NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
Medicis Pharmaceutical Corporation (Medicis or the Company) is a leading specialty pharmaceutical company focusing primarily on helping patients attain a healthy and youthful
appearance and self-image through the development and marketing in the United States (U.S.) and Canada of products for the treatment of dermatological and aesthetic conditions.
The Company offers a broad range of products addressing various conditions or aesthetic improvements
including facial wrinkles, glabellar lines, acne, fungal infections, hyperpigmentation, photoaging, psoriasis, actinic keratosis, bronchospasms, external genital and perianal warts/condyloma acuminate, seborrheic dermatitis and cosmesis (improvement
in the texture and appearance of skin). Medicis currently offers 28 branded products. Its primary brands are
DYSPORT
®
, PERLANE
®
, RESTYLANE
®
, SOLODYN
®
, VANOS
®
, ZIANA
®
and ZYCLARA
®
.
On September 2, 2012, the Company entered into an Agreement and Plan of Merger with Valeant Pharmaceuticals International (Valeant), whereby the Company will become a wholly owned
subsidiary of Valeant upon the closing of the transaction. See Note 2 for further discussion.
The condensed
consolidated financial statements include the accounts of Medicis and its wholly owned subsidiaries. The Company does not have any subsidiaries in which it does not own 100% of the outstanding stock. All of the Companys subsidiaries are
included in the condensed consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements of Medicis have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), consistent in all
material respects with those applied in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. The financial information is unaudited, but reflects all adjustments, consisting only of normal recurring adjustments
and accruals, which are, in the opinion of the Companys management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. Certain information
and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. Therefore, the information included in this Form 10-Q should be read in conjunction with the Companys Annual Report on Form 10-K for
the year ended December 31, 2011.
2.
|
AGREEMENT AND PLAN OF MERGER WITH VALEANT
|
On September 2, 2012, the Company, Valeant, Valeant Pharmaceuticals International, Inc., and Merlin Merger Sub,
Inc., a wholly-owned subsidiary of Valeant (Merger Sub), entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the terms of the Merger Agreement, upon consummation of the Merger (as defined below)
each share of the Companys Class A common stock, par value $0.014 per share (the Shares), issued and outstanding immediately prior to the Merger will convert into a right to receive $44.00 per Share (the Per Share Merger
Consideration), without interest, and Merger Sub will merge with and into the Company (the Merger) with the Company continuing as the surviving corporation and a wholly owned subsidiary of Valeant.
Upon consummation of the Merger, each option to acquire Shares (whether vested or unvested) that is outstanding
immediately prior to the Merger will be cancelled in exchange for the right to receive the Per Share Merger Consideration less the exercise price per Share of each respective award. Each stock appreciation right relating to Shares (whether vested or
unvested) that is outstanding immediately prior to the Merger will be canceled in exchange for the right to receive the Per Share Merger Consideration less the exercise price per share of the stock appreciation right. Each Share that is subject to
vesting restrictions will also convert into a right to receive the Per Share Merger Consideration.
Also upon
consummation of the Merger, the principal amount of the Companys 1.375% Convertible Senior Notes Due 2017 will become immediately due and payable. The long-term debt has not been reclassified to current liabilities as of September 30,
2012, however, as the acceleration of payment is contingent upon the consummation of the Merger.
6
The completion of the Merger is subject to customary conditions, including
the approval of the Companys stockholders, the absence of any material adverse effect on the Companys business and receiving antitrust approvals (including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended).
The Merger Agreement contains customary representations, warranties and covenants by the Company and Valeant.
The Company has agreed, among other things, not to solicit alternative transactions. The Company has also agreed, subject to certain exceptions, not to enter into discussions concerning, or provide confidential information in connection with, any
alternative transaction. In addition, each of the parties has agreed to use their reasonable best efforts to cause the Merger to be consummated. Subject to certain exceptions, the Merger Agreement also requires the Company to call and hold a
stockholders meeting and for the Companys board of directors (the Board) to recommend that the Companys stockholders adopt the Merger Agreement.
The Merger Agreement may be terminated under certain circumstances, including by Valeant if the Board (i) makes a
change to its recommendation in support of the Merger, (ii) fails to reaffirm its recommendation in support of the Merger within specified periods of time, or (iii) fails to recommend against a competing tender offer or exchange offer for
outstanding Shares within certain periods of time. The Company may terminate the Merger Agreement prior to its adoption by the Companys stockholders in the event that the Company receives an unsolicited proposal that the Board concludes, after
following certain procedures, is a Superior Proposal (as defined in the Merger Agreement). In each of these cases, the Company may be required to pay Valeant a fee of $85 million and reimburse Valeant for up to $7.5 million in expenses (the
Termination Fee). In addition, if either party terminates the Merger Agreement (i) under certain circumstances specified in the Merger Agreement and the Company has received an Acquisition Proposal (as defined in the Merger
Agreement) or an Acquisition Proposal has been publicly announced and has not been publicly withdrawn prior to a specified time and (ii) the Company enters into an agreement to consummate, or actually consummates, certain alternative
transactions within twelve (12) months after such termination, the Company also may be required to pay Valeant the Termination Fee.
The Merger Agreement has been approved by the boards of directors of both Valeant and the Company. The Board has also determined that the Merger is fair to, and in the best interests of, the Company and
its stockholders, approved and declared advisable the Merger Agreement and the Merger and the other transactions contemplated by the Merger Agreement and recommended that stockholders of the Company adopt the Merger Agreement.
On October 17, 2012, the Company announced that its stockholders of record at the close of business on
October 29, 2012, will be entitled to notice of, and vote at a special meeting of stockholders upon, among other things, the proposal to adopt the Merger Agreement. The meeting will be held on December 7, 2012.
3.
|
DISCONTINUED OPERATIONS
|
On February 25, 2011, the Company announced that as a result of the Companys strategic planning process and the existing regulatory and commercial capital equipment environment, the Company
would explore strategic alternatives for its LipoSonix business including, but not limited to, the sale of the stand-alone business. As a result of this decision, the Company classified the LipoSonix business as a discontinued operation for
consolidated financial statement reporting purposes. On November 1, 2011, the Company sold LipoSonix to Solta Medical, Inc.
7
The following is a summary of loss from discontinued operations, net of
income tax benefit, for the three and nine months ended September 30, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2011
|
|
|
September 30,
2011
|
|
Net revenues
|
|
$
|
157
|
|
|
$
|
513
|
|
Cost of revenues
|
|
|
87
|
|
|
|
2,543
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70
|
|
|
|
(2,030)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,478
|
|
|
|
15,072
|
|
Research and development
|
|
|
1,788
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income tax benefit
|
|
|
(5,196)
|
|
|
|
(25,538)
|
|
Income tax benefit
|
|
|
(1,698)
|
|
|
|
(8,987)
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax benefit
|
|
$
|
(3,498)
|
|
|
$
|
(16,551)
|
|
|
|
|
|
|
|
|
|
|
The Company included only revenues and costs directly attributable to the discontinued
operations, and not those attributable to the ongoing entity. Accordingly, no interest expense or general corporate overhead costs were allocated to the LipoSonix discontinued operations. Included in cost of revenues for the nine months ended
September 30, 2011 was a $1.9 million charge related to an increase in the valuation reserve for LipoSonix inventory that was not expected to be sold.
The following is a summary of net cash used in operating activities from discontinued operations for the nine months ended September 30, 2011 (in thousands):
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2011
|
|
|
|
Loss from discontinued operations, net of income tax benefit
|
|
$
|
(16,551)
|
|
Share-based compensation expense
|
|
|
(129)
|
|
Decrease in assets held for sale from discontinued operations
|
|
|
5,024
|
|
Decrease in liabilities held for sale from discontinued operations
|
|
|
(631)
|
|
|
|
|
|
|
Net cash used in operating activities from discontinued operations
|
|
$
|
(12,287)
|
|
|
|
|
|
|
During the three months ended September 30, 2012, the Company reduced its estimate for the
amount of expected future returns of SOLODYN
®
, based on recent historical experience and the reduced amount of
units that flow through the traditional wholesale and retail chain drugstore channel that has resulted from the Companys alternate fulfillment initiatives. As a result, the Company decreased the reserve for sales returns for SOLODYN
®
by $11.5 million, and correspondingly increased managed care and Medicaid reserves for SOLODYN
®
by $3.4 million and increased the reserve for consumer rebates for SOLODYN
®
by $1.3 million. The net $6.8 million reduction in these reserves increased net income for the three and nine months
ended September 30, 2012 by $4.4 million, or $0.07 per common share.
8
5.
|
SHARE-BASED COMPENSATION
|
At September 30, 2012, the Company had seven active share-based employee compensation plans. Of these seven share-based compensation plans, only the 2006 Incentive Award Plan is eligible for the
granting of future awards.
Upon consummation of the pending Merger with Valeant (see Note 2), each stock
option award (whether vested or unvested) that is outstanding immediately prior to the Merger will be cancelled in exchange for the right to receive the Per Share Merger Consideration less the exercise price per Share of each respective award. Each
stock appreciation right (whether vested or unvested) that is outstanding immediately prior to the Merger will be canceled in exchange for the right to receive the Per Share Merger Consideration less the exercise price per share of the stock
appreciation right. Each unvested restricted stock award will also convert into a right to receive the Per Share Merger Consideration. Unrecognized compensation costs and related weighted average periods over which they are expected to be recognized
for share-based compensation awards described below do not contemplate the impact of the pending Merger on the awards.
Stock Option Awards
Stock option awards are granted at the fair market value on the date of grant. The option awards vest
over a period determined at the time the options are granted, ranging from one to five years, and generally have a maximum term of ten years. Certain options provide for accelerated vesting if there is a change in control of the Company (as defined
in the plans). When options are exercised, new shares of the Companys Class A common stock are issued.
The total value of the stock option awards is expensed ratably over the service period of the employees receiving the awards. As of September 30, 2012, total unrecognized compensation cost related to
stock option awards, to be recognized as expense subsequent to September 30, 2012, was approximately $1.3 million and the related weighted average period over which it is expected to be recognized is approximately 2.4 years.
A summary of stock option activity within the Companys stock-based compensation plans and changes for the nine
months ended September 30, 2012, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2011
|
|
|
4,101,505
|
|
|
$
|
31.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
88,818
|
|
|
$
|
36.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(798,841)
|
|
|
$
|
23.69
|
|
|
|
|
|
|
|
|
|
Terminated/expired
|
|
|
(70,526)
|
|
|
$
|
37.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
|
3,320,956
|
|
|
$
|
33.15
|
|
|
|
2.2
|
|
|
$
|
33,594,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the nine months ended September 30,
2012 was approximately $10.6 million. Options exercisable under the Companys share-based compensation plans at September 30, 2012 were 3,154,275 with a weighted average exercise price of $33.34, a weighted average remaining contractual
term of 1.9 years, and an aggregate intrinsic value of approximately $31.3 million.
9
A summary of outstanding and exercisable stock options that are fully vested
and are expected to vest, based on historical forfeiture rates, as of September 30, 2012, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, net of expected forfeitures
|
|
|
3,162,353
|
|
|
$
|
33.22
|
|
|
|
2.1
|
|
|
$
|
31,777,261
|
|
Exercisable, net of expected forfeitures
|
|
|
3,036,138
|
|
|
$
|
33.30
|
|
|
|
1.9
|
|
|
$
|
30,279,871
|
|
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Expected dividend yield
|
|
1.06% to 1.14%
|
|
0.77% to 0.88%
|
Expected stock price volatility
|
|
31% to 32%
|
|
33%
|
Risk-free interest rate
|
|
1.13% to 1.19%
|
|
2.47% to 2.81%
|
Expected life of options in years
|
|
6.0 to 7.0
|
|
7.0
|
The expected dividend yield is based on expected annual dividends to be paid by the
Company as a percentage of the market value of the Companys stock as of the date of grant. The Company determined that a blend of implied volatility and historical volatility is more reflective of market conditions and a better indicator of
expected volatility than using purely historical volatility. The risk-free interest rate is based on the U.S. treasury security rate in effect as of the date of grant whose term is consistent with the expected life of the related grant. The expected
lives of the options are based on the Companys historical exercise data.
The weighted average fair
value of stock options granted during the nine months ended September 30, 2012 and 2011, was $10.77 and $12.25, respectively.
Restricted Stock Awards
The Company also grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Companys Class A common stock on the date of grant,
and the total value of the award is expensed ratably over the service period of the employees receiving the grants. As of September 30, 2012, the total amount of unrecognized compensation cost related to nonvested restricted stock awards, to be
recognized as expense subsequent to September 30, 2012, was approximately $43.3 million, and the related weighted average period over which it is expected to be recognized is approximately 3.4 years.
10
A summary of restricted stock activity within the Companys share-based
compensation plans and changes for the nine months ended September 30, 2012, is as follows:
|
|
|
|
|
|
|
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at December 31, 2011
|
|
|
1,919,462
|
|
|
$
|
22.61
|
|
|
|
|
Granted
|
|
|
715,593
|
|
|
$
|
35.02
|
|
Vested
|
|
|
(590,678)
|
|
|
$
|
20.49
|
|
Forfeited
|
|
|
(57,659)
|
|
|
$
|
31.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2012
|
|
|
1,986,718
|
|
|
$
|
27.44
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during the nine months ended
September 30, 2012 and 2011 was approximately $12.1 million and $9.3 million, respectively.
Stock Appreciation Rights
During 2009, the Company began granting cash-settled stock appreciation rights (SARs) to many of its
employees. SARs generally vest over a graduated five-year period and expire seven years from the date of grant, unless such expiration occurs sooner due to the employees termination of employment, as provided in the applicable SAR award
agreement. SARs allow the holder to receive cash (less applicable tax withholding) upon the holders exercise, equal to the excess, if any, of the market price of the Companys Class A common stock on the exercise date over the
exercise price, multiplied by the number of shares relating to the SAR with respect to which the SAR is exercised. The exercise price of the SAR is the fair market value of a share of the Companys Class A common stock relating to the
SAR on the date of grant. The total value of the SAR is expensed over the service period of the employee receiving the grant, and a liability is recognized in the Companys condensed consolidated balance sheets until settled. The fair value of
SARs is required to be remeasured at the end of each reporting period until the award is settled, and changes in fair value must be recognized as compensation expense to the extent of vesting during each reporting period based on the new fair value.
As of September 30, 2012, the total measured amount of unrecognized compensation cost related to outstanding SARs, to be recognized as expense subsequent to September 30, 2012, based on the remeasurement at September 30, 2012, was
approximately $22.8 million, and the related weighted average period over which it is expected to be recognized is approximately 2.0 years.
The fair value of each SAR was estimated on the date of the grant, and was remeasured at quarter-end, using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
Remeasurement
as of
September 30, 2012
|
|
SARs Granted During the
Nine Months
Ended
September 30, 2011
|
Expected dividend yield
|
|
0.92%
|
|
0.87%
|
Expected stock price volatility
|
|
29%
|
|
32%
|
Risk-free interest rate
|
|
0.23% to 0.62%
|
|
3.12%
|
Expected life of SARs in years
|
|
2.4 to 4.4
|
|
7.0
|
The expected dividend yield is based on expected annual dividends to be paid by the
Company as a percentage of the market value of the Companys stock as of the date of grant. The Company determined that a blend of implied volatility and historical volatility is more reflective of market conditions and a better indicator of
expected volatility than using purely historical volatility. The risk-free interest rate is based on the U.S. treasury security rate in effect as of the date of grant whose term is consistent with the expected life of the related grant. The expected
lives of the SARs are based on the Companys historical exercise data.
11
No SARs were granted during the nine months ended September 30, 2012.
The weighted average fair value of SARs granted during the nine months ended September 30, 2011, as of the grant date, was $9.90. The weighted average fair value of all SARs outstanding as of the remeasurement date of September 30, 2012
was $25.00.
A summary of SARs activity for the nine months ended September 30, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
SARs
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2011
|
|
|
2,323,060
|
|
|
$
|
17.52
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(316,067)
|
|
|
$
|
14.64
|
|
|
|
|
|
|
|
|
|
Terminated/expired
|
|
|
(138,303)
|
|
|
$
|
18.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
|
1,868,690
|
|
|
$
|
17.92
|
|
|
|
4.0
|
|
|
$
|
47,364,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of SARs exercised during the nine months ended September 30,
2012 was approximately $6.7 million.
As of September 30, 2012, 162,074 SARs were exercisable, with a
weighted average exercise price of $17.42, a weighted average remaining contractual term of 4.0 years, and an aggregate intrinsic value of approximately $4.2 million.
Total share-based compensation expense related to continuing operations recognized during the three and nine months ended
September 30, 2012 and 2011 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
Stock options
|
|
$
|
208
|
|
|
$
|
187
|
|
|
$
|
612
|
|
|
$
|
670
|
|
Restricted stock awards
|
|
|
3,791
|
|
|
|
2,794
|
|
|
|
10,774
|
|
|
|
8,593
|
|
Stock appreciation rights
|
|
|
9,558
|
|
|
|
1,457
|
|
|
|
14,362
|
|
|
|
11,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
13,557
|
|
|
$
|
4,438
|
|
|
$
|
25,748
|
|
|
$
|
20,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
|
On June 24, 2011, the Companys Compensation Committee adopted the Medicis Pharmaceutical
Corporation Supplemental Executive Retirement Plan, as amended on October 3, 2011 (the SERP), a non-qualified, noncontributory, defined benefit pension plan that provides supplemental retirement income for a select group of
officers, including the Companys named executive officers. The SERP became effective as of June 1, 2011. Retirement benefits are calculated based on a percentage of a SERP participants average earnings, beginning with the 2009
calendar year. The SERP retirement benefit is intended to be paid to participants who reach the normal retirement date, which is age 65, or age
59
1
/
2
with twenty years of service, subject to certain exceptions.
A SERP participant vests in 1/6th of his or her retirement benefit per plan year, (which runs from June 1 to May 31), effective as of the first day of the plan year, and becomes fully vested in
his or her accrued retirement benefit upon (1) the participants normal retirement date, provided that the participant has at least fifteen years of service with the Company and is employed by the Company on such date, (2) the
participants separation from
12
service due to a discharge without cause or resignation for good reason (as such terms are defined in the participants employment agreement, or in the absence of
such employment agreement or definitions, in the Companys Executive Retention Plan), or (3) a change in control of the Company. The completion of the pending merger with Valeant (see Note 2) will constitute a change in control
of the Company under the SERP, upon which each participants accrued retirement benefit will become fully vested and distributable on the 30th day following the merger.
Participants in the SERP received credit for prior service with the Company. The prior service accrued benefit of
approximately $33.8 million was recorded during the three months ended June 30, 2011 as other comprehensive income within stockholders equity, and is amortized as compensation expense over the remaining service years of each participant.
The Company also established a deferred tax asset of approximately $12.0 million, the benefit of which was also recorded in other comprehensive income. During the three months ended March 31, 2012, an additional participant was added to the
plan, and a prior service accrued benefit of approximately $0.8 million was recorded as other comprehensive income within stockholders equity, and is being amortized over the remaining service years of the participant. Total amortization of
prior service costs recognized as compensation expense during the three and nine months ended September 30, 2012, was approximately $1.2 million and $3.6 million, respectively. Amortization of prior service costs recognized as compensation
expense during the three and nine months ended September 30, 2011, was approximately $1.2 million and $1.6 million, respectively.
Compensation expense recognized during the three and nine months ended September 30, 2012 related to current service costs was approximately $0.3 million and $0.7 million, respectively. Compensation
expense recognized during the three and nine months ended September 30, 2011 was $0.3 million. Interest cost accrued related to prior and current service costs during the three and nine months ended September 30, 2012 was approximately
$0.4 million and $1.2 million, respectively. Interest cost accrued related to prior and current service costs during the three and nine months ended September 30, 2011 was approximately $0.4 million. The total present value of accrued benefits
for the SERP as of September 30, 2012 was approximately $37.8 million, which is included in other long-term liabilities in the Companys condensed consolidated balance sheets as of September 30, 2012.
The Company maintains a rabbi trust to fund the SERP benefit. During the three months ended September 30, 2011 and
three months ended June 30, 2012, the Company purchased life insurance policy investments of approximately $9.8 million and $12.1 million, respectively, to fund the SERP. The life insurance policies cover the SERP participants. The Company
intends to make similar annual purchases during each of the next three years. During the three months ended March 31, 2012 and September 30, 2012, the Company made additional life insurance policy investment purchases of approximately $0.4
million and $0.4 million, respectively, related to the new participant added to the SERP during the three months ended March 31, 2012. Net gains on the investments aggregating approximately $1.2 million were recognized during the three and nine
months ended September 30, 2012. The Companys expected return on the plan assets is 4%. The total investment related to the SERP of $24.0 million is included in other assets in the Companys condensed consolidated balance sheets as
of September 30, 2012, and is the cash surrender value of the life insurance policies, representing the fair value of the plan assets.
7.
|
SHORT-TERM AND LONG-TERM INVESTMENTS
|
The Companys policy for its short-term and long-term investments is to establish a high-quality portfolio that
preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to the Companys investment guidelines and market conditions. Short-term and long-term investments consist of
corporate and various government agency and municipal debt securities. The Companys investments in auction rate floating securities consist of investments in student loans. Management classifies the Companys short-term and long-term
investments as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses reported in stockholders equity. Realized gains and losses and declines in value judged to be other than temporary, if
any, are included in other expense in the condensed consolidated statement of operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary, results in impairment of the fair value
of the investment. Except for impairments related to the illiquidity of the Companys auction rate floating securities, other-than-temporary impairments are charged to earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related available-for-sale security. Dividends and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification method. At
September 30, 2012, the Company has recorded the estimated fair value of available-for-sale securities in short-term and long-term investments of approximately $629.8 million and $12.8 million, respectively.
13
Available-for-sale securities consist of the following at September 30,
2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Other-
Than-
Temporary
Impairment
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
$ 323,691
|
|
|
|
$ 2,674
|
|
|
|
$(8)
|
|
|
|
$ -
|
|
|
|
$ 326,357
|
|
Federal agency notes and bonds
|
|
|
254,072
|
|
|
|
324
|
|
|
|
(15)
|
|
|
|
-
|
|
|
|
254,381
|
|
Auction rate floating securities
|
|
|
17,350
|
|
|
|
-
|
|
|
|
(4,572)
|
|
|
|
-
|
|
|
|
12,778
|
|
Asset-backed securities
|
|
|
49,008
|
|
|
|
63
|
|
|
|
(1)
|
|
|
|
-
|
|
|
|
49,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
$ 644,121
|
|
|
|
$ 3,061
|
|
|
|
$ (4,596)
|
|
|
|
$ -
|
|
|
|
$ 642,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Other-
Than-
Temporary
Impairment
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
$ 138,554
|
|
|
|
$ 161
|
|
|
|
$ (549)
|
|
|
|
$ -
|
|
|
|
$ 138,166
|
|
Federal agency notes and bonds
|
|
|
125,092
|
|
|
|
221
|
|
|
|
(24)
|
|
|
|
-
|
|
|
|
125,289
|
|
Auction rate floating securities
|
|
|
17,400
|
|
|
|
-
|
|
|
|
(4,607)
|
|
|
|
-
|
|
|
|
12,793
|
|
Asset-backed securities
|
|
|
9,527
|
|
|
|
-
|
|
|
|
(8)
|
|
|
|
-
|
|
|
|
9,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
$ 290,573
|
|
|
|
$ 382
|
|
|
|
$ (5,188)
|
|
|
|
$ -
|
|
|
|
$ 285,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2012, gross realized gains on
sales of available-for-sale securities totaled approximately $0.1 million. During the three and nine months ended September 30, 2012, there were no significant gross realized losses on sales of available-for-sale securities. During the three
and nine months ended September 30, 2011, gross realized gains on sales of available-for-sale securities totaled approximately $0.1 million. During the three and nine months ended September 30, 2011, there were no significant gross
realized losses on sales of available-for-sale securities. Gross unrealized gains and losses are determined based on the specific identification method. The net adjustment to unrealized gains during the nine months ended September 30, 2012, on
available-for-sale securities included in stockholders equity totaled approximately $2.1 million. The amortized cost and estimated fair value of the available-for-sale securities at September 30, 2012, by maturity, are shown below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
309,421
|
|
|
$
|
311,520
|
|
Due after one year through five years
|
|
|
317,350
|
|
|
|
318,288
|
|
Due after 10 years
|
|
|
17,350
|
|
|
|
12,778
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
644,121
|
|
|
$
|
642,586
|
|
|
|
|
|
|
|
|
|
|
Expected maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities
14
as available for current operations. At September 30, 2012, approximately $12.8 million in estimated fair value expected to mature greater than one year has been classified as long-term
investments since these investments are in an unrealized loss position, and management has both the ability and intent to hold these investments until recovery of fair value, which may be maturity.
As of September 30, 2012, the Companys investments included auction rate floating securities with a fair value
of $12.8 million. The Companys auction rate floating securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions. The negative conditions in the credit markets from 2008
through the first nine months of 2012 have prevented some investors from liquidating their holdings, including their holdings of auction rate floating securities. During the three months ended March 31, 2008, the Company was informed that there
was insufficient demand at auction for the auction rate floating securities. As a result, these affected auction rate floating securities are now considered illiquid, and the Company could be required to hold them until they are redeemed by the
holder at maturity. The Company may not be able to liquidate the securities until a future auction on these investments is successful.
The following table shows the gross unrealized losses and the fair value of the Companys investments, with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
Greater Than 12 Months
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
$ 24,412
|
|
|
|
$ (8)
|
|
|
|
$ -
|
|
|
|
$-
|
|
Federal agency notes and bonds
|
|
|
28,965
|
|
|
|
(15)
|
|
|
|
-
|
|
|
|
-
|
|
Auction rate floating securities
|
|
|
-
|
|
|
|
-
|
|
|
|
12,778
|
|
|
|
(4,572)
|
|
Asset-backed securities
|
|
|
12,019
|
|
|
|
(1)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
$ 65,396
|
|
|
|
$ (24)
|
|
|
|
$ 12,778
|
|
|
|
$(4,572)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012, the Company has concluded that the unrealized losses on
its investment securities are temporary in nature and are caused by changes in credit spreads and liquidity issues in the marketplace. Available-for-sale securities are reviewed quarterly for possible other-than-temporary impairment. This
review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the expectation for that securitys performance and the creditworthiness of the issuer. Additionally, the Company does
not intend to sell and it is not more-likely-than-not that the Company will be required to sell any of the securities before the recovery of their amortized cost basis.
8.
|
FAIR VALUE MEASUREMENTS
|
As of September 30, 2012, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These included the Companys short-term and
long-term investments, including investments in auction rate floating securities, and the liability associated with the Counterparty Settlement Agreement (see Note 15).
The Company has invested in auction rate floating securities, which are classified as available-for-sale securities and
reflected at fair value. Due to events in credit markets, the auction events for some of these instruments held by the Company failed during the three months ended March 31, 2008 (See Note 7). Therefore, the fair values of these
auction rate floating securities, which are primarily rated AAA, are estimated utilizing a discounted cash flow analysis as of September 30, 2012. These analyses consider, among other items, the collateralization underlying the security
investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. These investments were also compared, when possible, to
other observable market data with similar characteristics to the securities held by the Company. Changes to these assumptions in future periods could result in additional declines in fair value of the auction rate floating securities.
15
The Companys assets and liabilities measured at fair value on a
recurring basis subject to the disclosure requirements of ASC 820,
Fair Value Measurements and Disclosures
, at September 30, 2012 and December 31, 2011, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2012
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
$
|
326,357
|
|
|
$
|
4,155
|
|
|
$
|
322,202
|
|
|
$
|
-
|
|
Federal agency notes and bonds
|
|
|
254,381
|
|
|
|
-
|
|
|
|
254,381
|
|
|
|
-
|
|
Auction rate floating securities
|
|
|
12,778
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,778
|
|
Asset-backed securities
|
|
|
49,070
|
|
|
|
-
|
|
|
|
49,070
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
642,586
|
|
|
$
|
4,155
|
|
|
$
|
625,653
|
|
|
$
|
12,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty Settlement Agreement liability
|
|
$
|
24,925
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
24,925
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2011
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
$
|
138,166
|
|
|
$
|
-
|
|
|
$
|
138,166
|
|
|
$
|
-
|
|
Federal agency notes and bonds
|
|
|
125,289
|
|
|
|
-
|
|
|
|
125,289
|
|
|
|
-
|
|
Auction rate floating securities
|
|
|
12,793
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,793
|
|
Asset-backed securities
|
|
|
9,519
|
|
|
|
-
|
|
|
|
9,519
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
285,767
|
|
|
$
|
-
|
|
|
$
|
272,974
|
|
|
$
|
12,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following tables present the Companys assets and liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Auction Rate
Floating
Securities
|
|
|
Counterparty
Settlement
Agreement
Liability
|
|
|
|
|
|
Balance at June 30, 2012
|
|
$
|
12,766
|
|
|
$
|
-
|
|
|
Transfers to (from) Level 3
|
|
|
-
|
|
|
|
17,182
|
|
|
Total losses (gains) included in other expense (income), net
|
|
|
-
|
|
|
|
7,743
|
|
|
Total gains included in other comprehensive income
|
|
|
12
|
|
|
|
-
|
|
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
12,778
|
|
|
$
|
24,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Auction Rate
Floating
Securities
|
|
|
Counterparty
Settlement
Agreement
Liability
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
12,793
|
|
|
$
|
-
|
|
|
Transfers to (from) Level 3
|
|
|
-
|
|
|
|
17,182
|
|
|
Total losses (gains) included in other expense (income), net
|
|
|
-
|
|
|
|
7,743
|
|
|
Total gains included in other comprehensive income
|
|
|
35
|
|
|
|
-
|
|
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
|
Settlements
|
|
|
(50)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
12,778
|
|
|
$
|
24,925
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the valuation techniques used for the assets and
liabilities measured at fair value classified within Level 2 or Level 3 of the fair value hierarchy:
Available-for-sale securities classified within Level 2 of the fair value hierarchy are valued utilizing reports from
third-party asset managers that hold the Companys investments, showing closing prices on the last business day of the period presented. These asset managers utilize an independent pricing source to obtain quotes for most fixed income
securities, and utilize internal procedures to validate the prices obtained. In addition, the Company uses an independent third-party to perform price testing, comparing a sample of quoted prices listed in the asset managers reports to quotes
listed through a public quotation service.
17
Available-for-sale securities classified within Level 3 of the fair value
hierarchy (auction rate floating securities) are valued utilizing a discounted cash flow model. Key variables that are included in the Companys calculation of the fair value of its auction rate floating securities utilizing a discounted cash
flow model are weighted average cost of capital (WACC), liquidity horizon and estimated coupon rate. The liquidity horizon is an estimation of how long the liquidity issue of the auction rate floating securities will continue to exist.
As part of its calculation of the fair value of its auction rate floating securities as of September 30, 2012, the Company used a WACC of 5.0%, a liquidity horizon of nine years, and an estimated coupon rate of a 12-month historical average for
the indexes. The 12-month historical averages for 1-Month LIBOR and 90-Day T-Bills were 0.25% and 0.06%, respectively. As part of its assessment of these variables used in calculating the fair value of its auction rate floating securities, the
Company performs a sensitivity analysis to understand the potential impact of using different amounts for these variables. As of September 30, 2012, the sensitivity analysis did not produce calculated fair values that were significantly
different from those calculated using the variables described above.
The fair value of the Note Hedge and
Warrant Transactions before the execution of the Counterparty Settlement Agreement was calculated utilizing potential settlement outcomes with the Counterparty under the original terms of the Note Hedge and Warrant Transactions considering merger
and non-merger events as probability weighted and discounted using a credit adjusted risk free rate. This valuation model utilizes inputs including market based settlement terms upon a merger or non-merger event for the respective Note Hedge and
Warrant Transactions, a credit adjusted discount rate, and probability weighting (Level 3 inputs). The probability-weighting was based on a market participants expectation as to the outcome of a merger event. The fair value of the Note
Hedge and Warrant Transactions after the execution of the Counterparty Settlement Agreement was calculated using potential settlement outcomes considering merger and non-merger events as probability weighted and discounted using a credit adjusted
risk free rate. This valuation model utilizes inputs including a fixed settlement amount based on the terms of the Counterparty Settlement Agreement, the assumed payment to be made under the Consulting Agreement as discounted for counterparty credit
risk, a counterparty credit risk adjusted discount rate, and probability weighting (Level 3 inputs).
9.
|
RESEARCH AND DEVELOPMENT
|
All research and development costs, including payments related to products under development and research consulting agreements, are expensed as incurred. The Company may continue to make non-refundable
payments to third parties for new technologies and for research and development work that has been completed. These payments may be expensed or capitalized at the time of payment depending on the nature of the payment made and the related stage of
the research and development project.
The Companys policy on accounting for costs of strategic
collaborations determines the timing of the recognition of certain development costs. In addition, this policy determines whether the cost is classified as development expense or capitalized as an asset. Management is required to form judgments with
respect to the commercial status of such products in determining whether development costs meet the criteria for immediate expense or capitalization. For example, when the Company acquires certain products for which there already is an Abbreviated
New Drug Application (ANDA) or a New Drug Application (NDA) approval related directly to the product, and there is net realizable value based on projected sales for these products, the Company capitalizes the amount paid as
an intangible asset.
18
Research and development expense for the three and nine months ended
September 30, 2012 and 2011 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing research and development costs
|
|
$
|
11,833
|
|
|
$
|
7,638
|
|
|
$
|
39,337
|
|
|
$
|
21,588
|
|
Payments related to strategic collaborations
|
|
|
(500
|
)
|
|
|
21,000
|
|
|
|
46,506
|
|
|
|
35,500
|
|
Share-based compensation expense
|
|
|
930
|
|
|
|
95
|
|
|
|
1,563
|
|
|
|
1,114
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
12,263
|
|
|
$
|
28,733
|
|
|
$
|
87,406
|
|
|
$
|
58,202
|
|
|
|
|
|
|
|
|
|
|
10.
|
STRATEGIC COLLABORATIONS
|
Development and License Agreement with a specialty pharmaceutical company
On March 30, 2012, the Company entered into a Development and License Agreement with a specialty pharmaceutical company pursuant to which the Company obtained exclusive worldwide rights for the
development and commercialization of an investigational drug targeted at certain topical skin applications. Under the terms of the agreement, the Company agreed to pay an up-front payment of $25.0 million in connection with the execution of the
agreement, and will pay up to an additional $80.0 million upon the achievement of certain research, development and regulatory milestones and up to an additional $120.0 million upon the achievement of certain commercial milestones, as well as
royalties on future sales. The initial $25.0 million up-front payment, which was paid in April 2012, was recognized as research and development expense during the three months ended March 31, 2012.
License Agreement with 3M
On February 24, 2012, the Company entered into a License Agreement with 3M Company and 3M Innovative Properties Company (collectively, 3M) for worldwide rights to a number of leading
molecules in 3Ms platform of immune response modifiers, for all topical dermatology indications and options for all human uses associated with the licensed molecules, excluding vaccine adjuvant. Under the terms of the agreement, the Company
made an up-front payment of $7.5 million to 3M in connection with the execution of the agreement, and will pay up to an additional $25.6 million of contingent license and option fees. The Company may also pay up to an additional $25.0 million upon
the achievement of certain research, development and regulatory milestones, as well as royalties on future sales. The initial $7.5 million payment was recognized as research and development expense during the three months ended March 31, 2012.
Joint Development Agreement with Lupin
On July 21, 2011, the Company entered into a Joint Development Agreement (the Original Agreement) with Lupin Limited, on behalf of itself and its affiliates (hereinafter collectively
referred to as Lupin), whereby the Company and Lupin will collaborate to develop multiple novel proprietary therapeutic products. Pursuant to the Original Agreement, subject to the terms and conditions contained therein, the Company made
an up-front $20.0 million payment to Lupin and was to make additional payments to Lupin upon the achievement of certain research, development, regulatory and other milestones, as well as royalty payments on sales of the products covered under
the Original Agreement. In addition, the Company was to receive an exclusive, worldwide (excluding India) license on the sale of the products covered under the Original Agreement.
On March 30, 2012, the Company entered into an Amended and Restated Joint Development Agreement, with Lupin (the
Amended and Restated Joint Development Agreement), which modified the list of products being developed. The Company made a $2.5 million payment to Lupin in April 2012 in connection with the execution of the Amended and Restated Joint
Development Agreement, and will make additional payments to Lupin of up to $35.5 million upon the achievement of certain research, development, regulatory and other milestones, as well as royalty payments on sales of the products covered under the
Amended and Restated Joint Development Agreement, which supersedes the additional payments the Company would have made under the Original Agreement. In addition, the Company will receive an exclusive, worldwide (excluding India) license on the sale
of the products covered under the Amended and Restated Joint Development Agreement.
19
The $20.0 million up-front payment related to the Original Agreement was
recognized as research and development expense during the three months ended September 30, 2011. The $2.5 million payment related to the Amended and Restated Joint Development Agreement was recognized as research and development expense during
the three months ended March 31, 2012.
Amended and Restated Collaboration Agreement and Asset Purchase Agreement with Hyperion
On March 22, 2012, Ucyclyd Pharma, Inc. (Ucyclyd), a wholly-owned subsidiary of the
Company, and Hyperion Therapeutics, Inc. (Hyperion) entered into an Amended and Restated Collaboration Agreement (the Amended Collaboration Agreement), which amended and restated their existing Collaboration Agreement, dated
August 23, 2007, as previously amended on or about November 24, 2008, June 29, 2009 and October 12, 2009 (the Prior Collaboration Agreement).
Pursuant to the terms of the Prior Collaboration Agreement, Ucyclyd granted rights to Hyperion,
exercisable in the future, to purchase certain worldwide rights to Ucyclyds existing on-market products
AMMONUL
®
and BUPHENYL
®
under certain conditions, as well as to develop and commercialize Ravicti, a compound referred to as HPN-100 (and also previously referred to as GT4P in the
Prior Collaboration Agreement), for the treatment of urea cycle disorder, hepatic encephalopathies and other indications. The parties agreed to supersede the Prior Collaboration Agreement with the Amended Collaboration Agreement, under which
Hyperion will continue to have the right, exercisable no earlier than January 1, 2013, to purchase certain worldwide rights to AMMONUL
®
and BUPHENYL
®
, subject to
Ucyclyds right to elect to retain such rights to AMMONUL
®
, and an Asset Purchase Agreement of even date
(the APA), under which Hyperion agreed to purchase Ucyclyds rights to Ravicti on the terms set forth therein. The parties completed the sale of Ravicti under the APA on March 22, 2012, for which Hyperion paid
Ucyclyd $6.0 million. If Ravicti is not approved by the FDA by January 1, 2013, Ucyclyd will pay Hyperion $0.5 million per month until June 30, 2013, or until Ravicti is approved, whichever comes first, subject to a maximum of
$3.0 million in aggregate payments. Pursuant to the APA, Hyperion will pay Ucyclyd certain royalties and regulatory and sales milestones relating to Ravicti and, pursuant to the terms of the Amended Collaboration Agreement, following exercise
of its purchase rights, Hyperion will pay Ucyclyd certain royalties and regulatory and sales milestones relating to
AMMONUL
®
(but only if Ucyclyd does not elect to retain rights to AMMUNOL
®
) and BUPHENYL
®
. Ucyclyd will continue to be entitled to all revenue from the sales of AMMONUL
®
and BUPHENYL
®
until the
exercise of the purchase rights by Hyperion. If Hyperion elects to purchase AMMONUL
®
and BUPHENYL
®
, but Ucyclyd elects to retain AMMONUL
®
, then AMMONUL
®
will remain an
asset of Ucyclyd and Ucyclyd will continue to be entitled to all revenue from the sales of AMMONUL
®
. A net gain
of $3.0 million on the sale of Ravicti to Hyperion was recognized in other income during the three months ended March 31, 2012. This consisted of the $6.0 million payment Ucyclyd received from Hyperion, partially offset by the $3.0
million in total potential contingent payments that Ucyclyd could pay to Hyperion during the first six months of 2013, based upon the timing of the approval of Ravicti by the FDA. The $3.0 million contingent liability is included in other
current liabilities in the Companys condensed consolidated balance sheets as of September 30, 2012.
Collaboration with a
privately-held U.S. biotechnology company
On September 10, 2010, the Company and a privately-held
U.S. biotechnology company entered into a sublicense and development agreement to develop an agent for specific dermatological conditions in the Americas and Europe and a purchase option to acquire the privately-held U.S. biotechnology company.
Under the terms of the agreements, the Company paid the privately-held U.S. biotechnology company $5.0
million in connection with the execution of the agreement, and will pay additional potential milestone payments totaling approximately $100.5 million upon successful completion of certain clinical, regulatory and commercial milestones.
During the three months ended December 31, 2010 and June 30, 2011, development milestones were achieved, and
the Company made a $10.0 million and a $5.5 million payment, respectively, pursuant to the agreements. The initial $5.0 million payment and the $10.0 million milestone payment were recognized as research and development expense during 2010, and the
$5.5 million milestone payment was recognized as research and development expense during the three months ended June 30, 2011. As of September 30, 2012, $75.0 million of potential milestone payments remain upon successful completion of
certain clinical, regulatory and commercial milestones.
20
Research and Development Agreement with Anacor
On February 9, 2011, the Company entered into a research and development agreement with Anacor Pharmaceuticals, Inc.
(Anacor) for the discovery and development of boron-based small molecule compounds directed against a target for the potential treatment of acne. Under the terms of the agreement, the Company paid Anacor $7.0 million in connection with
the execution of the agreement, and will pay up to $153.0 million upon the achievement of certain research, development, regulatory and commercial milestones, as well as royalties on sales by the Company. Anacor will be responsible for discovering
and conducting the early development of product candidates which utilize Anacors proprietary boron chemistry platform, while the Company will have an option to obtain an exclusive license for products covered by the agreement. The initial $7.0
million payment was recognized as research and development expense during the three months ended March 31, 2011.
11.
|
IMPAIRMENT OF INTANGIBLE ASSETS
|
The Company assesses the potential impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors that the Company
considers in deciding when to perform an impairment review include significant under-performance of a product line in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the
Companys use of the assets. Recoverability of assets that will continue to be used in the Companys operations is measured by comparing the carrying amount of the asset grouping to the Companys estimate of the related total future
net cash flows. If an asset carrying value is not recoverable through the related cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset groupings carrying amount and its fair value,
based on the best information available, including market prices or discounted cash flow analysis. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss through a charge to operating results to
the extent the present value of anticipated net cash flows attributable to the asset are less than the assets carrying value. When it is determined that the useful life of assets are shorter than originally estimated, and there are sufficient
cash flows to support the carrying value of the assets, the Company will accelerate the rate of amortization charges in order to fully amortize the assets over their new shorter useful lives.
During the quarter ended September 30, 2012, an intangible asset related to one of the Companys non-primary
products was determined to be impaired based on the Companys analysis of the intangible assets carrying value and projected future cash flows. As a result of the impairment analysis, the Company determined that the fair value of the
intangible asset was less than its carrying value and recorded a write-down of approximately $2.7 million related to this intangible asset. During the quarter ended September 30, 2012, the Company determined that the product, which was one of
the products acquired as part of the Companys December 2011 acquisition of the assets of Graceway Pharmaceuticals, LLC (Graceway), would no longer be sold. The $2.7 million impairment charge reduced the intangible assets
carrying value to $0.
During the quarter ended September 30, 2011, an intangible asset related to an
authorized generic product from which the Company receives contract revenue was determined to be impaired based on the Companys analysis of the intangible assets carrying value and projected future cash flows. As a result of the
impairment analysis, the Company recorded a write-down of $2.3 million related to this intangible asset. Factors affecting the future cash flows of the contract revenue related to the authorized generic product included projected net revenues for
the authorized generic product for which the Company receives contract revenue being less than originally anticipated.
12.
|
SEGMENT AND PRODUCT INFORMATION
|
The Company operates in one business segment: pharmaceuticals. The Companys current pharmaceutical franchises
are divided between the dermatological and non-dermatological fields. The dermatological field represents products for the treatment of acne and acne-related dermatological conditions and non-acne dermatological conditions. The non-dermatological
field represents products for the treatment of urea cycle disorder, contract revenue, and beginning on December 2, 2011, upon the Companys acquisition of the assets of Graceway, products in the respiratory and womens health
specialties. The acne and acne-related dermatological product lines include SOLODYN
®
and ZIANA
®
. During early 2011, the Company discontinued its TRIAZ
®
21
branded products and decided to no longer promote its
PLEXION
®
branded products. The non-acne dermatological product lines include DYSPORT
®
, LOPROX
®
, PERLANE
®
, RESTYLANE
®
, VANOS
®
and ZYCLARA
®
. ZYCLARA
®
was acquired by the Company as part of the acquisition of the assets of Graceway on December 2, 2011. The
non-dermatological product lines include AMMONUL
®
, BUPHENYL
®
and the MAXAIR
®
AUTOHALER
®
. The MAXAIR
®
AUTOHALER
®
was acquired by
the Company as part of the acquisition of the assets of Graceway on December 2, 2011. The non-dermatological field also includes contract revenues associated with licensing agreements and authorized generic agreements.
The Companys pharmaceutical products, with the exception of AMMONUL
®
and BUPHENYL
®
, are promoted to dermatologists and plastic surgeons. Such products are often prescribed by physicians outside these two specialties, including family practitioners,
general practitioners, primary-care physicians and OB/GYNs, as well as hospitals, government agencies and others. Currently, the Companys products are sold primarily to wholesalers and retail chain drug stores.
Net revenues and the percentage of net revenues for each of the product categories are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
Acne and acne-related dermatological products
|
|
$
|
85,109
|
|
|
$
|
119,119
|
|
|
$
|
286,741
|
|
|
$
|
345,711
|
|
Non-acne dermatological products
|
|
|
80,773
|
|
|
|
55,659
|
|
|
|
235,885
|
|
|
|
165,599
|
|
Non-dermatological products
|
|
|
14,313
|
|
|
|
9,890
|
|
|
|
55,865
|
|
|
|
29,098
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
180,195
|
|
|
$
|
184,668
|
|
|
$
|
578,491
|
|
|
$
|
540,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
Acne and acne-related dermatological products
|
|
|
47
|
%
|
|
|
65
|
%
|
|
|
49
|
%
|
|
|
64
|
%
|
Non-acne dermatological products
|
|
|
45
|
|
|
|
30
|
|
|
|
41
|
|
|
|
31
|
|
Non-dermatological products
|
|
|
8
|
|
|
|
5
|
|
|
|
10
|
|
|
|
5
|
|
|
|
|
|
|
Total net revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
During the three and nine months ended September 30, 2012, approximately 4.6% and
5.0% of the Companys net revenues were generated in Canada. No country or region outside of the U.S. and Canada generated more than 5%, individually or in the aggregate, of the Companys net revenues during the three or nine months ended
September 30, 2012. During the three and nine months ended September 30, 2011, less than 5% of the Companys net revenues were generated outside of the U.S.
The Company utilizes third parties to manufacture and package inventories held for sale, takes title to certain inventories once manufactured, and warehouses such goods until packaged for final
distribution and sale. Inventories consist of salable products held at the Companys warehouses, as well as raw materials and components at the manufacturers facilities, and are valued at the lower of cost or market using the first-in,
first-out method. The Company provides valuation reserves for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future
demand and market conditions.
Inventory costs associated with products that have not yet received regulatory
approval are capitalized if, in the view of the Companys management, there is probable future commercial use and future economic benefit. If future commercial use and future economic benefit are not considered probable, then costs associated
with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. As of September 30, 2012 and December 31, 2011, there were no costs
capitalized into inventory for products that had not yet received regulatory approval.
22
Inventories as of September 30, 2012 and December 31, 2011 is
comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Raw materials
|
|
$
|
11,678
|
|
|
$
|
9,100
|
|
Work-in-process
|
|
|
987
|
|
|
|
5,495
|
|
Finished goods
|
|
|
27,875
|
|
|
|
29,250
|
|
Valuation reserve
|
|
|
(5,659
|
)
|
|
|
(9,326
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
34,881
|
|
|
$
|
34,519
|
|
|
|
|
|
|
|
|
|
|
14.
|
OTHER CURRENT LIABILITIES
|
Other current liabilities as of September 30, 2012 and December 31, 2011 is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Accrued incentives, including SARs liability
|
|
$
|
44,199
|
|
|
$
|
41,516
|
|
Deferred revenue
|
|
|
11,351
|
|
|
|
13,703
|
|
Counterparty Settlement Agreement liability (see Note 15)
|
|
|
24,925
|
|
|
|
-
|
|
Other accrued expenses
|
|
|
33,962
|
|
|
|
23,566
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,437
|
|
|
$
|
78,785
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue as of September 30, 2012 and December 31, 2011 is comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Deferred revenue - aesthetics products, net of cost of revenue
|
|
$
|
7,694
|
|
|
$
|
13,349
|
|
Deferred revenue - sales into distribution channel in excess of eight weeks of projected demand
|
|
|
3,513
|
|
|
|
212
|
|
Other deferred revenue
|
|
|
144
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,351
|
|
|
$
|
13,703
|
|
|
|
|
|
|
|
|
|
|
The Company defers revenue, and the related cost of revenue, of its
aesthetics products, including DYSPORT
®
, PERLANE
®
and RESTYLANE
®
, until its
exclusive U.S. distributor ships the product to physicians. The Company also defers the recognition of revenue for certain sales of inventory into the distribution channel that are in excess of eight (8) weeks of projected demand. The increase
in deferred revenue for units in the distribution channel in excess of eight weeks of projected demand during the nine months ended September 30, 2012 was primarily associated with units of ZYCLARA
®
.
23
Long-term debt as of September 30, 2012 and December 31, 2011 is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
1.375% Convertible Senior Notes
|
|
$
|
500,000
|
|
|
$
|
|
|
Discount on 1.375% Convertible Senior Notes
|
|
|
(74,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.375% Convertible Senior Notes, net of discount
|
|
|
425,813
|
|
|
|
|
|
2.5% Contingent Convertible Senior Notes
|
|
|
168,926
|
|
|
|
169,145
|
|
1.5% Contingent Convertible Senior Notes
|
|
|
181
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594,920
|
|
|
|
169,326
|
|
Less current portion
|
|
|
(181
|
)
|
|
|
(169,145
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
594,739
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
1.375% Convertible Senior Notes Due 2017
On May 16, 2012, the Company issued and sold $500.0 million of its 1.375% Convertible Senior Notes due 2017 (the
1.375% Notes) in a public offering. The 1.375% Notes will mature on June 1, 2017 and pay 1.375% annual cash interest, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1,
2012.
On or after March 1, 2017, until the close of business on the second scheduled trading day
immediately preceding the stated maturity date, or prior to then but only under certain circumstances, the 1.375% Notes will be convertible into cash up to the principal amount, with the remaining amount, if any, to be satisfied, at the
Companys option, in shares of the Companys Class A common stock, cash or a combination thereof. The 1.375% Notes will be convertible at an initial conversion rate of 21.2427 shares of the Companys Class A common stock per
$1,000 principal amount of the 1.375% Notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $47.07 per share of the Companys Class A common stock.
The 1.375% Notes are convertible, at the holders option, prior to the close of business on the business day
immediately preceding March 1, 2017, into shares of the Companys Class A common stock in the following circumstances:
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during any calendar quarter commencing after the calendar quarter ending on September 30, 2012, if the closing price of the Companys
Class A common stock over a specified number of trading days during the previous quarter, including the last trading day of such quarter, is more than 130% of the conversion price of the 1.375% Notes in effect on each applicable trading day;
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during the five consecutive trading day period immediately following any ten consecutive trading day period in which the trading price of the 1.375%
Notes per $1,000 principal amount for each such trading day was less than 98% of the product of the closing sale price of the Companys Class A common stock on such days and the then-current conversion rate of $1,000 principal amount of
the 1.375% Notes; or
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upon the occurrence of specified corporate transactions.
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The 1.375% Notes are senior unsecured obligations of the Company and are not guaranteed by any of the Companys
subsidiaries. The 1.375% Notes rank senior in right of payment to the Companys existing and future indebtedness that is expressly subordinated in right of payment to the 1.375% Notes; equal in right of payment to the Companys
existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Companys secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally
junior to all existing and future indebtedness (including trade payables) incurred by the Companys subsidiaries.
24
The 1.375% Notes do not contain any restrictions on the payment of
dividends, the incurrence of additional indebtedness or the repurchase of the Companys securities and do not contain any financial covenants. The 1.375% Notes require an anti-dilution adjustment to the conversion rate upon certain specified
corporate dividend or common stock events or transactions, and if such event or transaction would result in at least a one percent (1%) change in the conversion rate. If the one percent (1%) threshold is not met on a particular qualifying
event or transaction, the adjustment is carried forward and taken into account when a subsequent qualifying event or transaction is assessed for potential conversion rate adjustment. The Company may not redeem the 1.375% Notes prior to maturity and
no sinking fund will be provided for the 1.375% Notes. If the Company undergoes a fundamental change, subject to certain conditions, holders of the 1.375% Notes may require the Company to purchase 1.375% Notes in whole or in part for cash at a
fundamental change purchase price equal to 100% of the principal amount of the 1.375% Notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding the fundamental change purchase date. In certain events of default, as defined
in the 1.375% Notes indenture, the trustee by notice to the Company, or the holders of at least 25% in principal amount of the then outstanding 1.375% Notes by notice to the Company and trustee, may declare 100% of the principal of, and accrued and
unpaid interest, if any, on, all outstanding 1.375% Notes to be due and payable. Upon such a declaration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.
As of September 30, 2012, the 1.375% Notes were not convertible.
The conversion feature embedded within the 1.375% Notes is considered a derivative; however, it has not been bifurcated
and accounted for separately because it is considered to be indexed to the Companys Class A common stock and meets the criteria for equity classification. Because the 1.375% Notes are considered to be cash convertible debt, the Company
has separately accounted for the liability and equity components of the 1.375% Notes by allocating the $500.0 million in proceeds from the issuance between the liability component and the embedded conversion option, or the equity component. The
allocation was conducted by estimating an interest rate at the time of issuance of the 1.375% Notes for similar debt instruments that do not include the embedded conversion feature. A straight-debt interest rate of 5.0% was used to compute the
initial fair value of the liability component of $420.5 million. For purposes of the fair value measurement, the Company determined that the valuation of the 1.375% Notes falls under Level 2 of the fair value hierarchy. The excess of the $500.0
million of proceeds from the issuance of the 1.375% Notes over the $420.5 million initial amount allocated to the liability component, or $79.5 million, was allocated to the embedded conversion option, or equity component. This excess was treated as
a debt discount and is being amortized through interest expense, using the effective interest method, over the five-year term of the 1.375% Notes, which runs through June 1, 2017.
In connection with the offering of the 1.375% Notes, on May 10, 2012 and May 11, 2012, the Company entered into
privately negotiated convertible note hedge transactions (the Convertible Note Hedge Transactions) with affiliates of the underwriters of the 1.375% Notes (the Option Counterparties). The Convertible Note Hedge Transactions
cover, collectively, the number of shares of the Companys Class A common stock underlying the 1.375% Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 1.375% Notes. The Company purchased these
hedges for $80.0 million, in aggregate, which was recorded as a reduction in additional paid-in capital during the three months ended June 30, 2012. The Company also entered into separate, privately-negotiated warrant transactions with the
Option Counterparties on May 10, 2012 and into additional warrant transactions with the Option Counterparties on May 11, 2012 (collectively, the Warrant Transactions and together with the Convertible Note Hedge Transactions,
the Convertible Note Hedge and Warrant Transactions), initially covering a number of shares of the Companys Class A common stock underlying the 1.375% Notes, subject to customary anti-dilution adjustments. Subject to certain
conditions, the Company may settle the warrants in cash or on a net-share basis. The warrants were issued and sold for proceeds of approximately $35.2 million, which was recorded as an increase in additional paid-in capital during the three months
ended June 30, 2012.
The Convertible Note Hedge Transactions are expected to reduce the potential
economic dilution with respect to the Companys Class A common stock and/or reduce the Companys exposure to potential cash payments that may be required upon conversion of the 1.375% Notes. The strike price of the Warrant
Transactions will initially be approximately $60.26 per share, which represents a premium of approximately 60% over the last reported sale price of $37.66 per share of the Companys Class A common stock on The New York Stock Exchange on
May 10, 2012.
The Convertible Note Hedge and Warrant Transactions are considered derivative instruments;
however, they have been classified within stockholders equity because both financial instruments are considered to be indexed to the Companys Class A common stock and meet the criteria for equity classification.
25
The Convertible Note Hedge and Warrant Transactions have been accounted for
as separate financial instruments, in each case, entered into by the Company with the Option Counterparties, and are not part of the terms of the 1.375% Notes and will not affect any holders rights under the 1.375% Notes. Holders of the 1.375%
Notes will not have any rights with respect to the Convertible Note Hedge and Warrant Transactions.
On
September 2, 2012, the Company entered into a settlement agreement (the Counterparty Settlement Agreement) with one of the Option Counterparties to provide for settlement of the Convertible Note Hedge Transactions that the Company
entered into with one of the Option Counterparties on May 10, 2012 and May 11, 2012, upon the occurrence of certain events in connection with the Merger Agreement with Valeant (see Note 2). Upon the public announcement, if any, that the
merger with Valeant has closed, or upon the occurrence of certain other specified events, one of the Option Counterparties will be obligated to pay to the Company, in lieu of any payment or delivery otherwise due under the Convertible Note Hedge
Transactions, a specified settlement amount per Relevant Note Hedging Unit (as defined in the Counterparty Settlement Agreement) on the Payment Date (as defined in the Counterparty Settlement Agreement), in full satisfaction
of the respective rights and obligations of the parties under the Convertible Note Hedge Transactions in respect of such Relevant Note Hedging Units.
In addition, the Counterparty Settlement Agreement provides for settlement of the Warrant Transactions that the Company entered into with one of the Option Counterparties on May 10, 2012 and
May 11, 2012, upon the occurrence of certain events in connection with the Merger Agreement with Valeant. Upon the public announcement, if any, that the Merger with Valeant has closed, or upon the occurrence of certain other specified events,
the Company will be obligated to pay one of the Option Counterparties, in lieu of any payment or delivery otherwise due under the Warrant Transactions, a specified settlement amount per Relevant Warrant (as defined in the Counterparty
Settlement Agreement) on the Payment Date, in full satisfaction of the respective rights and obligations of the parties under the Warrant Transactions in respect of such Relevant Warrants.
Notwithstanding the foregoing description, the Counterparty Settlement Agreement provides that the aggregate
settlement amounts payable by one of the Option Counterparties to the Company is $3.0 million after deducting any aggregate settlement amounts payable by the Company to one of the Option Counterparties under the Counterparty Settlement
Agreement on the Payment Date. The Counterparty Settlement Agreement is also subject to termination or renegotiation upon the occurrence of certain events.
The Option Counterparty that entered into the Counterparty Settlement Agreement had also previously entered into an advisory and consulting agreement with the Company in December 2011 to advise the
Company in a potential sale of the Company to a third party. That agreement (the Consulting Agreement) provides that in the event the Option Counterparty assists with the sale of the Company, the Option Counterparty would be entitled to
a fee as a percentage of the sale purchase price. Based on the actual purchase price proposed by Valeant for the Company on September 3, 2012, the amount of this fee will be approximately $28.1 million upon the closing of the transaction.
Because the Counterparty Settlement Agreement added a settlement condition based on a fixed monetary payoff
which is contingent upon an event not based on the Companys share price, the Note Hedge and Warrant Transactions entered into with one of the Option Counterparties no longer meet the criteria for equity classification.
Accordingly, the Company estimated and recorded the fair value of the Note Hedge and Warrant Transactions with this
Counterparty immediately before the execution of the Counterparty Settlement Agreement which resulted in a $17.2 million charge to additional paid-in capital and a corresponding increase to other current liabilities. Because the execution of the
Counterparty Settlement Agreement was made in contemplation and consideration of the Consulting Agreement, the Company determined that the Counterparty Settlement Agreement, Note Hedge and Warrant Transactions with this Counterparty and Consulting
Agreement should be subsequently accounted for and measured as one unit of account. Therefore, the Company subsequently determined the post execution Counterparty Settlement Agreement fair value of this equity derivative to be $24.9 million,
resulting in a $7.7 million charge to other expense (income) and an increase to other current liabilities for the three months ended September 30, 2012.
The resulting liability will continue to be recorded at fair value with changes in fair value reflected through the income statement through the closing of the merger transaction.
The impact of the Counterparty Settlement Agreement has not been included in the Companys computation of dilutive
earnings per share because such impact would be anti-dilutive.
26
The Company incurred $14.2 million of fees and other origination costs
related to the issuance of the 1.375% Notes. These fees and other origination costs have been allocated to the liability and equity components of the 1.375% Notes in proportion to their allocated values. Approximately $2.3 million of these fees and
other origination costs were recorded as a reduction in additional paid-in capital. The remaining $11.9 million of fees and other origination costs are included in other assets in the Companys condensed consolidated balance sheets and are
being amortized through interest expense over the five-year term of the 1.375% Notes, which runs through June 1, 2017.
2.5%
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Contingent Convertible Senior Notes Due 2032
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In June 2002, the Company sold $400.0 million aggregate principal amount of its 2.5% Contingent Convertible Senior Notes
Due 2032 (the 2.5% Notes) in private transactions. As discussed below, approximately $230.8 million in principal amount of the 2.5% Notes was exchanged for 1.5% Notes on August 14, 2003. The 2.5% Notes bear interest at a rate of
2.5% per annum, which is payable on June 4 and December 4 of each year, beginning on December 4, 2002. The Company also agreed to pay contingent interest at a rate equal to 0.5% per annum during any six-month period, with
the initial six-month period commencing June 4, 2007, if the average trading price of the 2.5% Notes reaches certain thresholds. Contingent interest of approximately $0.3 million related to the 2.5% Notes was payable at September 30, 2012.
No contingent interest related to the 2.5% Notes was payable at December 31, 2011. The 2.5% Notes will mature on June 4, 2032.
The Company may redeem some or all of the 2.5% Notes at any time on or after June 11, 2007, at a redemption price, payable in cash, of 100% of the principal amount of the 2.5% Notes, plus accrued and
unpaid interest, including contingent interest, if any. Holders of the 2.5% Notes may require the Company to repurchase all or a portion of their 2.5% Notes on June 4, 2017, or upon a change in control, as defined in the indenture governing the
2.5% Notes, at 100% of the principal amount of the 2.5% Notes, plus accrued and unpaid interest to the date of the repurchase, payable in cash. Holders of the 2.5% Notes also had this option on June 4, 2012. Under GAAP, if an obligation is due
on demand or will be due on demand within one year from the balance sheet date, even though liquidation may not be expected within that period, it should be classified as a current liability. Accordingly, the outstanding balance of 2.5% Notes along
with the deferred tax liability associated with accelerated interest deductions on the 2.5% Notes are classified as a current liability during the respective twelve month periods prior to June 4, 2012 and June 4, 2017. As of
December 31, 2011, $169.1 million of the 2.5% Notes and $62.5 million of deferred tax liabilities were classified as current liabilities in the Companys condensed consolidated balance sheets. The $62.5 million of deferred tax liabilities
were included within current deferred tax assets, net.
On May 3, 2012, the Company filed with the
Securities and Exchange Commission (the SEC) a Tender Offer Statement on Schedule TO and a notice (the Company Notice) to the holders of the 2.5% Notes related to the option of the holders to require the Company to repurchase
all or a portion of their 2.5% Notes on June 4, 2012. In addition, such Company Notice was made available through The Depository Trust Company and Deutsche Bank Trust Company Americas, the paying agent.
The Company Notice specified the terms, conditions and procedures for surrendering and withdrawing the 2.5% Notes for
purchase. The Company Notice also stated that holders that did not surrender their 2.5% Notes for purchase would maintain the right to convert their 2.5% Notes into shares of the Companys Class A common stock, as further described below.
Holders of $3,000 in principal amount of the 2.5% Notes requested to have their 2.5% Notes repurchased by the Company.
The 2.5% Notes are convertible, at the holders option, prior to the maturity date into shares of the Companys Class A common stock in the following circumstances:
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during any quarter commencing after June 30, 2002, if the closing price of the Companys Class A common stock over a specified number
of trading days during the previous quarter, including the last trading day of such quarter, is more than 110% of the conversion price of the 2.5% Notes, or $31.96. The 2.5% Notes are initially convertible at a conversion price of $29.05 per share,
which is equal to a conversion rate of approximately 34.4234 shares per $1,000 principal amount of 2.5% Notes, subject to adjustment;
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if the Company has called the 2.5% Notes for redemption;
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27
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during the five trading day period immediately following any nine consecutive day trading period in which the trading price of the 2.5% Notes per
$1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of the Companys Class A common stock on such days multiplied by the number of shares of the Companys Class A common
stock issuable upon conversion of $1,000 principal amount of the 2.5% Notes; or
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upon the occurrence of specified corporate transactions.
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The 2.5% Notes, which are unsecured, do not contain any restrictions on the payment of dividends, the incurrence of
additional indebtedness or the repurchase of the Companys securities and do not contain any financial covenants.
The Company incurred $12.6 million of fees and other origination costs related to the issuance of the 2.5% Notes. The Company amortized these costs over the first five-year Put period, which ran through
June 4, 2007.
During the quarters ended December 31, 2011, March 31,
2012, June 30, 2012 and September 30, 2012, the 2.5% Notes met the criteria for the right of conversion into shares of the Companys Class A common stock. This right of conversion of the holders of 2.5% Notes was triggered
by the stock closing above $31.96 on 20 of the last 30 trading days and the last trading day of the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012. During the quarter ended
June 30, 2012, outstanding principal amounts of $216,000 of 2.5% Notes were converted into shares of the Companys Class A common stock. The holders of the remaining $168.9 million of 2.5% Notes have this conversion right only until
December 31, 2012. At the end of each future quarter, the conversion rights will be reassessed in accordance with the bond indenture agreement to determine if the conversion trigger rights have been achieved.
1.5%
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Contingent Convertible Senior Notes Due 2033
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On August 14, 2003, the Company exchanged approximately $230.8 million in principal amount of its 2.5% Notes for
approximately $283.9 million in principal amount of its 1.5% Contingent Convertible Senior Notes Due 2033 (the 1.5% Notes). Holders of 2.5% Notes that accepted the Companys exchange offer received $1,230 in principal amount of 1.5%
Notes for each $1,000 in principal amount of 2.5% Notes. The terms of the 1.5% Notes are similar to the terms of the 2.5% Notes, but have a different interest rate, conversion rate and maturity date. Holders of 2.5% Notes that chose not to exchange
continue to be subject to the terms of the 2.5% Notes.
The 1.5% Notes bear interest at a rate of
1.5% per annum, which is payable on June 4 and December 4 of each year, beginning December 4, 2003. The Company will also pay contingent interest at a rate of 0.5% per annum during any six-month period, with the initial
six-month period commencing June 4, 2008, if the average trading price of the 1.5% Notes reaches certain thresholds. No contingent interest related to the 1.5% Notes was payable at September 30, 2012 or December 31, 2011. The 1.5%
Notes will mature on June 4, 2033.
As a result of the exchange, the outstanding principal amounts of the
2.5% Notes and the 1.5% Notes were $169.2 million and $283.9 million, respectively. The Company incurred approximately $5.1 million of fees and other origination costs related to the issuance of the 1.5% Notes. The Company amortized these costs over
the first five-year Put period, which ran through June 4, 2008.
Holders of the 1.5% Notes were able to
require the Company to repurchase all or a portion of their 1.5% Notes on June 4, 2008, at 100% of the principal amount of the 1.5% Notes, plus accrued and unpaid interest, including contingent interest, if any, to the date of the repurchase,
payable in cash. Holders of approximately $283.7 million of 1.5% Notes elected to require the Company to repurchase their 1.5% Notes on June 4, 2008. The Company paid $283.7 million, plus accrued and unpaid interest of approximately $2.2
million, to the holders of 1.5% Notes that elected to require the Company to repurchase their 1.5% Notes. The Company was also required to pay an accumulated deferred tax liability of approximately $34.9 million related to the repurchased 1.5%
Notes. This $34.9 million deferred tax liability was paid during the second half of 2008. Following the repurchase of these 1.5% Notes, $181,000 of principal amount of 1.5% Notes remained outstanding as of September 30, 2012 and
December 31, 2011.
Remaining holders of the 1.5% Notes may require the Company to repurchase all or a
portion of their 1.5% Notes on June 4, 2013 and June 4, 2018, or upon a change in control, as defined in the indenture governing the 1.5%
28
Notes, at 100% of the principal amount of the 1.5% Notes, plus accrued and unpaid interest to the date of the repurchase, payable in cash. Under GAAP, if an obligation is due on demand or will be
due on demand within one year from the balance sheet date, even though liquidation may not be expected within that period, it should be classified as a current liability. Accordingly, the outstanding balance of 1.5% Notes along with the deferred tax
liability associated with accelerated interest deductions on the 1.5% Notes will be classified as a current liability during the respective twelve month periods prior to June 4, 2013 and June 4, 2018. As of September 30, 2012,
$181,000 of the 1.5% Notes and $58,000 of deferred tax liabilities were classified as current liabilities in the Companys condensed consolidated balance sheets. The $58,000 of deferred tax liabilities were included within current deferred tax
assets, net.
The remaining 1.5% Notes are convertible, at the holders option, prior to the maturity
date into shares of the Companys Class A common stock in the following circumstances:
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during any quarter commencing after September 30, 2003, if the closing price of the Companys Class A common stock over a specified
number of trading days during the previous quarter, including the last trading day of such quarter, is more than 120% of the conversion price of the 1.5% Notes, or $46.51. The 1.5% Notes are initially convertible at a conversion price of $38.76 per
share, which is equal to a conversion rate of approximately 25.7998 shares per $1,000 principal amount of 1.5% Notes, subject to adjustment;
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if the Company has called the 1.5% Notes for redemption;
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during the five trading day period immediately following any nine consecutive day trading period in which the trading price of the 1.5% Notes per
$1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of the Companys Class A common stock on such days multiplied by the number of shares of the Companys Class A common
stock issuable upon conversion of $1,000 principal amount of the 1.5% Notes; or
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upon the occurrence of specified corporate transactions.
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The remaining 1.5% Notes, which are unsecured, do not contain any restrictions on the incurrence of additional
indebtedness or the repurchase of the Companys securities and do not contain any financial covenants. The 1.5% Notes require an adjustment to the conversion price if the cumulative aggregate of all current and prior dividend increases, through
June 11, 2008, above $0.025 per share would result in at least a one percent (1%) increase in the conversion price. This threshold was not reached and no adjustment to the conversion price has been made.
During the quarter ended September 30, 2012, the 1.5% Notes did not meet the criteria for the right of conversion.
29
Interest expense
Interest expense recognized related to the Companys long-term debt during the three and nine months ended
September 30, 2012 and 2011 was as follows (in thousands):
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Three Months Ended
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Nine Months Ended
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September 30,
2012
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September 30,
2011
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September 30,
2012
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September 30,
2011
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1.375% Notes:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon rate interest
|
|
$
|
1,718
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|
|
$
|
-
|
|
|
$
|
2,569
|
|
|
$
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-
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|
Amortization of discount
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|
|
3,577
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|
|
|
-
|
|
|
|
5,327
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|
|
|
-
|
|
Amortization of issuance costs
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|
|
595
|
|
|
|
-
|
|
|
|
891
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|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total 1.375% Notes
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|
|
5,890
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|
|
|
-
|
|
|
|
8,787
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|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5% Notes:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon rate interest
|
|
|
1,056
|
|
|
|
1,057
|
|
|
|
3,170
|
|
|
|
3,171
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|
Contingent interest
|
|
|
211
|
|
|
|
209
|
|
|
|
281
|
|
|
|
280
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total 2.5% Notes
|
|
|
1,267
|
|
|
|
1,266
|
|
|
|
3,451
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|
|
|
3,451
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon rate interest
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total 1.5% Notes
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense related to long-term debt
|
|
$
|
7,158
|
|
|
$
|
1,267
|
|
|
$
|
12,240
|
|
|
$
|
3,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Fair value of long-term debt
The fair value of the Companys long-term debt, based on market quotations, was approximately $789.7 million and
$202.5 million at September 30, 2012 and December 31, 2011, respectively. The fair value of the long-term debt held as of September 30, 2012 and December 31, 2011 were valued using Level 2 pricing inputs based on quoted prices
for similar instruments in markets that are not active, and through model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, enhanced charitable
contribution deductions for inventory, tax credits available in the U.S., the treatment of certain share-based payments that are not designed to normally result in tax deductions, various expenses that are not deductible for tax purposes, changes in
the reserve for uncertain tax positions, changes in valuation allowances against deferred tax assets and differences in tax rates in certain non-U.S. jurisdictions. The Companys effective tax rate may be subject to fluctuations during the year
as new information is obtained which may affect the assumptions it uses to estimate its annual effective tax rate, including factors such as its mix of pre-tax earnings in the various tax jurisdictions in which it operates, changes in valuation
allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws in jurisdictions where the Company conducts operations. The Company recognizes tax benefits only if the tax
position is more likely than not of being sustained. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities, along with net operating
losses and credit carryforwards. The Company records valuation allowances against its deferred tax assets to reduce the net carrying value to amounts that management believes is more likely than not to be realized.
On November 1, 2011, the Company closed its sale of all issued and outstanding shares of common stock of LipoSonix
to Solta. The transaction resulted in a $30.5 million capital loss for income tax purposes, of which $26.2 million can be carried back and used to offset capital gains generated in prior tax years. Accordingly, an
30
income tax benefit of $9.4 million was recognized and is included in the gain from discontinued operations for the year ended December 31, 2011. A deferred tax asset was recorded on the
portion of the capital loss ($4.3 million) that could not be carried back to prior years. As a capital loss can only be utilized to offset capital gains, the Company recorded at December 31, 2011 a valuation allowance of $1.5 million against
the deferred tax asset in order to reduce the carrying value of the deferred tax asset to $0, which was the amount that management believed was more likely than not to be realized. During the nine months ended September 30, 2012, the Company
recognized a $6.0 million capital gain (see Note 10), and accordingly, the reversal of this $1.5 million valuation allowance has been reflected in the Companys estimate of its annual effective tax rate for 2012.
The sales price used to calculate the above capital loss consisted of $15.5 million of cash received at closing, $20.0
million of cash received on November 18, 2011 and $29.3 million of value from future additional contingent cash and milestone payments. A deferred tax asset was recorded on the $29.3 million as it was not recognized as additional selling price
for financial reporting purposes. The Company has recorded a valuation allowance of $10.5 million against this deferred tax asset in order to reduce the carrying value of this deferred tax asset to $0, which is the amount that management believes is
more likely than not to be realized.
At December 31, 2011, the Company had an unrealized tax loss of
$21.0 million related to the Companys option to acquire Revance or license Revances topical product that is under development. The Company will not be able to determine the character of the loss until the Company exercises or fails to
exercise its option. A realized loss characterized as a capital loss can only be utilized to offset capital gains. At December 31, 2011, the Company had recorded a valuation allowance of $7.6 million against the deferred tax asset associated
with this unrealized tax loss in order to reduce the carrying value of the deferred tax asset to $0, which is the amount that management believes is more likely than not to be realized. As a result of the Settlement and Termination Agreement with
Revance (see Note 22), the Company has reflected a $1.7 million reduction of this valuation allowance in the Companys estimate of its annual effective tax rate for 2012.
At September 30, 2012, the Company has an unrealized tax loss of $21.9 million related to the Companys option
to acquire a privately-held U.S. biotechnology company. If the Company fails to exercise its option, a capital loss will be recognized. A loss characterized as a capital loss can only be used to offset capital gains. At September 30, 2012, the
Company has recorded a valuation allowance of $7.9 million against the deferred tax asset associated with this unrealized tax loss in order to reduce the carrying value of the deferred tax asset to $0, which is the amount that management believes is
more likely than not to be realized.
During the three months ended September 30, 2012 and
September 30, 2011, the Company made net tax payments of $1.4 million and $13.0 million, respectively. During the nine months ended September 30, 2012 and September 30, 2011, the Company made net tax payments of $43.8 million and
$51.0 million, respectively.
The Company operates in multiple tax jurisdictions and is periodically subject
to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. The Company and its domestic subsidiaries file a consolidated U.S. federal income tax
return. Such returns have either been audited or settled through statute expiration through 2007. The state of California is currently conducting an examination of the Companys tax returns for the periods ending December 31, 2008 and
December 31, 2009.
The Company owns two subsidiaries that file corporate tax returns in Sweden. The
Swedish tax authorities examined the tax return of one of the subsidiaries for fiscal 2004. The examiners issued a no change letter, and the examination is complete. The Companys other subsidiary in Sweden has not been examined by the Swedish
tax authorities. The Swedish statute of limitations may be open for up to five years from the date the tax return was filed. Thus, all returns filed for periods ending December 31, 2007 forward are open under the statute of limitations.
At September 30, 2012 and December 31, 2011, the Company had unrecognized tax benefits of $9.1
million and $8.6 million, respectively. The amount of unrecognized tax benefits which, if ultimately recognized, could favorably affect the Companys effective tax rate in a future period is $6.3 million and $5.6 million as of
September 30, 2012 and December 31, 2011, respectively. The Company estimates that it is reasonably possible that the amount of unrecognized tax benefits will decrease by $0.3 million in the next twelve months due to audit settlements.
31
The Company recognizes accrued interest and penalties, if applicable,
related to unrecognized tax benefits in income tax expense. The Company had approximately $0.6 million and $0.3 million for the payment of interest and penalties accrued (net of tax benefit) at September 30, 2012 and December 31, 2011,
respectively.
17.
|
DIVIDENDS DECLARED ON COMMON STOCK
|
On September 21, 2012, the Company announced that its Board of Directors had declared a cash dividend of $0.10 per
issued and outstanding share of the Companys Class A common stock, which was paid on October 31, 2012, to stockholders of record at the close of business on October 1, 2012. The $5.8 million dividend was recorded as a reduction
of accumulated earnings and is included in other current liabilities in the accompanying condensed consolidated balance sheets as of September 30, 2012. The Company has not adopted a dividend policy.
On August 8, 2011, the Company announced that its Board of Directors approved a Stock Repurchase Plan to purchase up to $200 million in aggregate value of shares of Medicis Class A common stock
(common stock). The plan was set to expire on August 7, 2012; however, on August 7, 2012, the Companys Board of Directors approved a six-month extension of the plan to February 7, 2013. The plan may also terminate at
the time at which the purchase limit is reached, and may be suspended or terminated at any time at the Companys discretion without prior notice.
Any repurchases will be made in compliance with the SECs Rule 10b-18 if applicable, and may be made in the open market or in privately negotiated transactions, including the entry into derivatives
transactions.
The number of shares to be repurchased and the timing of repurchases will depend on a variety
of factors, including, but not limited to, stock price, economic and market conditions and corporate and regulatory requirements. It is intended that any repurchases will be funded by existing general corporate funds. The plan does not obligate the
Company to repurchase any common stock.
As part of its stock repurchase program, the Company may from time to
time enter into structured share repurchase agreements with financial institutions. These agreements generally require the Company to make one or more cash payments in exchange for the right to receive shares of its common stock and/or cash at the
expiration of the agreement and/or at various times during the term of the agreement, generally based on the market price of the Companys common stock during the relevant valuation period or periods, but the Company may enter into structured
share repurchase agreements with different features.
During the three and nine months ended
September 30, 2012, 1,533,619 shares were repurchased in the open market at a weighted average cost of $32.55 per share. Total shares repurchased from the inception of the plan through September 30, 2012 in the open market and through
structured share repurchase arrangements was 5,971,852 shares at a weighted average cost of $33.49 per share.
As of September 30, 2012, the plan has terminated as the purchased limit has been reached.
32
19.
|
NET INCOME PER COMMON SHARE
|
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Net
Income
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
937
|
|
|
$
|
-
|
|
|
$
|
937
|
|
|
$
|
22,950
|
|
|
$
|
(3,498
|
)
|
|
$
|
19,452
|
|
Less: income (loss) allocated to participating securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
702
|
|
|
|
-
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
|
937
|
|
|
|
-
|
|
|
|
937
|
|
|
|
22,248
|
|
|
|
(3,498
|
)
|
|
|
18,869
|
|
Weighted average number of common shares outstanding
|
|
|
57,222
|
|
|
|
-
|
|
|
|
57,222
|
|
|
|
61,336
|
|
|
|
61,336
|
|
|
|
61,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
0.02
|
|
|
$
|
-
|
|
|
$
|
0.02
|
|
|
$
|
0.36
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
937
|
|
|
$
|
-
|
|
|
$
|
937
|
|
|
$
|
22,950
|
|
|
$
|
(3,498
|
)
|
|
$
|
19,452
|
|
Less: income (loss) allocated to participating securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
702
|
|
|
|
-
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
|
937
|
|
|
|
-
|
|
|
|
937
|
|
|
|
22,248
|
|
|
|
(3,498
|
)
|
|
|
18,869
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to unvested stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(579
|
)
|
|
|
-
|
|
|
|
(466
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings re-allocated to unvested stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
572
|
|
|
|
-
|
|
|
|
460
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest expense related to 2.5% Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
799
|
|
|
|
-
|
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) assuming dilution
|
|
$
|
937
|
|
|
$
|
-
|
|
|
$
|
937
|
|
|
$
|
23,040
|
|
|
$
|
(3,498
|
)
|
|
$
|
19,662
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
57,222
|
|
|
|
-
|
|
|
|
57,222
|
|
|
|
61,336
|
|
|
|
61,336
|
|
|
|
61,336
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5% Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,823
|
|
|
|
-
|
|
|
|
5,823
|
|
1.5% Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Stock options
|
|
|
1,104
|
|
|
|
-
|
|
|
|
1,104
|
|
|
|
751
|
|
|
|
-
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares assuming dilution
|
|
|
58,326
|
|
|
|
-
|
|
|
|
58,326
|
|
|
|
67,914
|
|
|
|
61,336
|
|
|
|
67,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
0.02
|
|
|
$
|
-
|
|
|
$
|
0.02
|
|
|
$
|
0.34
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Net
Income
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
21,213
|
|
|
$
|
-
|
|
|
$
|
21,213
|
|
|
$
|
84,146
|
|
|
$
|
(16,551
|
)
|
|
$
|
67,595
|
|
Less: income (loss) allocated to participating securities
|
|
|
551
|
|
|
|
-
|
|
|
|
551
|
|
|
|
2,645
|
|
|
|
-
|
|
|
|
2,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
|
20,662
|
|
|
|
-
|
|
|
|
20,662
|
|
|
|
81,501
|
|
|
|
(16,551
|
)
|
|
|
65,498
|
|
Weighted average number of common shares outstanding
|
|
|
57,296
|
|
|
|
-
|
|
|
|
57,296
|
|
|
|
60,264
|
|
|
|
60,264
|
|
|
|
60,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
0.36
|
|
|
$
|
-
|
|
|
$
|
0.36
|
|
|
$
|
1.35
|
|
|
$
|
(0.27
|
)
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
21,213
|
|
|
$
|
-
|
|
|
$
|
21,213
|
|
|
$
|
84,146
|
|
|
$
|
(16,551
|
)
|
|
$
|
67,595
|
|
Less: income (loss) allocated to participating securities
|
|
|
551
|
|
|
|
-
|
|
|
|
551
|
|
|
|
2,645
|
|
|
|
-
|
|
|
|
2,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
|
20,662
|
|
|
|
-
|
|
|
|
20,662
|
|
|
|
81,501
|
|
|
|
(16,551
|
)
|
|
|
65,498
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to unvested stockholders
|
|
|
(124
|
)
|
|
|
-
|
|
|
|
(124
|
)
|
|
|
(2,244
|
)
|
|
|
-
|
|
|
|
(1,709
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings re-allocated to unvested stockholders
|
|
|
123
|
|
|
|
-
|
|
|
|
123
|
|
|
|
2,213
|
|
|
|
-
|
|
|
|
1,685
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest expense related to 2.5% Notes
|
|
|
2,175
|
|
|
|
-
|
|
|
|
2,175
|
|
|
|
2,175
|
|
|
|
-
|
|
|
|
2,175
|
|
Tax-effected interest expense related to 1.5% Notes
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) assuming dilution
|
|
$
|
22,837
|
|
|
$
|
-
|
|
|
$
|
22,837
|
|
|
$
|
83,646
|
|
|
$
|
(16,551
|
)
|
|
$
|
67,650
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
57,296
|
|
|
|
-
|
|
|
|
57,296
|
|
|
|
60,264
|
|
|
|
60,264
|
|
|
|
60,264
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5% Notes
|
|
|
5,821
|
|
|
|
-
|
|
|
|
5,821
|
|
|
|
5,823
|
|
|
|
-
|
|
|
|
5,823
|
|
1.5% Notes
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Stock options
|
|
|
551
|
|
|
|
-
|
|
|
|
551
|
|
|
|
869
|
|
|
|
-
|
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares assuming dilution
|
|
|
63,672
|
|
|
|
-
|
|
|
|
63,672
|
|
|
|
66,960
|
|
|
|
60,264
|
|
|
|
66,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
0.36
|
|
|
$
|
-
|
|
|
$
|
0.36
|
|
|
$
|
1.25
|
|
|
$
|
(0.27
|
)
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share must be calculated using the if-converted
method. Diluted net income per share using the if-converted method is calculated by adjusting net income for tax-effected net interest on the 2.5% Notes and 1.5% Notes, divided by the weighted average number of common shares outstanding
assuming conversion.
34
Unvested share-based payment awards that contain rights to receive
nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, are included in the two-class method of computing earnings per share. The two-class method is an earnings allocation formula that
treats a participating security as having rights to earnings that would otherwise have been available to common stockholders. Restricted stock granted to certain employees by the Company (see Note 5) participate in dividends on the same basis as
common shares, and these dividends are not forfeitable by the holders of the restricted stock. As a result, the restricted stock grants meet the definition of a participating security.
The diluted net income per common share computation for the three months ended September 30, 2012 and 2011 excludes
1,629,144 and 1,695,545 shares of stock, respectively, that represented outstanding stock options whose impact would be anti-dilutive. The diluted net income per common share computation for the three months ended September 30, 2012, also
excludes 5,815,016 and 4,685 shares of common stock, issuable upon conversion of the 2.5% Notes and 1.5% Notes, respectively, as the effect of applying the if-converted method in calculating diluted net income per common share would be
anti-dilutive. For the three months ended September 30, 2012, the calculation of basic and diluted earnings per share under the two-class method is also anti-dilutive.
The diluted net income per common share computation for the nine months ended September 30, 2012 and 2011 excludes
2,541,543 and 2,581,316 shares of stock, respectively, that represented outstanding stock options whose impact would be anti-dilutive.
Due to the net loss from discontinued operations during the three and nine months ended September 30, 2011, diluted earnings per share and basic earnings per share from discontinued operations are
the same, as the effect of potentially dilutive securities would be anti-dilutive.
20.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters
The Company is currently party to various
legal proceedings, including those noted in this section. Unless specifically noted below, any possible range of loss associated with the legal proceedings described below is not reasonably estimable at this time. The Company is engaged in numerous
other legal actions not described below arising in the ordinary course of its business and, while there can be no assurance, the Company believes that the ultimate outcome of these actions will not have a material adverse effect on its operating
results, liquidity or financial position.
From time to time the Company may conclude it is in the best
interests of its stockholders, employees and customers to settle one or more litigation matters, and any such settlement could include substantial payments; however, other than as noted below, the Company has not reached this conclusion with respect
to any particular matter at this time. There are a variety of factors that influence the Companys decisions to settle and the amount the Company may choose to pay, including the strength of its case, developments in the litigation, the
behavior of other interested parties, the demand on management time and the possible distraction of the Companys employees associated with the case and/or the possibility that the Company may be subject to an injunction or other equitable
remedy. It is difficult to predict whether a settlement is possible, the amount of an appropriate settlement or when is the opportune time to settle a matter in light of the numerous factors that go into the settlement decision. Unless otherwise
specified below, any settlement payment made pursuant to any of the completed settlement agreements described below is immaterial to the Company for financial reporting purposes.
Revance Litigation
On May 18, 2012, the Company
received notice that Revance Therapeutics, Inc. (Revance) filed a lawsuit against the Company in the Court of Chancery of the State of Delaware. As previously disclosed, the Company is a minority owner of Revance and had an option to
acquire Revance or license Revances topical product that is under development. Revance alleged that the option period had commenced and sought specific performance and an injunction against the Company. The Company believed that the option
period had not commenced. Revance amended its complaint on June 8, 2012. The Company filed an answer to Revances
35
amended complaint on June 25, 2012 and, on the same day, filed counterclaims against Revance seeking declaratory relief, injunctive relief and specific performance from Revance. Trial began
on September 12, 2012 and lasted through September 14, 2012. On October 8, 2012, the parties entered into a Settlement and Termination Agreement (the Revance Settlement Agreement). The terms of the settlement provide for
the upfront payment by Revance to the Company of $7.0 million to be made within 30 days of the Revance Settlement Agreement, payments to the Company of up to $14.0 million to be made upon certain Revance capital raising achievements and a payment to
the Company of $4.0 million to be made upon the achievement of certain regulatory milestones. The Revance Settlement Agreement also terminated (i) the option to acquire Revance or to exclusively license certain of Revances topical
botulinum toxin products purchased by the Company on December 11, 2007 and (ii) the License Agreement dated July 28, 2009 between the Company and Revance. Pursuant to the Revance Settlement Agreement, the litigation filed by Revance
against the Company and the Companys counterclaims were dismissed with prejudice on October 8, 2012 and all claims under the terminated agreements, whether known or unknown, were released.
Stockholder Litigation Related to the Merger with Valeant
On September 11, 2012, October 1, 2012, and October 25, 2012, putative class action lawsuits were
filed in the Court of Chancery of the State of Delaware by Susan Omohundro Wood (Wood v. Shacknai, C.A. No. 7857-CS), Leslie Russell (Russell v. Shacknai, C.A. No. 7916-CS) and Maureen Collier (Collier v. Shacknai, C.A. No. 7984-CS),
and on September 11, 2012 in the Superior Court of Arizona in Maricopa County by Kimberly Swint (Swint v. Medicis Pharmaceutical Corporation, CV2012-055635), alleged stockholders of the Company. Plaintiffs Swint and Wood subsequently amended
their lawsuits on September 26, 2012 and September 28, 2012, respectively. The Delaware lawsuits have been consolidated under the name In re Medicis Pharmaceutical Corporation Shareholder Litigation, Consolidated C.A. No-7857-CS (the
Delaware Actions)
The lawsuits allege that the members of the Companys board of directors
breached their fiduciary duties in negotiating and approving the Merger Agreement, that the Merger consideration negotiated in the Merger Agreement undervalues the Company, that the Companys stockholders will not receive adequate or fair value
for their Company common stock in the Merger, that the terms of the Merger Agreement impose improper deal protection devices that preclude competing offers, and that the Preliminary Proxy Statement filed in connection with the Merger contains
material misstatements and/or omissions. They further allege that the Company, Valeant Pharmaceuticals International, Inc., and in the case of the Delaware Action, Valeant Pharmaceuticals International and its wholly-owned subsidiary Merlin Merger
Sub, Inc., aided and abetted the purported breaches of fiduciary duty. The lawsuits seek, among other things, an injunction against the completion of the Merger and rescission in the event that the Merger has already been consummated prior to the
entry of the Courts final judgment, and an award of damages and costs and expenses, including attorneys and experts fees and expenses. The Company believes the lawsuits are meritless and intends to defend against them vigorously.
Q-Med AB Complaint Related to the Merger with Valeant
On November 7, 2012, Q-Med AB (Q-Med) filed a complaint (the Complaint) against the Company, HA
North American Sales AB, a wholly-owned subsidiary of the Company (HANA) and Medicis Aesthetics Holdings Inc., in the United States District Court for the Southern District of New York.
The Company and HANA hold exclusive U.S. and Canadian rights to market certain dermal filler
products, including RESTYLANE
®
, RESTYLANE-L
®
, PERLANE
®
, PERLANE-L
®
and RESTYLANE FINE LINES
, through certain license and supply agreements with Q-Med (the Agreements). The Complaint alleges that Q-Med has the right under the Agreements to
withhold consent to a change of control of the Company that would result in a transfer to Valeant of the exclusive rights to market and sell the dermal filler products under the Agreements, and that the Company has breached or anticipatorily
breached the Agreements. Q-Med alleges that the action is in aid of arbitration to prevent the Company from transferring such rights to Valeant as a result of the Merger.
The Complaint seeks (1) a declaration that Q-Med has the right to withhold consent in accordance with the terms of the
Agreements; (2) a finding that the Company has materially breached its obligations under the Agreements, entitling Q-Med to contractual remedies, including termination or rescission of the Agreements; (3) a preliminary injunction prohibiting the
Company from transferring its rights under the Agreements to Valeant during the pendency of the arbitration proceedings that Q-Med will bring; and (4) other relief as the court deems just and proper.
The Company believes that Q-Meds action is without merit and intends to vigorously defend itself. The Merger
Agreement does not require the consent of Q-Med as a condition to consummating the Merger.
In addition to the
matters discussed above, in the ordinary course of business, the Company is involved in a number of legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions
is not presently determinable, it is the opinion of the Companys management, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse
effect on the results of operations, financial condition or cash flows of the Company.
21.
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|
In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04,
Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards
(Topic 820)
Fair Value Measurement
, to provide a consistent definition of fair value and ensure that the fair
value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU No. 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements,
particularly for level 3 fair value measurements. ASU No. 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011 and must be applied prospectively. The Company adopted ASU No. 2011-04 as of
January 1, 2012 and the revised guidance, which relates to disclosure, did not impact its results of operations and financial condition.
36
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive
Income
(Topic 220):
Presentation of Comprehensive Income
. The updated guidance amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the
components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both alternatives, an entity is required to present each
component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present
the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item
of other comprehensive income must be reclassified to net income. ASU No. 2011-05 will be applied retrospectively. ASU No. 2011-05 is effective for annual reporting periods beginning after December 15, 2011, with early adoption
permitted, and will be applied retrospectively. The Company adopted ASU No. 2011-05 as of January 1, 2012, and the adoption of this amendment only impacted the presentation of comprehensive income within the Companys condensed
consolidated financial statements. Comprehensive income is now presented in the condensed consolidated statements of comprehensive income that are now included as part of the Companys condensed consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08,
Intangibles Goodwill and Other
(Topic 350):
Testing
Goodwill for Impairment
. The updated guidance permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than its carrying value before applying the two-step goodwill
impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting units fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary.
The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed in annual reporting periods beginning after
December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 as of January 1, 2012, and the revised guidance did not impact its results of operations and financial condition.
In July 2012, the FASB issued ASU 2012-02,
Intangibles Goodwill and Other
(Topic 350):
Testing
Indefinite-Lived Intangible Assets for Impairment
. The updated guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under the updated guidance, an entity
would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The
updated guidance also includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2012-02 is effective for annual and interim indefinite-lived intangible asset impairment tests performed in
annual reporting periods beginning after September 15, 2012, with early adoption permitted. The Company is currently assessing what impact, if any, the revised guidance will have on its results of operations and financial condition.
The Company has evaluated subsequent events through the date of issuance of its condensed consolidated financial statements.
On October 8, 2012, the Company entered into a Settlement and Termination Agreement (the Agreement) with
Revance to settle litigation and terminate certain contractual relationships between the Company and Revance. Pursuant to the terms of the Agreement, (i) the option to acquire Revance or to exclusively license certain of Revances topical
botulinum toxin products purchased by the Company on December 11, 2007 and (ii) the License Agreement dated July 28, 2009 between the Company and Revance have been terminated. In accordance with the Agreement, the previously disclosed
litigation filed by Revance against the Company in the Court of Chancery of the State Delaware and the Companys counterclaims were dismissed with prejudice and all claims under the terminated agreements, whether known or unknown, were
released. The Agreement also provides for an upfront payment to the Company of $7.0 million to be made within 30 days of the Agreement, payments to the Company of up to $14.0 million to be made upon certain Revance capital raising achievements and a
payment to the Company of $4.0 million to be made upon the achievement of certain regulatory milestones.
37