Valeant
`Pharmaceuticals
`International, Inc.
`
`Investor Conference Call
`October 26, 2015
`
`Page 1 of 90
`
`ACRUX DDS PTY LTD. et al.
`
`EXHIBIT 1526
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
`
`

`

`Forward-looking Statements
`
`Forward-looking Statements
`Certain statements made in this presentation may constitute forward-looking statements, including, but not limited to, statements regarding the
`expected future performance, including guidance with respect to revenue, Cash EPS, adjusted cash flow from operations and organic growth, the
`Company’s relationship with Philidor RX Services, LLC (“Philidor”), including the Company’s option and the exercise of contractual rights and its
`ability to continue to use the Philidor network, the continued ability of the Company to offer certain products, the results of the litigation with R&O
`Pharmacy, LLC, strategies with regard to the Company’s distribution of product through the specialty pharmacy distribution channel, results of the
`ad hoc committee of the Board of Directors in its review of the publicly disclosed allegations regarding the Company’s relationship with Philidor,
`future expenditures for R&D and brand support, our pursuit of debt paydown, share repurchases and other acquisitions and the impact of recent
`events on our business. Forward-looking statements may generally be identified by the use of the words “anticipates,” “expects,” “intends,” “plans,”
`“should,” “could,” “would,” “may,” “will,” “believes,” “estimates,” “potential,” “target,” or “continue” and variations or similar expressions. These
`statements are based upon the current expectations and beliefs of management and are subject to certain risks and uncertainties that could cause
`actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited
`to, risks and uncertainties discussed in the Company's most recent annual or quarterly report and detailed from time to time in Valeant’s other filings
`with the Securities and Exchange Commission and the Canadian Securities Administrators, which factors are incorporated herein by reference.
`Readers are cautioned not to place undue reliance on any of these forward-looking statements. These forward-looking statements speak only as of
`the date hereof. Valeant undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the
`date of this presentation or to reflect actual outcomes.
`
`
`Non-GAAP Information
`To supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses non-
`GAAP financial measures that exclude certain items, such as amortization of inventory step-up, amortization of alliance product assets & property,
`plant and equipment step up, stock-based compensation step-up, contingent consideration fair value adjustments, restructuring, integration,
`acquisition-related and other costs, In-process research and development, impairments and other charges, ("IPR&D"), legal settlements outside the
`ordinary course of business, the impact of currency fluctuations, amortization including intangible asset impairments and other non-cash charges,
`amortization and write-down of deferred financing costs, debt discounts and ASC 470-20 (FSP APB 14-1) interest, loss on extinguishment of debt,
`(gain) loss on assets sold/held for sale/impairment, net, (gain) loss on investments, net, and adjusts tax expense to cash taxes. Management uses
`non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. By disclosing
`non-GAAP financial measures, management intends to provide investors with a meaningful, consistent comparison of the Company’s core operating
`results and trends for the periods presented. Non-GAAP financial measures are not prepared in accordance with GAAP. Therefore, the information
`is not necessarily comparable to other companies and should be considered as a supplement to, not a substitute for, or superior to, the
`corresponding measures calculated in accordance with GAAP.
`
`
`Note 1: The guidance in this presentation is only effective as of the date given,
`October 26, 2015, and will not be updated or affirmed unless and until the
`Company publicly announces updated or affirmed guidance.
`
`1
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`Page 2 of 90
`
`

`

`In attendance today
`
`Board
`members
`
` Robert Ingram, Lead Independent Director
`
` Robert Hale, Board Member, Partner of ValueAct Capital
`
` Theo Melas-Kyriazi, Board Member, Member Audit and Risk Committee
`
` G. Mason Morfit, Board Member, President of ValueAct Capital
`
` Norma Provencio, Board Member, Chairman Audit and Risk Committee
`
` Howard Schiller, Board Member, former Chief Financial Officer
`
` Katharine Stevenson, Board Member, Member Audit and Risk Committee
`
`
`
`Management
`
`
`
`J. Michael Pearson, Chairman and Chief Executive Officer
`
` Tanya Carro, Corporate Controller
`
` Seana Carson, Chief Compliance Officer
`
` Robert Chai-Onn, General Counsel
`
` Dr. Ari Kellen, Company Group Chairman
`
` Robert Rosiello, Chief Financial Officer
`
`2
`
`Page 3 of 90
`
`

`

`J. Michael Pearson
`
`Robert Ingram
`
`Opening Remarks
`
`Page 4 of 90
`
`

`

`Agenda
`
`▪ Philidor
`1. Specialty pharmacies
`
`2. Valeant’s history with Philidor
`
`3. Philidor’s network and operations
`
`4. Accounting and disclosure for Philidor
`
`5. Valeant diligence, oversight, and control as it relates
`to Philidor
`
`6. R&O: The facts as we know them
`
`7. Philidor summary and next steps
`▪ Business update
`
`4
`
`Page 5 of 90
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`

`

`1. Specialty pharmacies – Dr. Ari Kellen
`
`5
`
`Page 6 of 90
`
`

`

`Our Dermatology Specialty Pharmacy
`Strategy
`
`▪ We value our relationships with traditional wholesale and retail pharmacy channels,
`and continue to make our products available through those channels. We have an
`offering through specialty pharmacy for the smaller subset of physicians and patients
`who prefer this channel
`
`▪ Use of specialty pharmacies in dermatology is common
`
`▪ Our specialty pharmacy strategy originated from the Medicis Alternate Fulfillment
`Program
`
`▪ The strategy is designed to improve patients’ access to medications at an affordable
`price, and to help ensure doctors are able to prescribe the medications they believe
`are most appropriate for their patients
`
`▪ Philidor provides reimbursement support services to comply with managed care
`formulary restrictions such as prior-authorizations and step-edits
`
`▪ We have designed our programs to improve patient adherence to medications and
`contribute to improved patient outcomes
`
`6
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`Page 7 of 90
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`

`

`Key Elements of the Philidor Program
`
`▪ For Commercially insured patients, Philidor dispenses
`Valeant medications before adjudication of the
`reimbursement may be finalized. Patients get their
`medicines more quickly and Valeant takes the risk for non-
`reimbursement
`
`▪ Affordable cash pay options exist for prescriptions which
`are not reimbursed by commercial insurance
`
`▪ Co-pay subsidies and cash pay options are designed to
`be affordable and are not eligible for prescriptions
`reimbursed in whole or in part by government insurance
`
`7
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`Page 8 of 90
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`

`

`Other Companies Focused on
`Dermatology Utilize Specialty Pharmacies
`
`Company
`
`Allergan
`
`Example Product
`
`Aczone, Tazorac
`
`Example Specialty Pharmacies
`identified*
`
`Choice Compounding Pharmacy
`IRMAT Pharmacy
`
`Galderma (Nestle)
`
`Epiduo
`
`IRMAT Pharmacy
`
`PharmaDerm
`(Novartis)
`
`Kerydin
`
`RxCrossroads Pharmacy (Part of
`Omnicare)
`
`* Source: Company websites, promotional materials
`
`8
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`Page 9 of 90
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`

`

`Examples of Valeant products offered
`through Philidor*
`
`Commercially insured
`1st Rx
`Refill
`
`Product Name
`
`Strength
`
`Acanya
`
`1.2%/2.5%
`
`Atralin
`
`0.05%
`
`Clindagel
`
`Jublia
`
`1%
`
`10%
`
`Size
`
`50 g
`
`45 g
`
`75 ml
`
`4 ml
`8 ml
`
`Locoid Lotion
`
`0.10%
`
`59/118 ml
`
`Luzu
`
`Noritate
`
`1%
`
`1%
`
`Onexton Gel
`
`1.2%/3.75%
`
`Retin-A-Micro
`
`0.08%
`
`60 g
`
`60 g
`
`50 g
`
`50 g
`
`Solodyn
`
`55/65/80/105/115mg 30ct
`
`(1) $40 is for commercial uncovered refills
`* Effective October 2015
`
`9
`
`$35
`
`$35
`
`$0
`
`$0
`$0
`
`$35
`
`$35
`
`$0
`
`$0
`
`$35
`
`$0
`
`Cash pay
`
`$75
`
`$125
`
`$75
`
`$40
`
`$40
`
`$40
`
`$0/$40 (1)
`$0/$40 (1)
`
`$75
`$125
`
`$40
`
`$40
`
`$40
`
`$75
`
`$75
`
`$75
`
`$0/$40 (1)
`
`$75
`
`$40
`
`$40
`
`$75
`
`$50
`
`Page 10 of 90
`
`

`

`Channel economics
`
` In Q3 2015, Philidor represented 6.8% of total
`Valeant revenue
`
` In Q3 2015, Philidor represented ~7% of Valeant
`EBITA
`
`
` Prescriptions through Philidor are less profitable than
`traditional channels due to lower copay rates, lower
`cash pay rates and more cash pay scripts in Philidor
`than in retail and other channels
`
`10
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`Page 11 of 90
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`

`

`Specialty Pharmacy - Q&A (1/6)
`
`Question: What % of your YTD net revenues flow through
`specialty pharmacies? What % of YTD net revenues is
`through Philidor?
`
`Answer:
`▪ Specialty pharmacies account for 7.2% of Valeant net
`revenue YTD
`
`▪ Philidor accounts for 5.9% of Valeant net revenue YTD
`
`
`11
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`Page 12 of 90
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`

`

`Specialty Pharmacy - Q&A (2/6)
`
`Question: What % of Jublia net revenues flowed through
`Philidor in 3Q 2015?
`
`Answer:
`▪ 44% of Jublia revenue flowed through Philidor in Q3 2015
`
`
`12
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`Page 13 of 90
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`

`

`Specialty Pharmacy - Q&A (3/6)
`
`Question: How are specialty pharmacies compensated?
`
`Answer:
`▪ Like retail pharmacies, specialty pharmacies are paid by health insurers
`and patients, and often also receive fees for performing certain additional
`services on behalf of manufacturers such as refill reminders, processing
`copay assistance, or data reporting
`
`
`13
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`Page 14 of 90
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`

`

`Specialty Pharmacy - Q&A (4/6)
`
`Question: How do specialty pharmacies interact with the PBMs?
`
`Answer:
`▪ Specialty pharmacies, like retail pharmacies, contract with PBMs to
`be included in their network. The ability for PBMs to restrict members
`is dependent on state law
`▪ A number of states have “Any Willing Provider” laws, which ensure
`all pharmacies have access to PBM networks
`▪ PBMs have audit rights with all of their network participants
`
`14
`
`Page 15 of 90
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`

`

`Specialty Pharmacy - Q&A (5/6)
`
`Question: How are specialty pharmacies regulated?
`
`Answer:
`▪ Specialty pharmacies are licensed by state regulators and
`are subject to federal controlled substance regulations
`
`15
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`Page 16 of 90
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`

`

`Specialty Pharmacy - Q&A (6/6)
`
`Question: Can a manufacturer own a specialty pharmacy?
`
`Answer:
`▪ Yes
`
`▪ For example Abbvie currently owns Pharmacy Solutions,
`which distributes Humira, Lupron Depot, Lupaneta Pack to
`patients(1)
`
`
`
`
`(1) Source: www.abbvie.com
`
`16
`
`Page 17 of 90
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`

`

`2. Valeant’s history with Philidor – Howard Schiller
`
`17
`
`Page 18 of 90
`
`

`

`Philidor History – Pre Option
`
`▪ Pilot program developed pre-acquisition by Philidor for Medicis
`– Original program covered Solodyn and Ziana in a limited
`number of states
`– Services agreement with Philidor signed January 2013
`
`▪ After seeing evidence of success in late 2013 the parties agreed
`to expand the program
`– At the time Philidor was a small start-up
`– Valeant did not invest or lend any money to the Philidor scale-
`up
`
`
`▪ Patients and doctors had strong positive feedback on the
`Philidor experience
`– Led to significant growth over calendar year 2014
`
`
`18
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`Page 19 of 90
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`

`

`Why an option to acquire Philidor? (1/2)
`
`▪ In fall of 2014, Philidor was at an inflection point with their business.
`Philidor had experienced significant growth and success with Valeant in
`dermatology, and was now looking to expand into more therapeutic
`offerings with additional partners
`
`
`▪ While we work with a number of specialty pharmacies, we believed that
`a strategic relationship with a specialty pharmacy would allow us to
`provide high service levels to physicians and affordable access to drugs
`for patients
`
`
`▪ We were protective about our successful new platform. If Philidor
`rapidly expanded with additional partners, we might have lost the high
`service levels to patients and doctors that had driven success
`
`
`▪ We wanted to maintain Access program exclusivity in our key
`therapeutic areas
`
`
`
`19
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`Page 20 of 90
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`

`

`Why an option to acquire Philidor? (2/2)
`
`▪ Our primary interest was ensuring that Philidor remained focused on
`our business
`
`
`▪ We considered the full spectrum from outright purchase to different
`exclusivity arrangements
`
`
`▪ Ultimately determined the structured option acquisition with the
`oversight rights we negotiated provided security and the flexibility in the
`future to acquire a new growth platform
`
`
`
`20
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`

`

`Why this option purchase is different
`from typical Valeant transactions
`
`▪ Typical practice in Valeant integrations
`– Existing Valeant manager with operational responsibility for the business
`starting Day 1
`– Work to cut over all financial and IT systems ASAP post close
`– Employees are trained on Valeant policies and programs (e.g., compliance,
`HR)
`▪ Philidor
`– We do not own or control Philidor
`– No “day 1”, Philidor remains on their systems and policies
`– Philidor employees do not report to Valeant, though we:
`▫ maintain regular communication
`▫ have a joint steering committee
`▫ have rights (and have utilized them) to approve key positions (e.g., in-house
`lawyer, chief compliance officer)
`▫ included Philidor in Valeant’s SOX 404 Internal Control Testing and Internal
`Audit program for 2015
`
`21
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`Page 22 of 90
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`

`

`Philidor option terms
`
`▪ Upfront: ~$100M
`▪ Valeant has the right to exercise its option for up to 10 years to acquire
`Philidor for $0
`▪ Milestones: Up to $133M
`– $33M of milestones already paid
`
`▪ Philidor is independent, with Valeant having contractual rights including:
`– Joint Steering Committee
`– Right to require hires for certain positions
`– Substantial information rights
`– Covenants respecting Philidor’s compliance with all applicable laws
`
`▪ Philidor is a separate limited liability legal entity
`▪ We believe we do not have legal liability for Philidor
`
`22
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`Page 23 of 90
`
`

`

`Indemnification from Philidor (1/2)
`
`▪ Valeant received representations, warranties, and covenants as
`to business practices/performance from Philidor
`– Representations that Philidor:
`▫ Was not in violation of any applicable law
`▫ Had all material permits required by law necessary for the
`conduct of its business
`– Covenants that Philidor is operating their business
`▫ In compliance with applicable law
`– Philidor indemnification of Valeant:
`▫ Third party claims relating to the operation of Philidor’s
`business and performance of its duties
`▫ Breach of representations, warranties, and covenants or for
`Philidor’s negligence or willful misconduct
`
`23
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`Page 24 of 90
`
`

`

`Indemnification from Philidor (2/2)
`
`▪ Under the option agreement, for breaches of
`fundamental representations and certain covenants
`(including compliance with applicable law), Philidor’s
`equity holders’ obligation to indemnify Valeant
`survives indefinitely and is capped at the amount of
`the up-front payment plus all milestones paid or
`achieved (i.e., today that would be at least $133M)
`– Indemnification on other breaches of reps and covenants
`is capped at $25.4 million
`
`
`▪ For indemnification claims by Valeant, Valeant has
`right to set off such amounts against sales-based
`milestones owed to Philidor and/or seek directly from
`Philidor members
`
`24
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`Page 25 of 90
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`

`

`Philidor History – Post Option
`
`▪ December 2014 - acquired option to acquire Philidor
`– Rationale to acquire option for Philidor was to keep Philidor
`focused on Valeant’s business and to ensure continued strong
`customer service
`– Gave Valeant a level of contractual influence to benefit our
`business, while providing an option on long term ownership
`▪ Result:
`– High service levels and high customer satisfaction
`– Provided Valeant with another platform for growth
`
`
`
`
`25
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`Page 26 of 90
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`

`

`Valeant’s Management Rights
`
`▪ Unless and until Valeant exercises the option to acquire Philidor, Philidor
`remains independent and Valeant has no rights to remove CEO or
`management
`
`▪ Valeant has the right (but not the obligation) to appoint or cause Philidor to
`hire:
`
`– Advisor to the CEO
`
`– Head Compliance Officer
`
`– In-House lawyer
`
`– Head IT officer
`
`– Other employees as reasonably requested
`
`▪ Joint steering committee
`
`
`
`26
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`Page 27 of 90
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`

`

`Valeant’s history with Philidor – Q&A
`(1/4)
`
`Question: Do Mike Pearson, other Valeant senior
`executives, or board members own a stake in Philidor?
`
`Answer:
`▪ No, neither Valeant senior executives nor board members
`own a stake in Philidor
`
`
`
`27
`
`Page 28 of 90
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`

`

`Valeant’s history with Philidor – Q&A
`(2/4)
`
`Question: Has Valeant lent money to the owners of Philidor?
`
`Answer:
`No, Valeant has not lent any money to the owners of Philidor
`
`
`28
`
`Page 29 of 90
`
`

`

`Valeant’s history with Philidor – Q&A
`(3/4)
`
`Question: What would be the rationale for a Valeant entity to
`file the UCC-1 liens on Philidor’s members’ equity?
`
`Answer:
`▪ The UCC-1 liens have nothing to do with any loan
`▪ They are in place to secure our rights to the equity we
`would acquire if we exercised the option
`
`29
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`

`

`Valeant’s history with Philidor – Q&A
`(4/4)
`
`Question: Who is KGA Fulfillment Services?
`
`Answer:
`▪ KGA Fulfillment Services, a wholly-owned subsidiary of
`Valeant, filed the UCC-1 liens, and owns Valeant’s option to
`acquire Philidor
`
`
`30
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`Page 31 of 90
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`

`

`3. Philidor’s network and operations –
` Howard Schiller
`
`31
`
`Page 32 of 90
`
`

`

`Philidor at a Glance
`
`▪ Pharmacy headquartered in Pennsylvania
`– CEO Andrew Davenport
`– Locations in Hatboro and Horsham, Pennsylvania and
`Phoenix, Arizona
`– Licensed to dispense in 46 states + DC
`– Presently Philidor’s network of pharmacies includes
`pharmacies located in California, Florida, New Jersey,
`South Carolina and Texas
`▫ Valeant has retained and discussed the Philidor
`structure with knowledgeable counsel
`▫ Valeant understands that the structure, including
`Philidor’s use of an unaffiliated acquisition vehicle,
`meets legal requirements
`
`32
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`Page 33 of 90
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`

`

`Evolution of the Philidor model
`
`Original strategy:
`• Single hub in
`Pennsylvania
`• Added state
`licenses and
`back-end
`capacity over
`time
`
`Future:
`• Further expand
`network via
`partnering with
`existing
`pharmacies on
`a contract
`basis
`
`Phase 2:
`• Testing different
`expansion models:
`increased network
`by acquiring
`interests in
`additional
`Pharmacies and
`partnering with
`independent
`pharmacies
`
`33
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`Page 34 of 90
`
`

`

`Philidor’s network and operations - Q&A
`(1/12)
`
`Question: How does Philidor distribute drugs in states, like
`California, where they are not licensed? Does Philidor contract with
`sub-contractors?
`
`Answer:
`• We understand that Philidor holds non-resident licenses in 45 states, the
`District of Columbia and its resident license in Pennsylvania
`In the few states where it is not directly licensed, like California, Philidor
`does not dispense products to patients. Philidor has agreements with
`affiliated pharmacies that have California licenses, and those pharmacies
`have dispensed products to patients in California
`
`•
`
`34
`
`Page 35 of 90
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`

`

`Philidor’s network and operations - Q&A
`(2/12)
`
`Question: Are competitor products, including generics,
`available through Philidor?
`
`Answer:
`▪ Yes, but the bulk of Philidor’s volume is related to Valeant
`products
`
`35
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`Page 36 of 90
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`

`

`Philidor’s network and operations - Q&A
`(3/12)
`
`Question: How do you compensate Philidor?
`
`Answer:
`▪ We pay Philidor a per prescription service fee as
`consideration for the various services provided by Philidor in
`the administration of our alternate fulfillment program.
`However this fee is eliminated in consolidation and we
`recognize all of their operating expenses in our consolidated
`financial statements
`
`36
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`Page 37 of 90
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`

`

`Philidor’s network and operations - Q&A
`(4/12)
`
`Question: Is the Isolani structure intended to avoid continued
`review issues in California?
`
`Answer:
`▪ Valeant has consulted with experienced and
`knowledgeable regulatory counsel. We believe that the
`Isolani structure meets California’s legal requirements
`
`37
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`Page 38 of 90
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`

`

`Philidor’s network and operations - Q&A
`(5/12)
`
`Question: Did Valeant have an ownership interest at the time
`that Philidor applied for its non-resident license in California?
`
`Answer:
`▪ No, Valeant has never had an ownership interest in
`Philidor. Valeant acquired its option after Philidor had
`submitted its August 2013 application
`
`38
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`Page 39 of 90
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`

`

`Philidor’s network and operations - Q&A
`(6/12)
`Question: Does Philidor auto-refill RXs? If so, when? What is
`the full process?
`
`Answer:
`▪ We understand that Philidor patients are contacted by a
`customer service representative between 24 and 28 days
`after Philidor dispenses the initial fill on a particular
`prescription, to inquire whether the patient would like to
`have the prescription refilled (if there are refills written for
`the prescription). Patients who agree to refill their
`prescription and who are eligible for a $0 co-pay are offered
`auto-refill on all subsequent fills left on their prescription .
`Patients can opt-out from auto-refill at any time
`
`39
`
`Page 40 of 90
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`

`

`Philidor’s network and operations - Q&A
`(7/12)
`
`Question: Do other pharmacies have refill programs?
`
`Answer:
`▪ Yes, other pharmacies, including national chains such as
`Walgreens have auto-refill programs
`
`40
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`Page 41 of 90
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`

`

`Philidor’s network and operations - Q&A
`(8/12)
`
`Question: Does Philidor have contracts with PBMs?
`
`Answer:
`▪ Yes, Philidor, like other pharmacies, has contracts with
`PBMs to be included in their networks
`
`41
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`Page 42 of 90
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`

`

`Philidor’s network and operations - Q&A
`(9/12)
`
`Question: Have PBMs and Managed Care Organizations
`audited Philidor?
`
`Answer:
`▪ We understand that Philidor and its network pharmacies
`have complied with several hundred desk audits from
`almost the entire universe of payors, and have participated
`in more than two dozen live audits involving most major
`PBMs
`
`42
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`

`

`Philidor’s network and operations - Q&A
`(10/12)
`
`Question: Why have a number of employees of Valeant
`recently become employees of Philidor?
`
`Answer:
`▪ Philidor decided to hire a field force to assist in providing
`customer services and hired a number of former Valeant
`employees
`
`
`
`
`43
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`Page 44 of 90
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`

`

`Philidor’s network and operations - Q&A
`(11/12)
`
`Question: Do other specialty pharmacies have field forces?
`
`Answer:
`▪ Yes, pharmacies other than Philidor have field forces to
`promote their services
`
`
`
`
`44
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`

`

`Philidor’s network and operations - Q&A
`(12/12)
`
`Question: Why was Philidor’s California pharmacy
`application rejected?
`
`Answer:
`• This is an issue that the ad hoc committee of the board
`plans to review
`
`45
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`

`4. Accounting and Disclosure for Philidor –
` Robert Rosiello
` Tanya Carro
`
`
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`Revenue Recognition Policies for
`Philidor
`
`▪ Valeant consolidates financials with Philidor and the Philidor
`network, ensuring that revenue recognition and financial
`statement presentation is appropriate
`
`▪ Third party revenue is not recognized when products are
`shipped to Philidor and its network (these shipments are
`recorded as intercompany sales, which are eliminated in
`Valeant’s consolidation process)
`
`▪ Instead, Valeant recognizes revenue only when products are
`dispensed to patients and records this at net realized price
`
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`Accounting for Philidor
`
`Before Purchase Option Agreement (1)
`
` All sales to Philidor accounted for as
`Valeant does with any third party
` Sales recognized upon transfer of
`inventory to Philidor
`
`After Purchase Option Agreement (1)
`
` Inventory held at Philidor remains on
`Valeant’s consolidated balance sheet
` Revenues only recognized in Valeant’s
`consolidated income statement when
`products dispensed to the patient
`
`
`
` Consolidating financials of Philidor delays revenue recognition relative
`to third party transactions
` No way to “stuff the channel” of consolidated VIEs, since all
`inventory remains on Valeant’s consolidated balance sheet until
`dispensed to patients
`
`(1) Executed December, 2014
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`Product and Financial Flows for Philidor
`and the Philidor Network (1/2)
`
`1. Philidor for itself or affiliates sends an order to Valeant
`
`2. Valeant ships to Philidor for itself or affiliates in response to that
`order
`
`3. Valeant records these shipments as intercompany sales, which
`are eliminated in consolidation, and bills Philidor for itself or
`affiliates at Wholesale Acquisition Cost (WAC), and records an
`intercompany receivable from Philidor for itself or affiliates
`
`4. Philidor for itself or affiliates records receipt of inventory in the
`appropriate subledger (Philidor for itself or affiliates) and records
`an intercompany payable in the appropriate ledger
`
`5. Philidor for itself or affiliates dispenses prescription to patients
`and records 3rd party revenue (which appears in Valeant’s
`consolidated income statement at the net realized price)
`
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`Product and Financial Flows for Philidor
`and the Philidor Network (2/2)
`
`6. Difference between WAC inventory value and amount of
`collections from patients/payors is recorded as an intercompany
`receivable from Valeant, which offsets the intercompany payable
`
`7. Amounts collected from patients and payors are deposited into
`Philidor or affiliates’ operating accounts
`
`8. Intercompany payable is repaid bi-weekly to Valeant from
`Philidor or affiliates’ operating accounts
`
`9. Amounts outstanding due from payors are reflected in Philidor for
`or affiliates’ accounts receivable and in Valeant’s consolidated
`balance sheet
`
`10.Unsold inventory at Philidor or affiliates is included in Valeant’s
`consolidated balance sheet at standard cost
`
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`Policy on Consolidating VIEs
`
`▪ Valeant evaluates the accounting treatment of Variable Interest Entities
`(VIEs) in accordance with ASC 810
`
`▪ Philidor was considered a VIE prior to the Purchase Option Agreement, but
`since Valeant was not determined to be the primary beneficiary,
`consolidation was not appropriate
`
`▪ A Purchase Option Agreement for Philidor was executed in December 2014:
`
`– Finance and Transactions Committee, Audit and Risk Committee and Full
`Board reviewed the transaction
`
`– The appropriate accounting treatment was determined by management
`and reviewed with the Audit and Risk Committee
`
`▪ After the Purchase Option Agreement was executed, the VIE analysis was
`updated and Valeant was determined to be the primary beneficiary and
`consolidation became a requirement
`
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`Financial control approach to Philidor
`
`▪ Philidor is included in Valeant’s SOX 404 Internal Control Testing and
`Internal Audit program for 2015
`– This includes both Business Processes and IT General Controls testing
`– We co-source with a Big 4 Firm that conducts the testing for these
`programs
`
`
`▪ Valeant reviews the financials of Philidor network pharmacies on a regular
`basis
`– Credit and collections team at Valeant, along with Philidor CFO monitors
`payment activity to ensure receipt of bi-weekly payments
`– Financial statements of Philidor network pharmacies are consolidated
`and reviewed monthly by Valeant, including review of accounts
`receivable and inventory balances as well as reconciliation of all
`intercompany balances
`
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`Materiality of Philidor for Disclosure
`Purposes
`
`▪ Philidor is not considered material to Valeant’s business for reporting purposes
`– At the time of the Purchase Option Agreement in December, 2014, Philidor YTD
`net sales were $111 million
`– The GAAP requirement for disclosing sales to large customers is 10% of
`revenue; revenue from the smallest customer disclosed in 2014 was $0.9 billion
`– Philidor is no longer a customer for accounting purposes (since its financials are
`consolidated) but if it were, it would still not require disclosure when applying the
`10% threshold
`▪ Valeant has a pre-established internal threshold for specifically disclosing
`transactions in business combination footnotes
`– The purchase of the option to acquire Philidor did not meet this threshold
`– Valeant reviews this threshold (at a minimum annually) with its audit committee
`and external auditors, and makes adjustments as appropriate. This review
`includes benchmarking disclosures of other pharmaceutical companies and
`companies that are similarly acquisitive
`▪ Even if Valeant had acquired Philidor it would not have met the pre-established
`threshold
`
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`Disclosures of Philidor, Past and Future
`
`▪ As Philidor was not considered material to Valeant for reporting purposes, it was not
`reported prior to October 2015
`▪ Consolidation of VIEs was disclosed in Valeant’s 2014 10-K in two places
`– Footnote 2 Significant Accounting Policies
`– Footnote 3 Business Combinations
`▪ Philidor was not specifically mentioned as it has not been material to consolidated
`financial statements (1% or less of total assets, 7% or less of consolidated net
`revenues since Q4 2014)
`▪ On our Q3 earnings call Valeant disclosed its relationship with Philidor given the
`October 3rd announced litigation with R&O and investor interest
`– No obligation to disclose this as amounts are not material
`– Materiality of the Philidor arrangement is evaluated quarterly as part of Valeant’s
`disclosure checklist
`▪ We will continue to share financial information on Philidor for the foreseeable future
`
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`Accounting and Disclosure for Philidor -
`Q&A (1/4)
`
`Question: Did you use an outside law firm to design the
`Philidor arrangement?
`
`Answer:
`▪ Hogan Lovells advised us on structuring our distribution and
`services arrangement with Philidor along with supporting
`our due diligence on the company
`
`
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`Accounting and Disclosure for Philidor -
`Q&A (2/4)
`
`Question: How does Valeant account for other specialty
`pharmacies revenue?
`
`Answer:
` Pharmacies in the Philidor network, including R&O, are
`consolidated by Valeant and net revenue is booked when
`the product is sold to a patient
` Specialty pharmacies outside of the Philidor network are
`treated like the rest of our customers and revenue is
`recorded when they take ownership of the inventory
`
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`Accounting and Disclosure for Philidor -
`Q&A (3/4)
`
`Question: Are there any other accounting standards that
`could have been applied to Philidor with regard to revenues
`and/or inventories?
`
`Answer:
`▪ Based on the rights acquired by Valeant with the option
`purchase, and applying the criteria described in ASC 810,
`the only appropriate treatment from an accounting
`perspective was determined to be consolidation
`
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`Accounting and Disclosure for Philidor -
`Q&A (4/4)
`
`Question: Are there any other consolidated specialty pharmacies or
`VIEs besides Philidor?
`
`Answer:
` Valeant consolidates two VIE’s in addition to the Philidor network:
`(1) PT Kukah Usaha Maju (PT KUM), the 15% minority interest
`owner of a company we acquired in Indonesia, last year and (2) Al
`Balsam Al Shafi Gen Tr LLC (UAE Corp), a local shareholder of a
`company acquired in the UAE last year
`
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`5. Valeant diligence, oversight and control as it
`relates to Philidor – Seana Carson
`
`
`
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`Valeant diligence prior to entering into
`the option agreement
`
`▪ All agreements since the outset have been reviewed or drafted by legal
`counsel
`
`▪ Legal, compliance, regulatory, and business diligence was conducted in
`connection with the Purchase Option and Distribution Services Agreement
`with the assistance of external advisors. Included multiple site visits and
`Valeant negotiated representations, warranties, indemnities and ongoing
`covenants to protect Valeant
`
`▪ Diligence covered legal, regulatory and compliance matters including but
`not limited to corporate structure, pharmacy licensing, federal healthcare
`program requirements, privacy, pharmacy practices and IT security
`
`▪ Majority of the board, including the entire Audit and Risk Committee, went
`to tour the facility in person ahead of completing the transaction
`
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