestones of up to $59.9 million (AUD$60 million) based on the success of pipeline activities, product registrations and overall revenue. The fair value of the contingent consideration was determined to be $44.5 million as of the acquisition date, for a total fair value of consideration transferred of $701.2 million. As of June 30, 2012, the assumptions used for determining the fair value of the acquisition-related contingent consideration have not changed significantly from those used at the acquisition date.
iNova sells and distributes a range of prescription and OTC products in Australia, New Zealand, Asia and South Africa, including leading therapeutic weight management brands such as Duromine®/Metermine®, as well as leading OTC brands in the cold and cough area, such as Difflam®, Duro-Tuss® and Rikodeine®.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:
amounts and useful lives for identifiable intangible assets and property, plant and equipment, pending the finalization of valuation efforts;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of

11

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


certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
 
Amounts
Recognized as of
Acquisition Date(a)
 
Measurement
Period
Adjustments(b)
 
Amounts
Recognized
(as adjusted)
Cash and cash equivalents
$
8,792

 
$

 
$
8,792

Accounts receivable(c)
30,525

 

 
30,525

Inventories
43,387

 
(1,400
)
 
41,987

Property, plant and equipment(d)
15,257

 
(749
)
 
14,508

Identifiable intangible assets(e)
423,950

 
(2,188
)
 
421,762

Deferred income taxes, net

 
15,893

 
15,893

Current liabilities
(32,500
)
 
(1,713
)
 
(34,213
)
Total identifiable net assets
489,411

 
9,843

 
499,254

Goodwill(f)
211,770

 
(9,843
)
 
201,927

Total fair value of consideration transferred
$
701,181

 
$

 
$
701,181

_________________________
(a)
As previously reported in the 2011 Form 10-K.
(b)
The measurement period adjustments primarily reflect: (i) resolution of certain tax aspects of the transaction and the tax impact of pre-tax measurement period adjustments; (ii) changes in the estimated fair value of an intangible asset and the related inventory; (iii) additional information obtained with respect to the fair value of an acquired manufacturing facility; and (iv) additional information obtained with respect to the valuation of compensation-related liabilities. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.
(c)
The fair value of trade accounts receivable acquired was $30.5 million, with the gross contractual amount being $31.5 million, of which the Company expects that $1.0 million will be uncollectible.
(d)
Property, plant and equipment includes a manufacturing facility, which has a carrying value of $10.2 million as of June 30, 2012 and is classified within Assets held for sale in the consolidated balance sheet as of June 30, 2012. The facility, which is included in the Canada and Australia segment, is expected to be sold during the third quarter of 2012.
(e)
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
 
Weighted-
Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
 
Measurement
Period
Adjustments
 
Amounts
Recognized
(as adjusted)
Product brands
8
 
$
418,252

 
$
(2,188
)
 
$
416,064

Corporate brands
4
 
5,698

 

 
5,698

Total identifiable intangible assets acquired
8
 
$
423,950

 
$
(2,188
)
 
$
421,762


(f)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the provisional values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
cost savings, operating synergies and other benefits expected to result from combining the operations of iNova with those of the

12

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


Company;
the value of the continuing operations of iNova’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and
intangible assets that do not qualify for separate recognition (for instance, iNova’s assembled workforce).
The provisional amount of goodwill has been allocated to the Company’s Canada and Australia segment ($119.5 million) and the Company’s Emerging Markets segment ($82.4 million).
Dermik
Description of the Transaction
On December 16, 2011, the Company acquired Dermik, a dermatological unit of Sanofi in the U.S. and Canada, as well as the worldwide rights to Sculptra® and Sculptra® Aesthetic, for a total cash purchase price of approximately $421.6 million. The acquisition includes Dermik’s inventories and manufacturing facility located in Laval, Quebec. In connection with the acquisition of Dermik, the Company was required by the Federal Trade Commission (“FTC”) to divest 1% clindamycin and 5% benzoyl peroxide gel, a generic version of BenzaClin®, and 5% fluorouracil cream, an authorized generic of Efudex®. For further details, see note 4 titled “ACQUISITIONS AND DISPOSITIONS”.
Dermik is a leading global medical dermatology business focused on the manufacturing, marketing and sale of therapeutic and aesthetic dermatology products.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
 
Amounts
Recognized as of
Acquisition Date(a)
 
Measurement
Period
Adjustments(b)
 
Amounts
Recognized
(as adjusted)
Inventories
$
32,360

 
$
(3,792
)
 
$
28,568

Property, plant and equipment
39,581

 

 
39,581

Identifiable intangible assets(c)
341,680

 
1,969

 
343,649

Deferred tax liability
(1,262
)
 

 
(1,262
)
Total identifiable net assets
412,359

 
(1,823
)
 
410,536

Goodwill(d)
8,141

 
2,935

 
11,076

Total fair value of consideration transferred
$
420,500

 
$
1,112

 
$
421,612

_________________________
(a)
As previously reported in the 2011 Form 10-K.
(b)
The measurement period adjustments primarily reflect: (i) changes in estimated inventory reserves, (ii) revisions to certain assumptions impacting the fair value of intangible assets; and (iii) an increase in the total fair value of consideration transferred pursuant to a working capital adjustment provision under the purchase agreement. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.
(c)
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:

13

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


 
Weighted-
Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
 
Measurement
Period
Adjustments
 
Amounts
Recognized
(as adjusted)
Product brands
9
 
$
292,472

 
$
1,816

 
$
294,288

Product rights
5
 
33,857

 
227

 
34,084

Manufacturing agreement
5
 
15,351

 
(74
)
 
15,277

Total identifiable intangible assets acquired
9
 
$
341,680

 
$
1,969

 
$
343,649

(d)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. The Company expects that $6.4 million of the goodwill will be deductible for tax purposes. The goodwill recorded represents primarily the value of Dermik’s assembled workforce. The goodwill has been allocated to the Company’s U.S. Dermatology segment.
Ortho Dermatologics
Description of the Transaction
On December 12, 2011, the Company acquired assets of the Ortho Dermatologics division of Janssen Pharmaceuticals, Inc., for a total cash purchase price of approximately $345.2 million. The assets acquired included prescription brands Retin-A Micro®, Ertaczo®, Renova® and Biafine®.
Ortho Dermatologics is a leader in the field of dermatology and has developed several products to treat skin disorders and dermatologic conditions.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
 
Amounts
Recognized as of
Acquisition Date(a)
 
Measurement
Period
Adjustments(b)
 
Amounts
Recognized
(as adjusted)
Inventories
$
6,169

 
$

 
$
6,169

Property, plant and equipment
206

 

 
206

Identifiable intangible assets, excluding acquired IPR&D(c)
333,599

 

 
333,599

Acquired IPR&D(d)
4,318

 

 
4,318

Deferred tax liability
(1,690
)
 

 
(1,690
)
Total identifiable net assets
342,602

 

 
342,602

Goodwill(e)
3,507

 
(915
)
 
2,592

Total fair value of consideration transferred
$
346,109

 
$
(915
)
 
$
345,194

____________________
(a)
As previously reported in the 2011 Form 10-K.
(b)
The measurement period adjustment reflects a decrease in the total fair value of consideration transferred pursuant to a working capital adjustment provision under the purchase agreement. The measurement period adjustment was made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. This adjustment did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.
(c)
The identifiable intangible assets acquired relate to product brands intangible assets with an estimated weighted-average useful life of approximately nine years.
(d)
The acquired IPR&D asset relates to the development of the MC5 program, a topical treatment for acne vulgaris. In the second quarter

14

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


of 2012, the Company terminated the MC5 program and recognized a charge of $4.3 million to write off the related IPR&D asset. This charge was recognized as Acquired in-process research and development in the Company's consolidated statements of (loss) income.
(e)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations of Ortho Dermatologics with those of the Company. The goodwill has been allocated to the Company’s U.S. Dermatology segment.
Afexa
Description of the Transaction
On October 17, 2011, the Company acquired 73.8% (80,929,921 common shares) of the outstanding common shares of Afexa Life Sciences Inc. (“Afexa”) for cash consideration of $67.7 million. The acquisition date fair value of the 26.2% noncontrolling interest in Afexa of $23.8 million was estimated using quoted market prices on such date, for a total fair value of consideration transferred of $91.5 million.
At a special meeting of Afexa shareholders held on December 12, 2011, a subsequent acquisition transaction was approved resulting in the privatization of Afexa and the remaining shareholders receiving C$0.85 per share. Consequently, as of December 31, 2011, the Company owned 100% of Afexa.
Afexa markets several consumer brands, such as Cold-FX®, an OTC cold and flu treatment, and Coldsore-FX®, a topical OTC cold sore treatment.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
 
Amounts
Recognized as of
Acquisition Date(a)
 
Measurement
Period
Adjustments(b)
 
Amounts
Recognized
(as adjusted)
Cash
$
1,558

 
$

 
$
1,558

Accounts receivable(c)
9,436

 
(1,524
)
 
7,912

Inventories
22,489

 

 
22,489

Other current assets
5,406

 

 
5,406

Property and equipment
8,766

 

 
8,766

Identifiable intangible assets(d)
80,580

 
(5,850
)
 
74,730

Current liabilities
(18,104
)
 

 
(18,104
)
Deferred income taxes, net
(20,533
)
 
1,462

 
(19,071
)
Other non-current liabilities
(1,138
)
 

 
(1,138
)
Total identifiable net assets
88,460

 
(5,912
)
 
82,548

Goodwill(e)
3,070

 
5,912

 
8,982

Total fair value of consideration transferred
$
91,530

 
$

 
$
91,530

________________________
(a)
As previously reported in the 2011 Form 10-K.
(b)
The measurement period adjustments primarily reflect: (i) changes in the estimated fair value of certain intangible assets; (ii) changes in estimated sales reserves; and (iii) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.
(c)
Both the fair value and gross contractual amount of trade accounts receivable acquired were $7.9 million, as the Company expects that

15

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


the amount to be uncollectible is negligible.
(d)
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
 
Weighted-
Average
Useful Lives
(Years)
 
Amounts
Recognized as of
Acquisition Date
 
Measurement
Period
Adjustments
 
Amounts
Recognized
(as adjusted)
Product brands
11
 
$
65,194

 
$
(5,850
)
 
$
59,344

Patented technology
7
 
15,386

 

 
15,386

Total identifiable intangible assets acquired
10
 
$
80,580

 
$
(5,850
)
 
$
74,730

(e)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:
cost savings, operating synergies and other benefits expected to result from combining the operations of Afexa with those of the Company; and
intangible assets that do not qualify for separate recognition (for instance, Afexa’s assembled workforce).    
The goodwill has been allocated to the Company’s Canada and Australia segment.
Sanitas
Description of the Transaction
On August 19, 2011 (the “Sanitas Acquisition Date”), the Company acquired 87.2% of the outstanding shares of AB Sanitas (“Sanitas”) for cash consideration of $392.3 million. Prior to the Sanitas Acquisition Date, the Company acquired 1,502,432 shares of Sanitas, which represented approximately 4.8% of the outstanding shares. As a result, as of the Sanitas Acquisition Date, the Company held a controlling financial interest in Sanitas of 92%, or 28,625,025 shares. The acquisition date fair value of the 8% noncontrolling interest in Sanitas of $34.8 million, and the acquisition date fair value of the previously-held 4.8% equity interest of $21.1 million, were estimated using quoted market prices on such date.
On September 2, 2011, the Company announced a mandatory non-competitive tender offer (the “Tender Offer”) to purchase the remaining outstanding ordinary shares of Sanitas from all public shareholders at €10.06 per share. The Tender Offer closed on September 15, 2011, on which date the Company purchased an additional 1,968,631 shares (6.4% of the outstanding shares of Sanitas) for approximately $27.4 million. As a result of this purchase, the Company owned 30,593,656 shares or approximately 98.4% of Sanitas as of September 15, 2011.
On September 22, 2011, the Company received approval from the Securities Commission of the Republic of Lithuania to conduct the mandatory tender offer through squeeze out procedures (the “Squeeze Out”) at a price per one ordinary share of Sanitas equal to €10.06, which required that all minority shareholders sell to the Company the ordinary shares of Sanitas owned by them (512,264 ordinary shares, or 1.6% of Sanitas).
As the Company maintained a controlling financial interest in Sanitas during the Tender Offer, the additional ownership interest of 6.4% acquired in Sanitas was accounted for as an equity transaction between owners. The noncontrolling interest in Sanitas of approximately 1.6% to be acquired through the Squeeze Out procedures was classified as a liability in the Company’s consolidated balance sheet as it was mandatorily redeemable. As of June 30, 2012, the amount due to Sanitas shareholders of $2.4 million was included in Accrued liabilities and other current liabilities.
Sanitas has a broad branded generics product portfolio consisting of 390 products in nine countries throughout Central and Eastern Europe, primarily Poland, Russia and Lithuania. Sanitas has in-house development capabilities in dermatology, hospital injectables and ophthalmology, and a pipeline of internally developed and acquired dossiers.

16

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


Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The Company has not recognized any additional measurement period adjustments to the amounts previously reported in the 2011 Form 10-K. The amount of goodwill of $204.8 million has been allocated to the Company’s Emerging Markets segment.
PharmaSwiss
Description of the Transaction
On March 10, 2011, the Company acquired all of the issued and outstanding stock of PharmaSwiss S.A. (“PharmaSwiss”), a privately-owned branded generics and OTC pharmaceutical company based in Zug, Switzerland. As of the acquisition date, the total consideration transferred to effect the acquisition of PharmaSwiss comprised of cash paid of $491.2 million (€353.1 million) and the rights to contingent consideration payments of up to $41.7 million (€30.0 million) if certain net sales milestones of PharmaSwiss were achieved for the 2011 calendar year. The fair value of the contingent payments was determined to be $27.5 million as of the acquisition date. In May 2012, the Company made a contingent consideration payment of $12.4 million (€10.0 million) based on the net sales results for the 2011 calendar year. There are no remaining contingent consideration payments under this arrangement.
In connection with the transaction, in February 2011, the Company entered into foreign currency forward-exchange contracts to buy €130.0 million, which were settled on March 9, 2011. The Company recorded a $5.1 million gain on the settlement of these contracts, which was partially offset by a foreign exchange loss of $2.4 million recognized on the remaining €220.0 million bought to finance the transaction. The net foreign exchange gain of $2.7 million was recognized in Foreign exchange and other in the consolidated statement of (loss) income in the three-month period ended March 31, 2011.
PharmaSwiss is an existing partner to several large pharmaceutical and biotech companies offering regional expertise in such functions as regulatory, compliance, sales, marketing and distribution, in addition to developing its own product portfolio. Through its business operations, PharmaSwiss offers a broad product portfolio in seven therapeutic areas and operations in 19 countries throughout Central and Eastern Europe, including Serbia, Hungary, the Czech Republic and Poland, as well as in Greece and Israel.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The Company has not recognized any additional measurement period adjustments to the amounts previously reported in the 2011 Form 10-K. The amount of goodwill of $159.7 million has been allocated to the Company’s Emerging Markets segment.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for the three-month and six-month periods ended June 30, 2012 and 2011, as if the OraPharma, University Medical, Atlantis, Gerot Lannach and Probiotica acquisitions had occurred as of January 1, 2011 and the PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa acquisitions had occurred as of January 1, 2010. The unaudited pro forma information does not include the license agreement entered into in June 2011 to acquire the rights to Elidel® and Xerese®, as the impact is immaterial to these pro forma results and it was impracticable to obtain the necessary historical information as discrete financial statements for these product lines were not prepared. In addition, the unaudited pro forma information does not include the Dermik acquisition, as it was impracticable to obtain the necessary historical information as discrete financial statements were not prepared.

17

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


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
848,289

 
$
788,797

 
$
1,750,458

 
$
1,579,579

Net (loss) income
(5,408
)
 
51,475

 
(9,407
)
 
49,622

Basic (loss) earnings per share
$
(0.02
)
 
$
0.17

 
$
(0.03
)
 
$
0.16

Diluted (loss) earnings per share
$
(0.02
)
 
$
0.16

 
$
(0.03
)
 
$
0.15

The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company, OraPharma, University Medical, Atlantis, Gerot Lannach, Probiotica, PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa. Except to the extent realized in the three-month and six-month periods ended June 30, 2012, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the three-month and six-month periods ended June 30, 2012, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with OraPharma, University Medical, Atlantis, Gerot Lannach, Probiotica, PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa.
The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the OraPharma, University Medical, Atlantis, Gerot Lannach and Probiotica acquisitions and the PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa acquisitions been completed on January 1, 2011 and January 1, 2010, respectively. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily adjustments consistent with the unaudited pro forma information related to the following unaudited pro forma adjustments related to these acquisitions:
elimination of OraPharma’s, University Medical’s, Atlantis’, Gerot Lannach’s, Probiotica’s, PharmaSwiss’, Sanitas’, Ortho Dermatologics’, iNova’s and Afexa’s historical intangible asset amortization expense;
additional amortization expense related to the provisional fair value of identifiable intangible assets acquired;
additional depreciation expense related to fair value adjustment to property, plant and equipment acquired;
additional interest expense associated with the financing obtained by the Company in connection with the various acquisitions;
the exclusion from pro forma earnings in the six-month period ended June 30, 2012 of the acquisition accounting adjustments on iNova’s, Ortho Dermatologics’, Afexa’s, Probiotica’s, OraPharma’s, University Medical’s and Atlantis’ inventories that were sold subsequent to the acquisition date of $28.2 million, in the aggregate, and the exclusion of $15.8 million of acquisition-related costs, in the aggregate, incurred for the acquisitions of OraPharma, University Medical, Atlantis, Gerot Lannach, Probiotica, PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa in the six-month period ended June 30, 2012, and the inclusion of those amounts in pro forma earnings for the applicable comparative periods; and
the exclusion from pro forma earnings in the three-month period ended June 30, 2012 of the acquisition accounting adjustments on iNova’s, Ortho Dermatologics’, Afexa’s, Probiotica’s, OraPharma’s, University Medical’s and Atlantis’ inventories that were sold subsequent to the acquisition date of $11.3 million, and the exclusion of $13.2 million of acquisition-related costs, in the aggregate, incurred for the acquisitions of OraPharma, University Medical, Atlantis, Gerot Lannach, Probiotica, PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa in the three-month period ended June 30, 2012, and the inclusion of those amounts in pro forma earnings for the applicable comparative periods.
The pro forma earnings also exclude amortization of inventory step-up that arose from the Merger that was recognized in the three-month and six-month periods ended June 30, 2011. Such amounts were included in the applicable

18

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


comparative period for purposes of pro forma financial information.
In addition, all of the above adjustments were adjusted for the applicable tax impact.
4.
ACQUISITIONS AND DISPOSITIONS
Divestitures of IDP-111 and 5-FU
In connection with the acquisition of Dermik, the Company was required by the FTC to divest 1% clindamycin and 5% benzoyl peroxide gel (“IDP-111”), a generic version of BenzaClin®, and 5% fluorouracil cream (“5-FU”), an authorized generic of Efudex®.
On February 3, 2012, the Company sold the IDP-111 and 5-FU products. In the fourth quarter of 2011, the Company recognized $7.9 million and $19.8 million of impairment charges related to the write-down of the carrying values of the IDP-111 and 5-FU intangible assets, respectively, to their estimated fair values, less costs to sell. The adjusted carrying values of $54.4 million and $14.8 million for IDP-111 and 5-FU, respectively, were classified as Assets held for sale on the consolidated balance sheet as of December 31, 2011 and were included within the U.S. Dermatology reporting segment. IDP-111 and 5-FU were considered non-core products with respect to the Company’s business strategy, which contemplates, on an ongoing basis, the selective purchase and sale of products and assets with a focus on core geographies and therapeutic classes. The Company, therefore, considers the sale or the out-license of non-core products to be part of its ongoing major and central operations. Accordingly, proceeds on the sale of non-core products are recognized as alliance revenue, with the associated costs, including the carrying amount of related assets, recorded as cost of alliance revenue. In connection with the sale of the IDP-111 and 5-FU, the Company recognized $66.3 million of cash proceeds as alliance revenue in the first quarter of 2012 and expensed the carrying amounts of the IDP-111 and 5-FU assets of $69.2 million, in the aggregate, as cost of alliance revenue. The cash proceeds from this transaction are classified within investing activities in the consolidated statements of cash flows.
Cloderm® 
On March 31, 2011, the Company out-licensed the product rights to Cloderm® Cream, 0.1%, in the U.S. to Promius Pharma LLC, an affiliate of Dr. Reddy’s Laboratories, in exchange for a $36.0 million up-front payment, which was received in early April 2011, and future royalty payments. The Cloderm® product rights intangible asset was recorded at a fair value of $31.8 million as of the Merger Date, and had a remaining unamortized carrying value of $30.7 million at March 31, 2011. Cloderm® was considered a non-core product with respect to the Company’s business strategy. Accordingly, the Company recognized the up-front payment as alliance revenue in the first quarter of 2011 and expensed the carrying amount of the Cloderm® intangible assets as cost of alliance revenue. The cash proceeds from this transaction are classified within investing activities in the consolidated statements of cash flows. The Company recognizes the royalty payments as alliance revenue as they are earned.
Zovirax® 
On February 22, 2011 and March 25, 2011, the Company acquired the U.S. and Canadian rights, respectively, to non-ophthalmic topical formulations of Zovirax® from GlaxoSmithKline (“GSK”). Pursuant to the terms of the asset purchase agreements, the Company paid GSK an aggregate amount of $300.0 million in cash for both the U.S. and Canadian rights. The Company had been marketing Zovirax® in the U.S. since January 1, 2002, under a 20-year exclusive distribution agreement with GSK, which distribution agreement terminated following the closing of the U.S. transaction. The Company has entered into new supply agreements and new trademark license agreements with GSK with respect to the U.S. and Canadian territories.
This acquisition was accounted for as a purchase of identifiable intangible assets. Accordingly, the purchase price (including costs of acquisition) was allocated to the product brand intangible asset, with an estimated weighted-average useful life of 11 years. In addition, the Company reclassified the $91.4 million unamortized carrying amount of the original exclusive distribution agreement from product rights to the product brand intangible asset, to be amortized over the same 11-year estimated useful life.
5.
COLLABORATION AGREEMENT

19



In October 2008, Valeant closed the worldwide License and Collaboration Agreement (the “Collaboration Agreement”) with GSK to develop and commercialize a first-in-class neuronal potassium channel opener for treatment of adult epilepsy patients with refractory partial onset seizures and its backup compounds, with a generic name of ezogabine in the U.S. and retigabine in all other countries. Pursuant to the terms of the Collaboration Agreement, Valeant granted co-development rights and worldwide commercialization rights to GSK.
In March 2011, the European Commission granted marketing authorization for Trobalt™ (retigabine) as an adjunctive treatment of partial onset seizures, with or without secondary generalization in adults aged 18 years and above with epilepsy. In June 2011, the the U.S. Food and Drug Administration (“FDA”) approved the New Drug Application for Potiga™ (ezogabine) tablets as adjunctive treatment of partial-onset seizures in patients aged 18 years and older; however, the FDA recommended that ezogabine be scheduled as a controlled substance under the Controlled Substances Act prior to the marketing or launch of Potiga™. In December 2011, ezogabine/retigabine received scheduling as a controlled substance, which triggered the commencement of amortization.
In connection with the first sale of Potiga™ in the U.S. (which occurred in April 2012), GSK paid the Company a $45.0 million milestone payment, and the Company will share up to 50% of the net profits from the sale of Potiga™. In addition, in connection with the first sale of Trobalt™ by GSK in the European Union (which occurred in May 2011), GSK paid the Company a $40.0 million milestone payment and will pay up to a 20% royalty on net sales of the product. As substantive uncertainty existed at the inception of the Collaboration Agreement as to whether the milestones would be achieved because of the uncertainty involved with obtaining regulatory approval, no amounts were previously recognized for these potential milestone payments. The milestone payments (1) relate solely to past performance of the Company, (2) are reasonable relative to the other deliverables and payment terms within the Collaboration Agreement, and (3) are commensurate with the Company’s efforts in collaboration with GSK to achieve the milestone events and the increase in value of ezogabine/retigabine. Accordingly, the milestones are considered substantive, and the milestone payments are being recognized by the Company as alliance and royalty revenue upon achievement. In the three-month periods ended June 30, 2012 and 2011, the Company recorded $45.0 million and $40.0 million of milestone payments from GSK in connection with the launches of Potiga™ and Trobalt™, respectively.
6.
RESTRUCTURING, INTEGRATION AND OTHER COSTS
The Company has completed measures to integrate the operations of Biovail and Valeant, capture operating synergies and generate cost savings across the Company. In connection with these cost-rationalization and integration initiatives, the Company has incurred costs including: employee termination costs (including related share-based payments) payable to approximately 500 employees of Biovail and Valeant who were terminated as a result of the Merger; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with the Company’s research and development model; costs to consolidate or close facilities and relocate employees, asset impairments charges to write down property, plant and equipment to fair value; and contract termination and lease cancellation costs.
The following table summarizes the major components of costs incurred in connection with these initiatives through June 30, 2012:

20

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


 
Employee Termination Costs
 
IPR&D
Termination
Costs
 
Contract
Termination,
Facility Closure
and Other Costs
 
 
 
Severance and
Related Benefits
 
Share-Based
Compensation
 
 
 
Total
Balance, January 1, 2010
$

 
$

 
$

 
$

 
$

Costs incurred and charged to expense
58,727

 
49,482

 
13,750

 
12,862

 
134,821

Cash payments
(33,938
)
 

 
(13,750
)
 
(8,755
)
 
(56,443
)
Non-cash adjustments

 
(49,482
)
 

 
(2,437
)
 
(51,919
)
Balance, December 31, 2010
24,789

 

 

 
1,670

 
26,459

Costs incurred and charged to expense
14,548

 
3,455

 

 
28,938

 
46,941

Cash payments
(38,168
)
 
(2,033
)
 

 
(15,381
)
 
(55,582
)
Non-cash adjustments
989

 
(741
)
 

 
(4,913
)
 
(4,665
)
Balance, December 31, 2011
2,158

 
681

 

 
10,314

 
13,153

Costs incurred and charged to expense
1,586

 

 

 
12,334

 
13,920

Cash payments
(3,288
)
 

 

 
(22,572
)
 
(25,860
)
Non-cash adjustments
442

 
(681
)
 

 
378

 
139

Balance, March 31, 2012
898

 

 

 
454

 
1,352

Costs incurred and charged to expense

 

 

 

 

Cash payments
(409
)
 

 

 
(14
)
 
(423
)
Non-cash adjustments
(6
)
 

 

 
(193
)
 
(199
)
Balance, June 30, 2012
$
483

 
$

 
$

 
$
247

 
$
730

Facility closure costs incurred in the six-month period ended June 30, 2012 primarily included an incremental $10.2 million charge for the remaining operating lease obligations related to our vacated Mississauga, Ontario corporate office facility.
In addition to costs associated with the Company’s Merger-related initiatives, in the six-month period ended June 30, 2012, the Company incurred an additional $78.4 million of other restructuring, integration-related and other costs, including $30.4 million of severance costs, and made payments of $77.4 million. These costs were primarily related to the acquisitions of Dermik, Ortho Dermatologics, Afexa, iNova, Sanitas and PharmaSwiss, the global consolidation of the Company’s manufacturing facilities, and systems integration initiatives.
7.
FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components of the Company’s financial assets and liabilities measured at fair value as of June 30, 2012 and December 31, 2011:

21

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


 
As of June 30, 2012
 
As of December 31, 2011
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
204,097

 
$
204,097

 
$

 
$

 
$
27,711

 
$
27,711

 
$

 
$

Available-for-sale equity securities

 

 

 

 
3,364

 
3,364

 

 

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds

 

 

 

 
2,974

 
2,974

 

 

Total financial assets
$
204,097

 
$
204,097

 
$

 
$

 
$
34,049

 
$
34,049

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
204,097

 
$
204,097

 
$

 
$

 
$
27,711

 
$
27,711

 
$

 
$

Marketable securities

 

 

 

 
6,338

 
6,338

 

 

Total financial assets
$
204,097

 
$
204,097

 
$

 
$

 
$
34,049

 
$
34,049

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Acquisition-related contingent consideration
$
(500,386
)
 
$

 
$

 
$
(500,386
)
 
$
(420,084
)
 
$

 
$

 
$
(420,084
)
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
There were no transfers between Level 1 and Level 2 during the six-month period ended June 30, 2012.
Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined using unobservable (Level 3) inputs. These inputs include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the six-month period ended June 30, 2012:
 
Balance,
January 1,
2012
 
Issuances(a)
 
Payments(b)
 
Net
unrealized
Loss (c)
 
Foreign
Exchange(d)
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2012
Acquisition-related contingent consideration
$
(420,084
)
 
$
(126,028
)
 
$
61,916

 
$
(17,568
)
 
$
1,378

 
$

 
$

 
$
(500,386
)
________________________
(a)
Relates primarily to the OraPharma, Gerot Lannach, Atlantis and University Medical acquisitions as described above in note 3.

22

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


(b)
Relates primarily to payments of acquisition-related contingent consideration related to the Elidel®/Xerese® license agreement entered into in June 2011 and the PharmaSwiss acquisition.
(c)
Recognized as Acquisition-related contingent consideration in the consolidated statements of (loss) income. The balance is primarily driven by fair value adjustments of $13.5 million related to the Elidel®/Xerese® license agreement and $4.0 million related to the iNova acquisition described above in note 3.
(d)
Included in Foreign exchange and other in the consolidated statements of (loss) income.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
There were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis subsequent to initial recognition in the six-month period ended June 30, 2012.
8.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the estimated fair values of the Company’s financial instruments as of June 30, 2012 and December 31, 2011:
 
As of June 30, 2012
 
As of December 31, 2011
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash equivalents
$
204,097

 
$
204,097

 
$
27,711

 
$
27,711

Marketable securities

 

 
6,338

 
6,338

Long-term debt (as described in note 11)(a)
(7,551,175
)
 
(7,772,258
)
 
(6,651,011
)
 
(6,732,568
)
__________________________
(a)
Fair value measurement of long-term debt was estimated using the quoted market prices for the same issues and other pertinent information available to management (Level 1).
The following table summarizes the Company’s marketable securities by major security type as of June 30, 2012 and December 31, 2011:
 
As of June 30, 2012
 
As of December 31, 2011
 
Cost
Basis
 
Fair
Value
 
Gross Unrealized
 
Cost
Basis
 
Fair
Value
 
Gross Unrealized
 
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
Corporate bonds
$

 
$

 
$

 
$

 
$
2,983

 
$
2,974

 
$

 
$
(9
)
Equity securities

 

 

 

 
1,730

 
3,364

 
1,634

 

 
$

 
$

 
$

 
$

 
$
4,713

 
$
6,338

 
$
1,634

 
$
(9
)
Gross gains and losses realized on the sale of marketable debt securities were not material in the three-month and six-month periods ended June 30, 2012 and 2011.
9.
INVENTORIES
The components of inventories as of June 30, 2012 and December 31, 2011 were as follows:

23

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


 
As of
June 30,
2012
 
As of
December 31,
2011
Raw materials
$
90,946

 
$
63,368

Work in process
46,624

 
64,108

Finished goods
297,051

 
250,555

 
434,621

 
378,031

Less allowance for obsolescence
(45,892
)