10-K 1 valeant2012form10-k.htm 10-K Valeant 2012 Form 10-K




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                   
Commission file number 001-14956
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
CANADA
State or other jurisdiction of
incorporation or organization
98-0448205
(I.R.S. Employer Identification No.)
4787 Levy Street
Montreal, Quebec
CANADA, H4R 2P9
 (Address of principal executive offices)
Registrant's telephone number, including area code (514) 744-6792
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
 
Name of each exchange on which registered 
Common Shares, No Par Value
 
New York Stock Exchange, Toronto Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the common shares held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $10,315,067,000 based on the last reported sale price on the New York Stock Exchange on June 29, 2012.
The number of outstanding shares of the registrant’s common stock, as of February 22, 2013 was 305,758,623.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s proxy statement for the 2013 Annual Meeting of Shareholders. Such proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2012.





TABLE OF CONTENTS

GENERAL INFORMATION

 
 
 
 
Page
PART I
Item 1.
 
Business
 
Item 1A.
 
Risk Factors
 
Item 1B.
 
Unresolved Staff Comments
 
Item 2.
 
Properties
 
Item 3.
 
Legal Proceedings
 
Item 4.
 
Mine Safety Disclosures
 
PART II
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6.
 
Selected Financial Data
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8.
 
Financial Statements and Supplementary Data
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A.
 
Controls and Procedures
 
Item 9B.
 
Other Information
 
PART III
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
Item 11.
 
Executive Compensation
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
Item 14.
 
Principal Accounting Fees and Services
 
PART IV
Item 15.
 
Exhibits and Financial Statement Schedules
 
SIGNATURES
 



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Basis of Presentation
General
On September 28, 2010, Biovail Corporation (“Biovail”) completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) through a wholly-owned subsidiary, pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” Biovail is both the legal and accounting acquirer in the Merger. Accordingly, the pre-acquisition consolidated financial statements of Biovail are the historical financial statements of the Company going forward such that the accompanying financial statements reflect Biovail’s stand-alone operations as they existed prior to the completion of the Merger. The results of Valeant’s business have been included in the financial statements only for periods subsequent to the completion of the Merger.
Except where the context otherwise requires, all references in this Annual Report on Form 10-K (“Form 10-K”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries, taken together. In this Form 10-K, references to “$” and “US$” are to United States dollars, references to “C$” are to Canadian dollars, references to “€” are to Euros, references to “AUD$” are to Australian dollars, references to “R$” are to Brazilian real, references to “MXN$” are to Mexican peso and references to “PLN” are to Polish zloty. Unless otherwise indicated, the statistical and financial data contained in this Form 10-K are presented as of December 31, 2012.
Trademarks
The following words are trademarks of our Company and are the subject of either registration, or application for registration, in one or more of Canada, the United States of America (the “U.S.”) or certain other jurisdictions: ACANYA®, AFEXA®, ACNEFREE™, AMBI®, ANDOLEX®, ANTI-ANGIN ®, ANTIGRIPPIN™, APLENZIN®, ARESTIN®, ATRALIN®, BEDOYECTA®, BENZACLIN®, BIAFINE®, BIOVAIL®, BISOCARD™, CALADRYL®, CARAC®, CARDIOPIRIN™, CARDIZEM®, CERAVE®, CESAMET®, CLODERM®, COLD-FX®, COLDSORE-FX®, CORN HUSKERS ®, CORTAID®, DERMAGLOW®, DERMAVEEN®, DERMIK®, DIASTAT®, DIFFLAM®, DUROMINE®, DURO-TUSS®, EFUDEX®, EMERVEL®, ERTACZO®, EUCALYPTUS MA™, GLUMETZA®, LACRISERT®, LODALIS™, MACUGEN®, MELLERIL®, METERMINE®, M.V.I.®, NITOMAN®, NORGESIC®, OCEAN®, ORTHO DERMATOLOGICS®, PERLANE®, PERLANE-L®, PHOLTEX®, POTIGA™, PURPOSE® RENOVA®, RESTYLANE®, RESTYLANE-L®, RETIN-A MICRO®, RIKODEINE®, SAGE™, SCULPTRA®, SHOWER TO SHOWER ®, SOLODYN®, TAMBOCOR®, TANDENE®, TARGRETIN®, THROMBO AS™, TIAZAC®, TIMOPTIC®, TROBALT®, VALEANT®, VALEANT V & DESIGN®, VALEANT PHARMACEUTICALS & DESIGN®, VANOS®, XENAZINE®, XENAZINA®, ZIANA®, and ZYCLARA®.
WELLBUTRIN®, WELLBUTRIN® XL, WELLBUTRIN XL® and ZOVIRAX® are trademarks of The GlaxoSmithKline Group of Companies and are used by us under license. ULTRAM® is a trademark of Ortho-McNeil, Inc. (now known as PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.) and is used by us under license. MVE® is a registered trademark of Healthpoint, Ltd. and is used by us under license. ELIDEL® and XERESE® are registered trademarks of Meda Pharma SARL and are used by us under license. VISUDYNE® is a registered trademark of Novartis Pharma AG and is used by us under license. DYSPORT® is a registered trademark of Ipsen Biopharm Limited and is used by us under license. MONOPRIL®, CEFZIL®, DURACEF® and MEGACE® are registered trademarks of Bristol-Myers Squibb Company and are used by us under license.
In addition, we have filed trademark applications for many of our other trademarks in the U.S., Canada and in other jurisdictions and have implemented, on an ongoing basis, a trademark protection program for new trademarks.
Forward-Looking Statements
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:
        To the extent any statements made in this Annual Report on Form 10-K contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, “forward-looking statements”).
        These forward-looking statements relate to, among other things: the expected benefits of our acquisitions (including the Medicis acquisition) and other transactions, such as cost savings, operating synergies and growth potential of the Company; business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products; the impact of healthcare reform; exposure to foreign currency exchange rate changes and interest rate changes; the

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outcome of contingencies, such as certain litigation and regulatory proceedings; general market conditions; and our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity and income taxes.
        Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-K that contain forward-looking statements are qualified by these cautionary statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
the introduction of generic competitors of our brand products;
the introduction of products that compete against our products that do not have patent or data exclusivity rights, which products represent a significant portion of our revenues;
the challenges and difficulties associated with managing the rapid growth of our Company and a large, complex business;
our ability to identify, acquire, close and integrate acquisition targets successfully and on a timely basis;
our ability to secure and maintain third-party research, development, manufacturing, marketing or distribution arrangements;
factors relating to the integration of the companies, businesses and products acquired by the Company (including the integration relating to our recent acquisition of Medicis), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations, and the achievement of the anticipated benefits from such integrations;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
our substantial debt and debt service obligations and their impact on our financial condition and results of operations;
our future cash flow, our ability to service and repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected levels of operations, acquisition activity and general economic conditions;
interest rate risks associated with our floating debt borrowings;
the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets;
adverse global economic conditions and credit market and foreign currency exchange uncertainty in Central and Eastern European and other countries in which we do business;
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
the outcome of legal proceedings, investigations and regulatory proceedings;  
the risk that our products could cause, or be alleged to cause, personal injury, leading to potential lawsuits and/or withdrawals of products from the market;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, Health Canada and European, Asian, Brazilian and Australian regulatory approvals, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents

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and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing;
the availability and extent to which our products are reimbursed by government authorities and other third party payors, as well as the impact of obtaining or maintaining such reimbursement on the price of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price of our products in connection therewith;
the impact of price control restrictions on our products, including the risk of mandated price reductions;
our ability to retain, motivate and recruit executives and other key employees;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products, which could lead to material impairment charges;
the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
our ability to obtain components, raw materials or finished products supplied by third parties and other manufacturing and supply difficulties and delays;
the disruption of delivery of our products and the routine flow of manufactured goods;
declines in the pricing and sales volume of certain of our products that are distributed by third parties, over which we have no or limited control;
the seasonality of sales of certain of our products;
compliance with, or the failure to comply with, health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and pricing practices, worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act and other legislative and regulatory healthcare reforms in the countries in which we operate; and
other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing.
        Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this Form 10-K, under Item 1A. “Risk Factors”, and in the Company’s other filings with the SEC and CSA. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect actual outcomes.


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PART I
Item 1.    Business
Biovail Corporation (“Biovail”) was formed under the Business Corporations Act (Ontario) on February 18, 2000, as a result of the amalgamation of TXM Corporation and Biovail Corporation International. Biovail was continued under the Canada Business Corporations Act (the “CBCA”) effective June 29, 2005. On September 28, 2010 (the “Merger Date”), Biovail completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) through a wholly-owned subsidiary pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” The accompanying financial statements reflect Biovail’s stand-alone operations as they existed prior to the completion of the Merger. The results of Valeant’s business have been included in the financial statements only for periods subsequent to the completion of the Merger.
Unless the context indicates otherwise, when we refer to “we”, “us”, “our” or the “Company” in this Annual Report on Form 10-K (“Form 10-K”), we are referring to Valeant Pharmaceuticals International, Inc. and its subsidiaries on a consolidated basis.
Introduction
We are a multinational, specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products and medical devices. Our specialty pharmaceutical and over-the-counter (“OTC”) products are marketed under brand names and are sold in the United States (“U.S.”), Canada, Australia and New Zealand, where we focus most of our efforts on products in the dermatology and neurology therapeutic classes. We also have branded generic, branded, and OTC operations in Central and Eastern Europe, Latin America, Southeast Asia and South Africa.
Business Strategy
Our strategy is to focus the business on core geographies and therapeutic classes, manage pipeline assets either internally or through strategic partnerships with other pharmaceutical companies and deploy cash with an appropriate mix of selective acquisitions, debt repurchases and repayments, and share buybacks. We believe this strategy will allow us to improve both the growth rate and profitability of the Company and to enhance shareholder value.
Our low risk research and development model is one key element to this business strategy. It will allow us to progress certain development programs to drive future commercial growth, while minimizing our research and development expense. This will be achieved in four ways:
focusing our efforts on niche therapeutic areas such as dermatology, podiatry, ophthalmology and life-cycle management programs for currently marketed products;
acquiring dossiers and registrations for branded generic products, which require limited manufacturing start-up and development activities; 
selling internal development capabilities to third parties, thereby allowing higher utilization and infrastructure cost absorption; and
structuring partnerships and collaborations so that our partners share development costs.
Focused Diversification across Geographies, Therapeutic Areas and Products with Limited Patent Exposure
We are diverse not only in our sources of revenue from our broad drug portfolio, but also among the therapeutic classes and geographic segments we serve. We focus on those businesses that we view to have the potential for strong operating margins and solid growth, while providing natural balance across geographies.
In addition, we have an established portfolio of specialty pharmaceutical, branded generic and OTC products with a focus in the dermatology therapeutic areas. We believe dermatology is particularly attractive given that many of the products are:
generally relatively small on an individual basis (with the exception of Solodyn® and Zovirax®), and therefore not the focus of larger pharmaceutical companies;
often topical treatments and, therefore, subject to less generic competition. Topical treatments generally require full clinical trials and not just bioequivalence tests before generics can enter the market; and

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marked by a higher self-pay component than other therapeutic areas, so that they are not as dependent on increasing reimbursement pressures.
Acquisitions and Dispositions
We have completed several transactions to expand our product portfolio including, among others, the following acquisitions of businesses and product rights in 2012: Medicis Pharmaceutical Corporation (“Medicis”), OraPharma Topco Holdings, Inc. (“OraPharma”), certain assets from Johnson & Johnson Consumer Companies, Inc. (“J&J North America” and “J&J ROW”), certain assets from QLT Inc. and QLT Ophthalmics, Inc. (collectively “QLT”), certain assets from University Medical Pharmaceuticals Corp. (“University Medical”), certain assets from Atlantis Pharma (“Atlantis”), certain assets from Gerot Lannach, and Probiotica Laboratorios Ltda. (“Probiotica”). In addition, in February 2013, we acquired Natur Produkt International, JSC (“Natur Produkt”), as well as certain assets from Eisai Inc. (“Eisai”).
In connection with the acquisition of Dermik in December 2011, we were required by the Federal Trade Commission (“FTC”) to divest 1% clindamycin and 5% benzoyl peroxide gel, a generic version of BenzaClin®, and 5% fluorouracil cream, an authorized generic of Efudex®. We completed the divestiture of these products in February 2012.
For more information regarding our acquisitions and dispositions, see note 3, note 4 and note 27 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Segment Information
As a result of the acquisition of iNova in December 2011, we began operating in five new territories: Malaysia, Philippines, Singapore, Hong Kong and South Africa, with a distribution business in Thailand, Taiwan and some sub-Saharan Africa markets. iNova also distributes through partners in China, Korea and Japan. Consequently, our Chief Executive Officer (“CEO”), who is our Chief Operating Decision Maker (“CODM”), began to manage the business differently, which necessitated a realignment of the segment structure, effective in the first quarter of 2012. Pursuant to this change, we now have four reportable segments: (i) U.S. Dermatology, (ii) U.S. Neurology and Other, (iii) Canada and Australia and (iv) Emerging Markets. Accordingly, the Company has restated prior period segment information to conform to the current period presentation. Comparative segment information for 2012, 2011 and 2010 is presented in note 26 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Our current product portfolio comprises approximately 1,100 products, with approximately 7,300 stock keeping units (“SKUs”). In 2012, 2011 and 2010, global Wellbutrin XL® represented 7%, 9% and 21%, respectively, and Zovirax® represented 7%, 8% and 14%, respectively, of our consolidated revenues. We anticipate a continuing decline in Wellbutrin XL® product sales due to generic erosion. However, the rate of decline is expected to decrease in the future, and this brand is expected to represent a declining percentage of total revenues primarily due to anticipated growth in other parts of our business and recent acquisitions. We anticipate that Zovirax® may also continue to decline as a percentage of consolidated revenues in the future as a result of revenue growth from acquisitions. In addition, in the U.S., Zovirax® does not currently have generic competition, but is not protected by patent or regulatory exclusivity.
U.S. Dermatology
The U.S. Dermatology segment generates revenues from pharmaceutical and OTC products, and alliance and contract service revenues, in the areas of dermatology and topical medication, aesthetics (including medical devices), dentistry, ophthalmology and podiatry. These pharmaceutical products are marketed and sold primarily through wholesalers and to a lesser extent through retail and direct-to-physician channels.
Dermatology Products — Our principal dermatology products are:
Zovirax® Ointment is a topical formulation of a synthetic nucleoside analogue which is active against herpes viruses. Each gram of Zovirax® Ointment contains 50 mg of acyclovir in a polyethylene glycol base. This product is indicated for the management of initial genital herpes and in limited non-life threatening mucocutaneous herpes simplex infections in immuno-compromised patients. Zovirax® Cream was approved by the FDA in December 2002 and launched by Biovail in July 2003. Zovirax® Cream is indicated for the treatment of recurrent herpes labialis (cold sores) in adults and adolescents (12 years of age and older). Pursuant to a distribution rights agreement, GSK provided us with Zovirax® products for the U.S. This distribution rights agreement terminated in February 2011 with our acquisition of the U.S. rights to non-ophthalmic topical formulations of Zovirax® from GSK. We entered into a new supply agreement and trademark license with GSK for the U.S in 2011.

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Xerese® (acyclovir and hydrocortisone cream) is indicated for the early treatment of recurrent herpes labialis (cold sores) to reduce the likelihood of ulcerative cold sores and to shorten the lesion healing time in adults and adolescents (12 years of age and older). Xerese® contains acyclovir, a synthetic nucleoside analogue active against herpes viruses, and hydrocortisone, an anti-inflammatory corticosteroid, combined in a cream for topical administration.
Retin-A Micro® (tretinoin gel) microsphere, 0.04%/0.1% Pump, is an oil-free prescription-strength acne treatment proven to start clearing skin in as little as two weeks after the start of treatment, with full results seen after seven weeks of treatment.
Elidel® is a topical formulation used to treat mild to moderate atopic dermatitis, a form of eczema. Each gram of Elidel® Cream 1% contains 10 mg of pimecrolimus in a whitish cream base of benzyl alcohol, cetyl alcohol, citric acid, mono- and di-glycerides, oleyl alcohol, propylene glycol, sodium cetostearyl sulphate, sodium hydroxide, stearyl alcohol, triglycerides, and water. Elidel® (pimecrolimus) Cream 1% is indicated as second-line therapy for the short-term and non-continuous chronic treatment of mild to moderate atopic dermatitis in nonimmunocompromised adults and children 2 years of age and older, who have failed to respond adequately to other topical prescription treatments, or when those treatments are not advisable.
Carac® (fluorouracil cream) Cream, 0.5%, is a once daily formulation of fluorouracil cream which is indicated for the topical treatment of multiple actinic or solar keratoses of the face and anterior scalp, a type of precancerous lesion.
Acanya® gel is a fixed-combination clindamycin phosphate (1.2%)/benzoyl peroxide (2.5%) aqueous gel approved by the FDA for the once daily treatment of acne vulgaris in patients 12 years and older. Studied in patients with moderate and severe acne, Acanya® offers significant efficacy with a favorable tolerability profile and contains no preservatives, surfactants, parabens or alcohol. Acanya® was launched by Valeant in March 2009.
Sculptra® and Sculptra® Aesthetic is an injectable implant containing microparticles of poly-L-lactic acid (PLLA), a biocompatible, biodegradable, synthetic polymer from the alpha-hydroxy-acid family, carboxymethylcellulose (USP), non-pyrogenic mannitol (USP) and sterile water for injection (USP). Sculptra® is intended for restoration and/or correction of the signs of facial fat loss (lipoatrophy) in people with human immunodeficiency virus. Sculptra® Aesthetic is indicated for use in immune-competent people as a single regimen for correction of shallow to deep nasolabial fold contour deficiencies and other facial wrinkles in which deep dermal grid pattern (cross-hatch) injection technique is appropriate.
Atralin® gel is an aqueous gel containing micronized tretinoin (0.05%) approved for once daily treatment of acne vulgaris in patients 10 years and older. Atralin® has been demonstrated to reduce both inflammatory and non-inflammatory acne lesions and contains ingredients (hyaluronic acid, collagen and glycerin) known to moisturize and hydrate the skin.
As part of the acquisition of Medicis in December 2012, we now market the following dermatology products:
Solodyn® is a prescription oral antibiotic (minocycline) approved to treat only the red, pus-filled pimples of moderate to severe acne in patients 12 years of age and older.
Zyclara® is a prescription medication (imiquimod) cream for use on the skin (topical) to treat actinic keratosis (AK) of the full face or balding scalp in adults with normal immune function.
Ziana® is a lincosamide antibiotic and retinoid combination product indicated for the topical treatment of acne vulgaris in patients 12 years of age or older.
Vanos® is a prescription corticosteroid (fluocinonide) cream for the relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses in patients 12 years of age or older.
Restylane® family of products (Restylane®/Restylane-L®/Perlane®/Perlane-L®) is a range of hyaluronic acid-based injectable implant dermal fillers. These products can be used individually to add volume and fullness to the skin to correct moderate to severe facial wrinkles and folds, such as nasolabial folds. Restylane® is also FDA-approved for lip enhancement in patients over 21 years of age, and is uniquely formulated to provide fullness and definition to the lips.
Dysport® is a prescription injection neurotoxin (abobotulinumtoxinA) for temporary improvement in the look of moderate to severe glabellar lines in adults less than 65 years of age.
OTC Products — our principal OTC products are:
CeraVe® is a range of OTC products with essential ceramides and other skin-nourishing and skin-moisturizing ingredients (humectants and emollients) combined with a unique, patented Multivesicular Emulsion (MVE®) delivery technology that, together, work to rebuild and repair the skin barrier. CeraVe® formulations incorporate ceramides, cholesterol and fatty acids, all of which are essential for skin barrier repair and are used as adjunct therapy in the management of various skin conditions.

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AcneFree™ is a range of OTC cleansers and acne treatments containing benzoyl peroxide and salicylic acid.
Dentistry Products (oral health) — Our principal dentistry products are:
Arestin® (minocycline hydrochloride) was acquired in June 2012 as part of our acquisition of OraPharma. Arestin® is a subgingival sustained-release product containing the antibiotic minocycline hydrochloride incorporated into a bioresorbable polymer. Arestin® is indicated as an adjunct to scaling and root planing (SRP) procedures for reduction of pocket depth in patients with adult periodontitis. Arestin® may be used as part of a periodontal maintenance program, which includes good oral hygiene and SRP.
In November, 2012, we acquired from KLOX Technologies (“KLOX”) the global rights to KLOX’s in-office Teeth Whitening System, as well as an at-home use Teeth Whitening Pen. The in-office system, to be called EZ White™ Pro is a professional in-office teeth whitening system. The at-home whitening pen, to be called EZ White™ Pen, is designed to be utilized for independent use or as supplemental to the in-office whitening system for teeth whitening maintenance requirements.
Ophthalmology Products — Our principal ophthalmology products are:
Timoptic® (timolol maleate ophthalmic solution) is a prescription product that comes in several forms and strengths and is indicated for the treatement of elevated intraocular pressure in patients with ocular hypertension or open-angle glaucoma.
Lacrisert® (hydroxypropyl cellulose ophthalmic insert) is a prescription product indicated for the treatment of moderate to severe dry eye.
Macugen® (pegaptanib sodium injection) is a prescription product indicated for the treatement of wet age-related macular degeneration. We acquired this product through the acquisition of Eyetech, Inc. in 2012. Macugen® is dosed via intraocular injection.
Visudyne® (verteporfin for injection) is a prescription product indicated for the treatment of patients with predominantly classic subfoveal choroidal neovascularization due to age-related macular degeneration, pathologic myopia or presumed ocular histoplasmosis. We acquired this product from QLT in September 2012. Visudyne® is dosed via intravenous infusion and is activated with a laser (photodynamic therapy) operated by an ophthalmologist.
U.S. Dermatology Service and Alliance Revenue — We generate alliance revenue and service revenue from the licensing of dermatological products and from contract services in the areas of dermatology and topical medication. Alliance revenue within our U.S. Dermatology segment included profit sharing payments from the sale of a 1% clindamycin and 5% benzoyl peroxide gel product (“IDP-111”) by Mylan Pharmaceuticals, Inc. (“Mylan”), and royalties from patent-protected formulations developed by our Dow Pharmaceutical Sciences, Inc. subsidiary and licensed to third parties. As described above, in connection with the Dermik acquisition in December 2011, we were required by the FTC to divest IDP-111. On February 3, 2012, we divested IDP-111 to Mylan and, as a result, we no longer receive royalties on sales by Mylan of IDP-111 made after February 3, 2012. Contract services are primarily focused on contract research for external development and clinical research in areas such as formulations development, in vitro drug penetration studies, analytical sciences and consulting in the areas of labeling and regulatory affairs.
U.S. Neurology and Other
The U.S. Neurology and Other segment generates revenues from pharmaceutical products indicated for the treatment of neurological and other diseases, as well as alliance revenue from the licensing of various products we developed or acquired. These pharmaceutical products are marketed and sold primarily through wholesalers.
Neurology and Other Products — our principal neurology and other products are:
Wellbutrin XL®, an extended-release formulation of bupropion indicated for the treatment of major depressive disorder in adults, was launched in the U.S. in September 2003 by an affiliate of GlaxoSmithKline LLC (the entities within The Glaxo Group of Companies are referred to throughout as “GSK”). Pursuant to a manufacturing-and-supply agreement then in effect with GSK, Biovail received a tiered supply price based on GSK’s net sales of Wellbutrin XL®. In May 2009, Biovail acquired the full U.S. commercialization rights to Wellbutrin XL® from GSK.
Xenazine® is indicated for the treatment of chorea associated with Huntington’s disease. In the U.S., Xenazine® is distributed for us by Lundbeck Inc. under an exclusive marketing, distribution and supply agreement for an initial term of 15 years.
U.S. Neurology and Other Alliance Revenue — We generate alliance revenue from the licensing of various products we developed or acquired.

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Canada and Australia
The Canada and Australia segment generates product revenues from pharmaceutical and OTC products sold in Canada, Australia, and New Zealand. These pharmaceutical products are marketed and sold primarily through wholesalers and to a lesser extent through retail and direct-to-physician channels.
Canada — our principal products sold in the Canadian market are:
Tiazac® XC is a calcium channel blocker (“CCB”) used in the treatment of hypertension and angina. Tiazac® XC is a once-daily formulation of diltiazem that delivers smooth blood pressure control over a 24-hour period. As a non-dihydropyridine CCB, Tiazac® XC provides specific renal protective benefits, as well as blood pressure reduction, which is particularly important for diabetic hypertensive patients. Our generic version of Tiazac® XC is distributed in Canada by Teva Canada.
Wellbutrin® XL is a once-daily formulation of bupropion developed by Biovail that is approved for the treatment of major depressive illness and the prevention of seasonal major depressive illness.
a dermatology and aesthetics portfolio, which includes Zovirax®, Benzaclin®, and Penlac®.
OTC Products — our principal OTC product in Canada is:
Cold-FX® is a highly purified ChemBioPrint product derived from the roots of North American ginseng (Panax quinquefolius). Each capsule contains 200 mg or 300 mg of CVT-E002, a unique extract of polysaccharides that has been shown in laboratory and clinical studies to strengthen the immune system.
Australia — our principal products sold in the Australian market are:
Duromine®/Metermine® are prescription weight loss drugs that act through appetite suppression. Duromine®/Metermine® contain the active ingredient, phentermine, in a once daily formulation.
Cough and Cold OTC product ranges — we market a range of OTC products in the Australian market that relieve painful conditions of the mouth and throat and also a range of products that provide relief of dry cough and chest congestion sold under the brand names Difflam®, Duro-Tuss® and Rikodeine®, respectively.
Difflam® is a market leading product range of lozenges, sprays and gargles for the treatment of sore throats and other painful mouth conditions.
Duro-Tuss® and Rikodeine® are market leading products consisting of lozenges and syrups for the treatment of dry cough and chest congestion.
OTC Skin Products — our principal OTC skin products in Australia include Dermaveen®, a therapeutic skincare range for dry, itchy or sensitive skin using colloidal oatmeal.
Emerging Markets
The Emerging Markets segment generates product revenues from branded generic pharmaceutical products, as well as OTC products and agency/in-licensing arrangements with other research-based pharmaceutical companies (where we distribute and market branded, patented products under long-term, renewable contracts). Products are sold primarily in Europe, Latin America, South Africa and Asia.
Europe — The Emerging Markets segment generates revenues in more than 20 countries in Central and Eastern Europe. Products are sold primarily in Poland, Serbia, and Russia. Our strategy is to develop and commercialize modern, high value-added branded generics and OTC products which represent a quality, affordable alternative to brand name counterparts. Our European products are sold largely under the Valeant umbrella brand, although in those countries where the brand names of legacy companies still resonate with healthcare professionals and consumers, we have chosen for certain products to retain on our packaging the logos of some of the historical companies that make up Valeant Europe — ICN Polfa (Poland), PharmaSwiss (Serbia), Sanitas (Lithuania) and Jelfa (Poland and Russia).
In March 2012, we acquired certain assets from Gerot Lannach, a branded generics pharmaceutical company based in Austria. Approximately 90% of sales relating to the acquired assets are in Russia, with sales also made in certain Commonwealth of Independent States (“CIS”) countries, including Kazakhstan and Uzbekistan. Gerot Lannach’s largest product is acetylsalicylic acid, a low dose aspirin. In the second half of 2012, we also acquired several well-developed OTC products for the Polish market.
Our combined European branded generics business now covers a broad range of treatments, including antibiotics, treatments for cardiovascular and neurological diseases, dermatological products and diabetic therapies among many others, as well as a

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broad range of various OTC products. We have significantly strengthened our presence in OTC markets and from a geographical footprint perspective in Russia and CIS countries. Our largest products are Bisocard™, a Beta-blocker that is indicated to treat hypertension and angina pectoris, Thrombo AS™ and Cardiopirin™ (low dose aspirin) and Monopril® (fosinopril).
Latin America — The Emerging Markets segment generates revenues from branded generic pharmaceutical products and OTC products in Mexico and Brazil and exports out of Mexico to other Latin American markets. Our branded generic and generic products in Mexico and Brazil are developed when patents or other regulatory exclusivity no longer protect an originator’s brand product. Our branded generic products in Mexico are primarily marketed in this region to physicians and pharmacies through sales professionals under the Grossman, Valeant, and Tecnofarma brands. Our Tecnofarma generic portfolio is primarily sold through Mexico’s Government Health Care System, which awards its business through a tender process. In May 2012, we acquired certain assets from Atlantis, including products in gastro, analgesics and anti-inflammatory therapeutic categories.
Our portfolio in Mexico and Brazil covers a broad range of therapeutic classes including vitamin deficiency, antibacterials and dermatology. In Mexico, our largest product is Bedoyecta®, a brand of vitamin B complex (B1, B6 and B12 vitamins) products. Bedoyecta® products act as energy improvement agents for fatigue related to age or chronic diseases, and as nervous system maintenance agents to treat neurotic pain and neuropathy. Bedoyecta® is sold in an injectable form, as well as in a tablet form, in Mexico and has strong brand recognition in Mexico. Our second largest product, M.V.I.®, multi-vitamin infusion, is a hospital dietary supplement used in treating trauma and burns.
In Brazil, our primary pharmaceutical products include a generic product which contains Isotretinoine Soft Capsules used in treating acne, Melleril®, an anti-psychotic product used in treating anxiety, depression, and other related disorders, and Tandene®, which contains acetaminophen used in treating fever, headaches, and other minor aches and pains. Our branded generic products in Brazil are primarily marketed to pharmacies and wholesalers. In addition, in February 2012, we acquired Probiotica, a company that markets a line of OTC sports nutrition products and other food supplements in Brazil. Probiotica’s primary brands include Monster Extreme Black™, containing amino acids, proteins, minerals, carbohydrates and caffeine, providing energy and muscle strength, and 100% Pure Whey™, containing concentrated whey protein, amino acids and prebiotic formula, recommended to build and recover muscles.
South Africa — our principal products sold in South Africa are:
Duromine® is a prescription weight loss drug that act through appetite suppression. Duromine® contains the active ingredient, phentermine, in a once daily formulation.
Cough and Cold OTC product ranges — we market a range of OTC products that relieve painful conditions of the mouth and throat and also a range of products that provide relief of coughs sold under the brand names Andolex® and Pholtex®, respectively.
Andolex® is a market leading product range of lozenges, sprays and gargles for the treatment of sore throats and other painful mouth conditions.
Pholtex® is a market leading products consisting of syrups for the treatment of dry and chesty cough.
Asia — our principal products sold in Asia are:
Cough and Cold OTC product ranges — we market a range of prescription and OTC products that relieve painful conditions of the mouth and throat and also a range of products that provide relief of coughs sold under the brand names Difflam® and Duro-Tuss®, respectively.
Difflam® is a product range of lozenges, sprays and gargles for the treatment of sore throats and other painful mouth conditions.
Duro-Tuss® is a product range consisting of syrups for the treatment of dry cough and chest congestion.
Tambocor® is a prescription medicine indicated for life-threatening ventricular tachycardia or ventricular fibrillation, and for the treatment of refractory supraventricular tachycardia. Tambocor® contains the active ingredient flecainide acetate.
Norgesic® is a prescription medicine for the treatment of muscle spasms and tension headaches. It contains the active ingredient orphenadrine and paracetamol.
Planned Change in Segment Structure
With the acquisition of Medicis in December 2012, we will manage our business differently beginning in 2013. As a result, effective in 2013, we will have two operating segments: Developed Markets and Emerging Markets. Developed Markets

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will include our U.S. promoted and neurology/other businesses, as well as our Canada and Australia businesses. Emerging Markets will include our Latin America, Central and Eastern Europe, and Southeast Asia/South Africa businesses.
For detailed information regarding the revenues, operating profits and identifiable assets attributable to our segments, see note 26 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Collaboration Agreements
See note 5 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information regarding our License and Collaboration Agreement with GSK, joint ventures with Meda AB, collaboration and option agreements with Bristol-Myers Squibb Company and collaboration agreements assumed in connection with the Medicis acquisition.
Research and Development
Our research and development organization focuses on the development of products through clinical trials. We currently have (or had during 2012) a number of compounds in clinical development including: ezogabine/retigabine, Luliconazole, Metronidazole 1.3%, IDP-108, IDP-118 and certain life-cycle management projects. Our research and development expenses for the years ended December 31, 2012, 2011 and 2010 were $79.1 million, $65.7 million and $68.3 million, respectively, excluding impairment charges.
As of December 31, 2012, approximately 400 employees (including regulatory affairs and quality assurance employees) were involved in our research and development efforts.
For more information regarding our products in clinical development, see Item 7 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Products in Development” of this Form 10-K.
Trademarks, Patents and Proprietary Rights
Trademarks
We believe that trademark protection is an important part of establishing product and brand recognition. We own a number of registered trademarks and trademark applications. U.S. federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce.
Data and Patent Exclusivity
We rely on a combination of regulatory and patent rights to protect the value of our investment in the development of our products.
A patent is the grant of a property right which allows its holder to exclude others from, among other things, selling the subject invention in, or importing such invention into, the jurisdiction that granted the patent. In the U.S., Canada and the European Union, patents expire 20 years from the date of application. We have obtained, acquired or in-licensed a number of patents and patent applications covering key aspects of our principal products. However, we do not consider any single patent material to our business as a whole.
In the U.S., the Hatch-Waxman Act provides nonpatent regulatory exclusivity for five years from the date of the first FDA approval of a new drug compound in a New Drug Application (“NDA”). The FDA is prohibited during those five years from approving a generic, or ANDA, that references the NDA. Protection under the Hatch-Waxman Act will not prevent the filing or approval of another full NDA. However, the NDA applicant would be required to conduct its own pre-clinical, adequate and well-controlled clinical trials to independently demonstrate safety and effectiveness.
A similar data exclusivity scheme exists in the European Union, whereby only the pioneer drug company can use data obtained at the pioneer’s expense for up to eight years from the date of the first approval of a drug by the European Medicines Agency (“EMA”) and no generic drug can be marketed for ten years from the approval of the innovator product. Under both the U.S. and the European Union data exclusivity programs, products without patent protection can be marketed by others so long as they repeat the clinical trials necessary to show safety and efficacy. Canada employs a similar regulatory regime.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the U.S. or a disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years.

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Proprietary Know-How
We also rely upon unpatented proprietary know-how and technological innovation in the development and manufacture of many of our principal products.
Government Regulations
Government authorities in the U.S., at the federal, state and local level, in Canada and in other countries extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export and import of pharmaceutical products and medical devices. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. FDA approval must be obtained in the U.S., approval of Health Canada must be obtained in Canada, EMA approval must be obtained for countries that are part of the European Union and approval must be obtained from comparable agencies in other countries prior to marketing or manufacturing new pharmaceutical products or medical devices for use by humans. Regulation by other federal agencies, such as the Drug Enforcement Administration (“DEA”), and state and local authorities in the United States, and by comparable agencies in certain foreign countries, is also required. The FTC, the FDA and state and local authorities regulate the advertising of medical devices, prescription drugs, over-the-counter drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended (“FDCA”) and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, sale, distribution, advertising and promotion of our products. The FDA requires a Boxed Warning (sometimes referred to as a “Black Box” Warning) for products that have shown a significant risk of severe or life-threatening adverse events and similar warnings are also required to be displayed on the product in certain other jurisdictions.
Manufacturers of drug products and medical devices are required to comply with manufacturing regulations, including current good manufacturing regulations enforced by the FDA and Health Canada and similar regulations enforced by regulatory agencies outside the U.S. and Canada. In addition, we are subject to price control restrictions on our pharmaceutical products in many countries in which we operate.
We are also subject to extensive U.S. federal and state health care marketing and fraud and abuse regulations, such as the federal False Claims Act, Federal and Provincial marketing regulation in Canada and similar regulations in foreign countries in which we may conduct our business. The federal False Claims Act imposes civil and criminal liability on individuals or entities who submit (or cause the submission of) false or fraudulent claims for payment to the government. If our operations are found to be in violation of any of these laws, regulations, rules or policies or any other law or governmental regulation, or if interpretations of the foregoing change, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations.
Environmental Regulation
We are subject to national, state and local environmental laws and regulations, including those governing the handling and disposal of hazardous wastes, wastewater, solid waste and other environmental matters. Our development and manufacturing activities involve the controlled use of hazardous materials.
Marketing and Customers
Our four major geographic markets by country are: the U.S., Canada, Poland and Australia.
The following table identifies external customers that accounted for 10% or more of our total revenue during the year ended December 31, 2012:
 
Percentage of
Total Revenue
2012
McKesson Corporation
20%
Cardinal Health, Inc.
20%
No other customer generated over 10% of our total revenues.
We currently promote our pharmaceutical products to physicians, hospitals, pharmacies and wholesalers through our own sales force and sell through wholesalers. In some limited markets, we additionally sell directly to physicians, hospitals and large drug store chains and we sell through distributors in countries where we do not have our own sales staff. As part of our marketing

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program for pharmaceuticals, we use direct mailings, advertise in trade and medical periodicals, exhibit products at medical conventions and sponsor medical education symposia.
Competition
Competitive Landscape for Products and Products in Development
Our competitors include specialty and large pharmaceutical companies, biotechnology companies, OTC companies and generic manufacturers, both in the U.S., Canada and abroad. The dermatology competitive landscape is highly fragmented, with a large number of mid-size and smaller companies competing in both the prescription sector and the OTC and cosmeceutical sectors. Our competitors are pursuing the development and/or acquisition of pharmaceuticals and OTC products that target the same diseases and conditions that we are targeting in dermatology, neurology and other therapeutic areas. Academic and other research and development institutions may also develop products or technologies that compete with our products, which technologies and products may be acquired or licensed by our competitors.
We sell a broad range of products, and competitive factors vary by product line and geographic area in which the products are sold.
Generic Competition
We face increased competition from manufacturers of generic pharmaceutical products when patents covering certain of our currently marketed products expire or are successfully challenged. Generic versions are generally significantly less expensive than branded versions, and, where available, may be required in preference to the branded version under third-party reimbursement programs, or substituted by pharmacies. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions or decreased volume of sales, or both. Most new products that we introduce must compete with other products already on the market or products that are later developed by competitors. Manufacturers of generic pharmaceuticals typically invest far less in research and development than research-based pharmaceutical companies and therefore can price their products significantly lower than branded products. Accordingly, when a branded product loses its market exclusivity, it normally faces intense price competition from generic forms of the product. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits but also cost advantages as compared with other forms of care.
A number of our products already face generic competition, including Wellbutrin XL®, Ultram® ER and Diastat®, all of which had generic competitors during 2012. In March 2012, a generic version of Cesamet® was introduced by a competitor in Canada.
With the expiration of the last patent covering the Cardizem® CD 360mg SKU, we anticipate increased generic competition for this dosage strength of this product, which currently only has one approved generic competitor.
In the U.S., Zovirax® does not currently have generic competition, but is not protected by patent or regulatory exclusivity. Given the FDA’s draft guidance on acyclovir ointment, which would permit the approval by the FDA of an ANDA for acyclovir ointment referencing Zovirax® ointment on the basis of in vitro studies only, and the FDA’s denial of our Citizen's Petition with respect thereto, we anticipate that we may face increased generic competition for this product.
In addition, for a number of our products, we have commenced infringement proceedings against potential generic competitors in the U.S. and Canada. If we are not successful in these proceedings, we may face increased generic competition for these products. See note 24 of notes to consolidated financial statements in Item 15 of this Form 10-K for additional details regarding such potential infringement proceedings.
Manufacturing
We currently operate 16 manufacturing plants worldwide. All of our manufacturing facilities that require certification from the FDA, Health Canada or foreign agencies have obtained such approval.
We also subcontract the manufacturing of certain of our products, including products manufactured under the rights acquired from other pharmaceutical companies. Generally, acquired products continue to be produced for a specific period of time by the selling company. During that time, we integrate the products into our own manufacturing facilities or initiate toll manufacturing agreements with third parties.
Products representing the majority of our product sales are produced by third party manufacturers under toll manufacturing arrangements.

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In some cases, the principal raw materials, including active pharmaceutical ingredient, used by us (or our third party manufacturers) for our various products are purchased in the open market or are otherwise available from several sources. However, some of the active pharmaceutical ingredient and other raw materials are currently available from a single source and others may in the future become available from only one source. In addition, in some cases, only a single source of such active pharmaceutical ingredient is identified in filings with regulatory agencies, including the FDA, and cannot be changed without prior regulatory approval. Any disruption in the supply of any such active pharmaceutical ingredient or other raw material or an increase in the cost of such material could adversely impact our ability to manufacture such products, the ability of our third party manufacturers to supply us with such products, or our profitability. We attempt to manage the risks associated with reliance on single sources of active pharmaceutical ingredient or other raw materials by carrying additional inventories or, where possible, developing second sources of supply.
Employees
As of December 31, 2012, we had approximately 7,000 employees. These employees included approximately 3,300 in production, 2,700 in sales and marketing, 400 in research and development and 600 in general and administrative positions. Collective bargaining exists for some employees in a number of markets. We consider our relations with our employees to be good and have not experienced any work stoppages, slowdowns or other serious labor problems that have materially impeded our business operations.
Product Liability Insurance
We have product liability insurance to cover damages resulting from the use of our products. We have in place clinical trial insurance in the major markets where we conduct clinical trials.
Seasonality of Business
Historically, revenues from our business tend to be weighted slightly toward the second half of the year.  This trend is driven by the third quarter “back to school” period which impacts demand for certain of our dermatology products.  Further, sales in the fourth quarter tend to be higher based on the purchasing patterns of our customer base.  However, as we continue our strategy of selective acquisitions to expand our product portfolio, there are no assurances that these historical trends will continue in the future. 
Geographic Areas
A significant portion of our revenues is generated from operations or otherwise earned outside the U.S. and Canada. All of our foreign operations are subject to risks inherent in conducting business abroad, including price and currency exchange controls, fluctuations in the relative values of currencies, political and economic instability and restrictive governmental actions including possible nationalization or expropriation. Changes in the relative values of currencies may materially affect our results of operations. For a discussion of these risks, see Item 1A., Risk Factors in this Form 10-K.
See note 26 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information regarding revenues by geographic area.
A material portion of our revenue and income is earned in Bermuda, Ireland, Luxembourg and Switzerland, which have low tax rates. See Item 1A., Risk Factors in this Form 10-K relating to tax rates.
Available Information
Our Internet address is www.valeant.com. We post links on our website to the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendment to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. The information on our Internet website is not incorporated by reference into this Form 10-K or our other securities filings and is not a part of such filings.
We are also required to file reports and other information with the securities commissions in all provinces in Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) (http://www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system.

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Our filings may also be read and copied at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.

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Item 1A.    Risk Factors     
Our business, operations and financial condition are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Form 10-K, including those risks set forth under the heading entitled “Forward-Looking Statements”, and in other documents that we file with the SEC and the CSA, before making any investment decision with respect to our securities. If any of the risks or uncertainties actually occur or develop, our business, financial condition, results of operations and future growth prospects could change. Under these circumstances, the market value of our securities could decline, and you could lose all or part of your investment in our securities.
Competitive Risks
We operate in an extremely competitive industry. If competitors develop or acquire more effective or less costly drugs for our target indications, it could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Many of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. Many of our competitors spend significantly more on research and development related activities than we do. Others may succeed in developing or acquiring products that are more effective than those currently marketed or proposed for development by us. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products. They may also establish exclusive collaborative or licensing relationships with our competitors.
We have faced generic competition in the past and expect to face additional generic competition in the future. Generic competition of our products could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Upon the expiration or loss of patent protection for our products, or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a generic competitor of a generic version of our products, we can lose a significant portion of sales of that product in a very short period, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Products representing a significant amount of our revenue are not protected by patent or data exclusivity rights or are nearing the end of their exclusivity period.
A significant number of the products we sell have no meaningful exclusivity protection via patent or data exclusivity rights or are protected by patents that will be expiring in the near future. These products represent a significant amount of our revenues. Without exclusivity protection, competitors face fewer barriers in introducing competing products. The introduction of competing products could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Acquisition-related Risks
We have grown at a very rapid pace. Our inability to properly manage or support this growth could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We have grown very rapidly over the past few years as a result of our acquisitions. This growth has put significant demands on our processes, systems and people. We have made and expect to make further investments in additional personnel, systems and internal control processes to help manage our growth. If we are unable to successfully manage and support our rapid growth and the challenges and difficulties associated with managing a larger, more complex business, this could cause a material adverse effect on our business, financial position and results of operations, and the market value of our common stock could decline.
We may be unable to identify, acquire, close or integrate acquisition targets successfully.
Part of our business strategy includes acquiring and integrating complementary businesses, products, technologies or other assets, and forming strategic alliances, joint ventures and other business combinations, to help drive future growth. We may also in-license new products or compounds. Acquisitions or similar arrangements may be complex, time consuming and expensive. We may not consummate some negotiations for acquisitions or other arrangements, which could result in significant diversion of management and other employee time, as well as substantial out-of-pocket costs. In addition, there are a number of risks and uncertainties relating to our closing transactions. If such transactions are not completed for any reason, we will be subject to several risks, including the following: (i) the market price of our common shares may reflect a market assumption that such transactions will occur, and a failure to complete such transactions could result in a negative perception by the market of us generally and a

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decline in the market price of our common shares; and (ii) many costs relating to the such transactions may be payable by us whether or not such transactions are completed.
If an acquisition is consummated (such as our recent acquisition of Medicis), the integration of the acquired business, product or other assets into our company may also be complex and time-consuming and, if such businesses, products and assets are not successfully integrated, we may not achieve the anticipated benefits, cost-savings or growth opportunities. Potential difficulties that may be encountered in the integration process include the following:
integrating personnel, operations and systems, while maintaining focus on selling and promoting existing and newly-acquired products;
coordinating geographically dispersed organizations;
distracting management and employees from operations;
retaining existing customers and attracting new customers; and
managing inefficiencies associated with integrating the operations of the Company.
Furthermore, these acquisitions and other arrangements, even if successfully integrated, may fail to further our business strategy as anticipated, expose us to increased competition or challenges with respect to our products or geographic markets, and expose us to additional liabilities associated with an acquired business, product, technology or other asset or arrangement. Any one of these challenges or risks could impair our ability to realize any benefit from our acquisition or arrangement after we have expended resources on them.
Tax-related Risks
Our effective tax rates may increase.
We have operations in various countries that have differing tax laws and rates. Our tax reporting is supported by current domestic tax laws in the countries in which we operate and the application of tax treaties between the various countries in which we operate. Our income tax reporting will be, and the historic tax reporting of each of Valeant and Biovail is, subject to audit by domestic and foreign authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income earned among the different jurisdictions in which we operate; changes in tax laws in these jurisdictions; changes in the tax treaties between various countries in which we operate; changes in our eligibility for benefits under those tax treaties; and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in a substantial increase in the effective tax rate on all or a portion of our income.
Our provision for income taxes is based on certain estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of net income earned in our various operating jurisdictions, the availability of benefits under tax treaties, and the rates of taxes payable in respect of that income. We enter into many transactions and arrangements in the ordinary course of business in respect of which the tax treatment is not entirely certain. We therefore make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries could seek to tax a greater share of income than will be provided for by us. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions that we may use in determining our consolidated tax provisions and accruals. This could result in a material adverse effect on our consolidated income tax provision, financial condition and the net income for the period in which such determinations are made.
Our deferred tax liabilities, deferred tax assets and any related valuation allowances are affected by events and transactions arising in the ordinary course of business, acquisitions of assets and businesses, and non-recurring items. The assessment of the appropriate amount of a valuation allowance against the deferred tax assets is dependent upon several factors, including estimates of the realization of deferred income tax assets, which realization will be primarily based on forecasts of future taxable income. Significant judgment is applied to determine the appropriate amount of valuation allowance to record. Changes in the amount of any valuation allowance required could materially increase or decrease our provision for income taxes in a given period.
Debt-related Risks
We have incurred significant indebtedness, which indebtedness may restrict the manner in which we conduct business and limit our ability to implement elements of our growth strategy.
We have incurred significant indebtedness, primarily in connection with our acquisitions (including our acquisition of Medicis). We may also incur additional long-term debt and working capital lines of credit to meet future financing needs which,

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subject to certain restrictions under our indebtedness, would increase our total debt. This indebtedness may restrict the manner in which we conduct business and limit our ability to implement elements of our growth strategy, including with respect to:
limitations on our ability to obtain additional debt financing on favorable terms or at all;
instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of resulting in the acceleration of the maturity of some or all of our outstanding indebtedness;
the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes;
requiring us to issue debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
compromising our flexibility to plan for, or react to, competitive challenges in our business;
the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources; and
limitations on our ability to execute business development activities to support our strategies.
In January 2012, Moody’s Investor Services (“Moody’s”) downgraded our senior secured debt rating from Baa3 to Ba1. At the same time, Moody’s reaffirmed our Corporate Family rating (Ba3) and our senior unsecured debt rating (B1). On September 5, 2012, following the announcement of our planned acquisition of Medicis, Standard & Poor’s reaffirmed our Corporate Family rating (BB) and our senior unsecured debt rating (BB-). On September 13, 2012, Moody’s reaffirmed our Corporate Family rating (Ba3) and our senior unsecured debt rating (B1). Increased debt levels could result in further ratings pressure. A further downgrade would increase our cost of borrowing and may negatively affect our ability to raise additional debt capital.
To service our debt, we will be required to generate a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
We have a significant amount of indebtedness. Our ability to satisfy our debt obligations will depend principally upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make payments on our debt. If we do not generate sufficient cash flow to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations or to refinance our obligations on commercially reasonable terms, would have an adverse effect, which could be material, on our business, financial position, results of operations and cash flows.
Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. Certain non-guarantor subsidiaries include non-U.S. subsidiaries that may be prohibited by law or other regulations from distributing funds to us and/or we may be subject to payment of repatriation taxes and withholdings. In the event that we do not receive distributions from our subsidiaries or receive cash via cash repatriation strategies for services rendered and intellectual property, we may be unable to make required principal and interest payments on our indebtedness.
We are exposed to risks related to interest rates.
Our Credit Facility bears interest based on U.S. dollar London Interbank Offering Rates, or U.S. Prime Rate, or Federal Funds effective rate. Thus, a change in the short-term interest rate environment could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. As of December 31, 2012, we do not have any outstanding interest rate swap contracts.
Risks related to the International Scope of our Business

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Our business, financial condition and results of operations are subject to risks arising from the international scope of our operations.
We conduct a significant portion of our business outside the U.S. and Canada and, in light of our growth strategy, we anticipate continuing to expand our operations into new countries, including emerging markets. We sell our pharmaceutical products in many countries around the world. All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things:
difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as U.S. laws applicable to U.S. companies with foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act, or FCPA;
price and currency exchange controls;
credit market uncertainty;
political and economic instability;
compliance with multiple regulatory regimes;
differing degrees of protection for intellectual property;
unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements;
new export license requirements;
adverse changes in tariff and trade protection measures;
differing labor regulations;
potentially negative consequences from changes in or interpretations of tax laws;
restrictive governmental actions;
possible nationalization or expropriation;
restrictions on the repatriation of funds;
difficulties with licensees, contract counterparties, or other commercial partners; and
differing local product preferences and product requirements.
Any of these factors, or any other international factors, could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Due to the large portion of our business conducted in currency other than U.S. dollars, we have significant foreign currency risk.
We face foreign currency exposure on the translation into U.S. dollars of the financial results of our operations in Poland and other Eastern European countries, Canada, Australia, Latin America and Southeast Asia. Where possible, we manage foreign currency risk by managing same currency revenue in relation to same currency expenses. As a result, both favorable and unfavorable foreign currency impacts to our foreign currency-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our foreign currency-denominated revenue. In addition, the repurchase of principal under our U.S. dollar denominated debt may result in foreign exchange gains or losses for Canadian income tax purposes. One half of any foreign exchange gains or losses will be included in our Canadian taxable income. Any foreign exchange gain will result in a corresponding reduction in our available Canadian Non-Capital Losses, Scientific Research and Experimental Development Pool, and/or Investment Tax Credit carryforward balances.
The general business and economic conditions in the U.S., Canada, Central and Eastern Europe, Australia, Latin America and other countries in which we conduct business could have a material adverse impact on our liquidity and capital resources, revenues and operating results, which could cause the market value of our common stock to decline.
We may be impacted by general economic conditions and factors over which we have no control, such as changes in inflation, interest rates and foreign currency rates, lack of liquidity in certain markets and volatility in capital markets. Similarly, adverse economic conditions impacting our customers or uncertainty about global economic conditions could cause purchases of our products to decline, which would adversely affect our revenues and operating results. Moreover, our projected revenues and operating results are based on assumptions concerning certain levels of customer spending. Any failure to attain our projected

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revenues and operating results as a result of adverse economic or market conditions could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Employment-related Risks
We must continue to retain, motivate and recruit executives and other key employees, and failure to do so could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We must continue to retain, motivate and recruit executives, including our Chief Executive Officer, J. Michael Pearson, and other key employees. A failure by us to retain and motivate executives and other key employees could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Risks related to Legal Proceedings
We may become involved in infringement actions which are uncertain, costly and time-consuming and could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
The pharmaceutical industry historically has generated substantial litigation concerning the manufacture, use and sale of products and we expect this litigation activity to continue. As a result, we expect that patents related to our products will be routinely challenged, and our patents may not be upheld. In order to protect or enforce patent rights, we may initiate litigation against third parties. If we are not successful in defending an attack on our patents and maintaining exclusive rights to market one or more of our products still under patent protection, we could lose a significant portion of sales in a very short period. We may also become subject to infringement claims by third parties and may have to defend against charges that we violated patents or the proprietary rights of third parties. If we infringe the intellectual property rights of others, we could lose our right to develop, manufacture or sell products, including our generic products, or could be required to pay monetary damages or royalties to license proprietary rights from third parties. The outcomes of infringement action are uncertain and infringement actions are costly and divert technical and management personnel from their normal responsibilities.
If our products cause, or are alleged to cause, serious or widespread personal injury, we may have to withdraw those products from the market and/or incur significant costs, including payment of substantial sums in damages, and we may be subject to exposure relating to product liability claims.
We face an inherent business risk of exposure to significant product liability and other claims in the event that the use of our products caused, or is alleged to have caused, adverse effects. Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. The withdrawal of a product following complaints and/or incurring significant costs, including the requirement to pay substantial damages in personal injury cases or product liability cases, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. Our product liability insurance coverage may not be sufficient to cover our claims and we may not be able to obtain sufficient coverage at a reasonable cost in the future.
We are involved in various legal proceedings that could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We are involved in several legal proceedings. Defending against claims and any unfavorable legal decisions, settlements or orders could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Regulatory Risks
Obtaining necessary government approvals is time consuming and not assured.
The FDA and Health Canada approval must be obtained in the U.S. and Canada, respectively, and approval must be obtained from comparable agencies in other countries, prior to marketing or manufacturing new pharmaceutical products for use by humans. Obtaining FDA, Health Canada and other regulatory approval for new products and manufacturing processes can take a number of years and involves the expenditure of substantial resources. Even if such products appear promising in large-scale Phase 3 clinical trials, regulatory approval may not be achieved and no assurance can be given that we will obtain approval in the U.S., Canada or any other country. Nor can any assurance be given that if such approval is secured, the approved labeling will not have significant labeling limitations, including limitations on the indications for which we can market a product, or require onerous risk management programs.

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Our marketed drugs will be subject to ongoing regulatory review.
Following initial regulatory approval of any drugs we or our partners may develop, we will be subject to continuing regulatory review by the FDA, the Health Canada and other regulatory authorities in countries where our products are marketed or intended to be marketed, including the review of adverse drug events and clinical results that are reported after product candidates become commercially available. The manufacturing, labeling, packaging, storage, distribution, advertising, promotion, reporting and recordkeeping related to the product will also be subject to extensive ongoing regulatory requirements. If we fail to comply with U.S. and Canadian regulatory requirements and those in other countries where our products are sold, we could lose our marketing approvals or be subject to fines or other sanctions. In addition, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market. As a condition to granting marketing approval of a product, the FDA and Health Canada may require a company to conduct additional clinical trials, the results of which could result in the subsequent loss of marketing approval, changes in product labeling or new or increased concerns about side effects or efficacy of a product.
Our marketing, promotional and pricing practices, as well as the manner in which sales forces interact with purchasers, prescribers and patients, are subject to extensive regulation and any material failure to comply could result in significant sanctions against us.
The marketing, promotional, and pricing practices of pharmaceutical companies, as well as the manner in which companies, in-house or third-party sales forces interact with purchasers, prescribers, and patients, are subject to extensive regulation, enforcement of which may result in the imposition of civil and/or criminal penalties, injunctions, and/or limitations on marketing practice for our products. Many companies, including us and Medicis, have been the subject of claims related to these practices asserted by federal authorities. These claims have resulted in fines and other consequences. We are now operating under a Corporate Integrity Agreement (“CIA”) that requires us to maintain a comprehensive compliance program governing our sales, marketing and government pricing and contracting functions. Material failures to comply with the CIA could result in significant sanctions against us, including monetary penalties and exclusion from federal health care programs.
Companies may not promote drugs for “off-label” uses - that is, uses that are not described in the product's labeling and that differ from those approved by the FDA, Health Canada or other applicable regulatory agencies. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. In addition, management's attention could be diverted from our business operations and our reputation could be damaged.
We will not be able to commercialize our pipeline products if preclinical studies do not produce successful results or if clinical trials do not demonstrate safety and efficacy in humans.
We and our development partners, as applicable, conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our pipeline products in order to obtain regulatory approval for the sale of our pipeline products. Preclinical studies and clinical trials are expensive, can take many years and have uncertain outcomes.
For certain of our products, we depend on reimbursement from third party payors and a reduction in the extent of reimbursement could reduce our product sales and revenue.
Sales of certain of our products are dependent, in part, on the availability and extent of reimbursement from government health administration authorities, private health insurers and other organizations and our continued participation in such programs. Changes in government regulations or private third-party payors’ reimbursement policies may reduce reimbursement for our products and adversely affect our future results.
Failure to be included in formularies developed by managed care organizations and other organizations may negatively impact the utilization of our products, which could harm our market share and negatively impact our business, financial condition and results of operations.
Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Failure to be included in such formularies or to achieve favorable formulary status may negatively impact the utilization of our products. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, our market share and gross margins could be harmed, as could our business, financial condition, results of operations and cash flows.

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Manufacturing and Supply Risks
If we or our third-party manufacturers are unable to manufacture our products or the manufacturing process is interrupted due to failure to comply with regulations or for other reasons, the interruption of the manufacture of our products could adversely affect our business. Other manufacturing and supply difficulties or delays may also adversely affect our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Our manufacturing facilities and those of our contract manufacturers must be inspected and found to be in full compliance with current good manufacturing practices (“cGMP”) or similar standards before approval for marketing. Our failure or that of our contract manufacturers to comply with cGMP regulations or similar regulations outside of the U.S. can result in enforcement action by the FDA or its foreign counterparts, including, but not limited to, warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of products, total or partial suspension of production or importation, suspension or withdrawal of regulatory approval for approved or in-market products, refusal of the government to renew marketing applications or approve pending applications or supplements, suspension of ongoing clinical trials, imposition of new manufacturing requirements, closure of facilities and criminal prosecution.
Our manufacturing and other processes use complicated and sophisticated equipment, which sometimes requires a significant amount of time to obtain and install. Manufacturing complexity, testing requirements and safety and security processes combine to increase the overall difficulty of manufacturing these products and resolving manufacturing problems that we may encounter. Although we endeavor to properly maintain our equipment, including through on-site quality control and experienced manufacturing supervision, and have key spare parts on hand, our business could suffer if certain manufacturing or other equipment, or all or a portion of our facilities, were to become inoperable for a period of time. This could occur for various reasons, including catastrophic events, such as hurricanes, earthquakes or other natural disasters, explosions, environmental accidents, pandemics, quarantine, equipment failures or delays in obtaining components or replacements, construction delays or defects and other events, both within and outside of our control. We could experience substantial production delays in the event of any such occurrence until we build or locate replacement equipment or a replacement facility, as applicable, and seek to obtain necessary regulatory approvals for such replacement. Any interruption in our manufacture of products could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Our dependence upon others to manufacture our products may adversely affect our profit margins and our ability to develop and obtain approval for our products on a timely and competitive basis, if at all. In addition, delays or difficulties by us or with our contract manufacturers in producing, packaging, or distributing our products could adversely affect the sales of our current products or introduction of other products.
The supply of our products to our customers is subject to and dependent upon the use of transportation services. Disruption of transportation services could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture and deliver our products to the market would be impeded, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Some components and raw materials used in our manufactured products, and some products sold by us, are currently available only from one or a limited number of domestic or foreign suppliers. In the event an existing supplier becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or we are unable to renew current supply agreements when such agreements expire and we do not have a second supplier, we may be unable to obtain the required components, raw materials or products on a timely basis or at commercially reasonable prices. A prolonged interruption in the supply of a single-sourced raw material, including the active pharmaceutical ingredient, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Commercialization and Distribution Risks
Our approved products may not achieve or maintain expected levels of market acceptance.
Even if we are able to obtain and maintain regulatory approvals for our new pharmaceutical products, generic or branded, the success of these products is dependent upon achieving and maintaining market acceptance. Commercializing products is time consuming, expensive and unpredictable. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees, successfully commercialize new products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success. Levels of market acceptance for our new products could be impacted by several factors, many of which are not within our control, including but not limited to the:

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safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors;
scope of approved uses and marketing approval;
timing of market approvals and market entry;
availability of alternative products from our competitors;
acceptance of the price of our products; and
ability to market our products effectively at the retail level or in the appropriate setting of care.
Further, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of the affected products. Accordingly, new data about our products, or products similar to our products, could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal.
Our business may be impacted by seasonality, which may cause our operating results and financial condition to fluctuate.
Demand for certain of our products may be impacted by seasonality. In particular, demand for certain of our dermatology products tends to increase during the third quarter “back to school” period. In addition, sales in the fourth quarter tend to be higher based on the purchasing patterns of our customer base.  This seasonality may cause our operating results to fluctuate. Furthermore, there are no assurances that these historical trends will continue in the future. 
We have entered into distribution agreements with other companies to distribute certain of our products at supply prices based on net sales. Declines in the pricing and/or volume, over which we have no or limited control, of such products, and therefore the amounts paid to us, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Certain of our generic products and certain of our other products are the subject of various agreements, pursuant to which we manufacture and sell products to other companies, which distribute such products at a supply price typically based on net sales. Our ability to control pricing and volume of these products is limited and, in some cases, these companies make all distribution and pricing decisions independently of us. If the pricing or volume of such products declines, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Risks related to Specific Legislation and Regulations
We are subject to various laws and regulations, including “fraud and abuse” laws, anti-bribery laws, environmental laws and privacy and security regulations, and a failure to comply with such laws and regulations or prevail in any litigation related to noncompliance could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Pharmaceutical and biotechnology companies have faced lawsuits and investigations pertaining to violations of health care “fraud and abuse” laws, such as the federal False Claims Act, the federal Anti-Kickback Statute, the U.S. Foreign Corrupt Practices Act (“FCPA”) and other state and federal laws and regulations. We also face increasingly strict data privacy and security laws in the U.S. and in other countries, the violation of which could result in fines and other sanctions. The United States Department of Health and Human Services Office of Inspector General recommends and, increasingly states, require pharmaceutical companies to have comprehensive compliance programs and to disclose certain payments made to healthcare providers or funds spent on marketing and promotion of drug products. While we have developed corporate compliance programs based on what we believe to be current best practices, we cannot assure you that we or our employees or agents are or will be in compliance with all applicable federal, state or foreign regulations and laws. If we are in violation of any of these requirements or any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines, exclusion from federal healthcare programs or other sanctions.
The FCPA and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices or may require us to interact with doctors and hospitals, some of which may be state controlled, in a manner that is different than in the U.S. and Canada. We cannot assure you that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and

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result in criminal or civil penalties or remedial measures, any of which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, hazardous substances may be released into the environment, which could cause environmental or property damage or personal injuries, and which could subject us to remediation obligations regarding contaminated soil and groundwater or potential liability for damage claims. Under certain laws, we may be required to remediate contamination at certain of our properties regardless of whether the contamination was caused by us or by previous occupants of the property or by others. In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and future changes in laws or regulations may require us to install additional controls for certain of our emission sources, to undertake changes in our manufacturing processes or to remediate soil or groundwater contamination at facilities where such cleanup is not currently required.
We are also subject to various privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (as amended, “HIPAA”). HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions (e.g., health care claims information and plan eligibility, referral certification and authorization, claims status, plan enrollment, coordination of benefits and related information), as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. Failure to comply with these laws can result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws and the potential liability associated with the failure to comply with these laws could adversely affect our financial condition, results of operations and cash flows.
Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably and could adversely affect our business.
In the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products profitably. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) may affect the operational results of companies in the pharmaceutical industry, including the Company and other healthcare related industries, by imposing on them additional costs. Effective January 1, 2010, the Health Care Reform Act increased the minimum Medicaid drug rebates for pharmaceutical companies, expanded the 340B drug discount program, and made changes to affect the Medicare Part D coverage gap, or "donut hole". The law also revised the definition of "average manufacturer price" for reporting purposes, which has the potential to affect the amount of our Medicaid drug rebates to states. Beginning in 2011, the law imposed a significant annual fee on companies that manufacture or import branded prescription drug products.

The Health Care Reform Act also added substantial new provisions affecting compliance, some of which may require us to modify our business practices with health care practitioners. Pharmaceutical manufacturers are required in 2013 to comply with the federal Physician Payments Sunshine Act, which was passed as part of the Act and requires pharmaceutical companies to monitor and report payments, gifts, the provision of samples and other remuneration made to physicians and other health care professionals and health care organizations.
We are unable to predict the future course of federal or state health care legislation. A variety of federal and state agencies are in the process of implementing the Health Care Reform Act, including through the issuance of rules, regulations or guidance that materially affect our business. The risk of our being found in violation of these rules and regulations is increased by the fact that many of them have not been fully interpreted by applicable regulatory authorities or the courts, and their provisions are open to a variety of interpretations. The Health Care Reform Act and further changes to health care laws or regulatory framework that reduce our revenues or increase our costs could also have a material adverse effect on our business, financial condition and results of operations and cash flows, and could cause the market value of our common stock to decline.
Other Risks
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter for a number of reasons. The following events or occurrences, among others, could cause fluctuations in our financial performance from period to period:

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development and launch of new competitive products;
the timing and receipt of FDA approvals or lack of approvals;
costs related to business development transactions;
changes in the amount we spend to promote our products;
delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses;
changes in treatment practices of physicians that currently prescribe certain of our products;
increases in the cost of raw materials used to manufacture our products;
manufacturing and supply interruptions;
our responses to price competition;
expenditures as a result of legal actions, including the defense of our patents and other intellectual property;
market acceptance of our products;
the timing of wholesaler and distributor purchases;
increases in insurance rates for existing products and the cost of insurance for new products;
general economic and industry conditions; and
changes in seasonality of demand for certain of our products.
As a result, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. The above factors may cause our operating results to fluctuate and adversely affect our financial condition and results of operations. In any quarterly period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to decrease.
Item 1B.    Unresolved Staff Comments
None.

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Item 2.    Properties
We believe that we have sufficient facilities to conduct our operations during 2013. The following table lists the location, use, size and ownership interest of our principal properties:
Location
 
Purpose
 
Owned
or
Leased
 
Approximate
Square
Footage
Montreal, Quebec, Canada
 
Corporate Headquarters
 
Leased
 
79,000

Bridgewater, New Jersey
 
Administration
 
Leased
 
110,000

Christ Church, Barbados(1)
 
Commercial, IP and strategic planning
 
Owned
 
23,000

U.S. Dermatology and U.S. Neurology and Other
 
 
 
 
 
 
Petaluma, California
 
Offices and laboratories
 
Leased
 
50,000

Scottsdale, Arizona
 
Offices
 
Leased
 
150,000

Horsham, Pensylvania
 
Office
 
Leased
 
19,000

Canada and Australia
 
 
 
 
 
 
Richmond Hill, Ontario, Canada
 
Offices, manufacturing and warehouse facility
 
Leased
 
72,000

Montreal, Quebec, Canada
 
Offices, manufacturing and warehouse facility
 
Owned
 
94,000

Steinbach, Manitoba, Canada
 
Offices, manufacturing and warehouse facility
 
Owned
 
250,000

Laval, Quebec, Canada
 
Offices, manufacturing and distribution facility
 
Owned
 
337,000

Chatswood, Sydney, Australia
 
Offices
 
Leased
 
7,000

Emerging Markets
 
 
 
 
 
 
Mexico City, Mexico
 
Offices and manufacturing facility
 
Owned
 
98,000

Mexico City, Mexico
 
Offices and manufacturing facility
 
Owned
 
161,000

Estado de Mexico, Mexico
 
Distribution facility
 
Leased
 
117,000

San Juan del Rio, Mexico
 
Manufacturing facility
 
Owned
 
144,000

Indaiatuba, Brazil
 
Manufacturing facility
 
Owned
 
178,000

Sao Paulo, Brazil
 
Manufacturing facility
 
Owned
 
45,000

Embu, Brazil
 
Offices, manufacturing and distribution facility
 
Leased
 
68,000

Jelenia Gora, Poland
 
Offices, laboratories and manufacturing and warehouse facility
 
Owned
 
452,000

Rzeszow, Poland
 
Offices, laboratories and manufacturing facility
 
Owned
 
407,000

Ksawerow, Poland
 
Offices and manufacturing facility
 
Owned
 
66,000

Kaunas, Lithuania
 
Offices and manufacturing facility
 
Owned
 
86,000

Belgrade, Serbia
 
Offices and manufacturing facility
 
Owned
 
163,000

Belgrade, Serbia
 
Offices, manufacturing and warehouse facility
 
Leased
 
154,000

___________________
(1)
In January 2013, this facility was sold.
We believe our facilities are in satisfactory condition and are suitable for their intended use, although some limited investments to improve our manufacturing and other related facilities are contemplated, based on the needs and requirements of our business.
Item 3.    Legal Proceedings
See note 24 of notes to consolidated financial statements in Item 15 of this Form 10-K, which is incorporated by reference herein.
Item 4.    Mine Safety Disclosures
Not applicable.

22



PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are traded on the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) under the symbol “VRX”. The following table sets forth the high and low per share sales prices for our common shares on the NYSE and TSX for the periods indicated.
 
 
NYSE
 
TSX
 
 
High
$
 
Low
$
 
High
C$
 
Low
C$
2012
 
 
 
 
 
 
 
 
First quarter
 
55.80
 
45.52
 
55.24
 
45.32
Second quarter
 
59.94
 
42.47
 
58.98
 
43.99
Third quarter
 
61.11
 
44.01
 
59.88
 
45.07
Fourth quarter
 
61.10
 
52.50
 
60.73
 
52.29
2011
 
 
 
 
 
 
 
 
First quarter
 
51.13
 
28.06
 
49.62
 
28.82
Second quarter
 
55.00
 
47.28
 
53.38
 
45.05
Third quarter
 
57.24
 
34.12
 
54.28
 
35.27
Fourth quarter
 
47.58
 
32.05
 
48.29
 
33.91
_______________
Source: NYSEnet, TSX Historical Data Access
Market Price Volatility of Common Shares
Market prices for the securities of pharmaceutical and biotechnology companies, including our securities, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, the aftermath of public announcements by us, concern as to safety of drugs and general market conditions can have an adverse effect on the market price of our common shares and other securities.
Holders
The approximate number of holders of record of our common shares as of February 22, 2013 is 2,447.
Performance Graph
The following graph compares the cumulative total return on our common shares with the cumulative return on the S&P 500 Index, the TSX/S&P Composite Index and a 8-stock Custom Composite Index for the five years ended December 31, 2012, in all cases, assuming reinvestment of dividends. The Custom Composite Index consists of Allergan, Inc.; Endo Pharmaceuticals Holdings Inc.; Forest Laboratories, Inc.; Gilead Sciences, Inc.; Mylan Inc.; Perrigo Company; Shire Pharmaceuticals Group plc and Watson Pharmaceuticals, Inc.

23



 
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
S&P 500 Index
100
63
80
92
94
109
S&P/TSX Composite Index
100
67
90
106
97
104
Valeant Pharmaceuticals International, Inc.
100
81
126
270
446
571
Custom Composite Index
100
86
107
134
162
186

Dividends
No dividends were declared or paid in 2012 and 2011. During 2010, we declared and paid dividends per common share as follows:
Date Declared
 
Dividend per share
 
Payment Date
February 25, 2010
 
$
0.09

 
April 5, 2010
May 6, 2010
 
$
0.095

 
July 5, 2010
August 5, 2010
 
$
0.095

 
October 4, 2010
November 4, 2010
 
$
1.00

 
December 22, 2010
Total
 
$
1.280

 
 
On November 4, 2010, our board of directors declared a special dividend of $1.00 (the “post-Merger special dividend”) per common share, no par value. Shareholders of record as of the close of business on November 15, 2010 (the “record date”) were entitled to receive the post-Merger special dividend on December 22, 2010. In connection with the post-Merger special dividend, we established a special dividend reinvestment plan under which eligible shareholders of record as of the record date could elect to reinvest the post-Merger special dividend (net of any applicable withholding tax) in additional common shares of the Company. Following the payment of the post-Merger special dividend, the special dividend reinvestment plan was terminated. The aggregate cash post-Merger special dividend paid was $297.6 million and we issued 72,283 additional shares to shareholders that elected to reinvest in additional common shares of the Company.
While our board of directors will review our dividend policy from time to time, we currently do not intend to pay any cash dividends in the foreseeable future. In addition, the covenants contained in the Third Amended and Restated Credit and Guaranty Agreement include restrictions on the payment of dividends.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Selected Financial Information — Cash Dividends”, for additional details about our dividend payments.
Restrictions on Share Ownership by Non-Canadians

24



There are no limitations under the laws of Canada or in our organizational documents on the right of foreigners to hold or vote securities of our Company, except that the Investment Canada Act (Canada) (the “Investment Canada Act”) may require review and approval by the Minister of Industry (Canada) of certain acquisitions of “control” of our Company by a “non-Canadian”.
Investment Canada Act
An acquisition of control of a Canadian business by a non-Canadian is either reviewable (a “Reviewable Transaction”), in which case it is subject to both a reporting obligation and an approval process, or notifiable, in which case it is subject to only a post-closing reporting obligation. In the case of a Reviewable Transaction, the non-Canadian acquirer must submit an application for review with the prescribed information. The responsible Minister is then required to determine whether the Reviewable Transaction is likely to be of net benefit to Canada, taking into account the assessment factors specified in the Investment Canada Act and any written undertakings that may have been given by the non-Canadian acquirer.
In March 2009, the Investment Canada Act was amended to provide that any investment by a non-Canadian in a Canadian business, even where control has not been acquired, can be reviewed on grounds of whether it may be injurious to national security. Where an investment is determined to be injurious to national security, Cabinet can prohibit closing or, if closed, can order the investor to divest control. Short of a prohibition or divestment order, Cabinet can impose terms or conditions on the investment or can require the investor to provide binding undertakings to remove the national security concern.
Competition Act
Part IX of the Competition Act (Canada) (the “Competition Act”) requires that a pre-merger notification filing be submitted to the Commissioner of Competition (the “Commissioner”) in respect of certain classes of merger transactions that exceed certain prescribed thresholds. If a proposed transaction exceeds such thresholds, subject to certain exceptions, the notification filing must be submitted to the Commissioner and the statutory waiting period must expire or be terminated early or waived by the Commissioner before the transaction can be completed.
All mergers, regardless of whether they are subject to Part IX of the Competition Act, are subject to the substantive mergers provisions under Section 92 of the Competition Act. In particular, the Commissioner may challenge a transaction before the Competition Tribunal where the transaction prevents or lessens, or is likely to prevent or lessen, competition substantially in a market. The Commissioner may not make an application to the Competition Tribunal under Section 92 of the Competition Act more than one year after the merger has been substantially completed.
Exchange Controls
Canada has no system of exchange controls. There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to non-resident holders of our securities, except as discussed in “Taxation” below.
Taxation
Canadian Federal Income Taxation
The following discussion is a summary of the principal Canadian federal income tax considerations generally applicable to a holder of our common shares who, at all relevant times, for purposes of the Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “Canadian Tax Act”) deals at arm’s-length with, and is not affiliated with, our Company, beneficially owns its common shares as capital property and does not use or hold and is not deemed to use or hold such common shares in carrying on a business in Canada and who, at all relevant times, for purposes of the application of the Canadian Tax Act and the Canada-U.S. Income Tax Convention (1980, as amended) (the “U.S. Treaty”), is resident in the U.S., is not, and is not deemed to be, resident in Canada and is eligible for benefits under the U.S. Treaty (a “U.S. Holder”). Special rules, which are not discussed in the summary, may apply to a non-resident holder that is an insurer that carries on an insurance business in Canada and elsewhere or that is an “authorized foreign bank” as defined in the Canadian Tax Act.
The U.S. Treaty includes limitation on benefits rules that restrict the ability of certain persons who are resident in the U.S. to claim any or all benefits under the U.S. Treaty. Furthermore, limited liability companies (“LLCs”) that are not taxed as corporations pursuant to the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) do not generally qualify as resident in the U.S. for purposes of the U.S. Treaty. Under the U.S. Treaty, a resident of the U.S. who is a member of such an LLC and is otherwise eligible for benefits under the U.S. Treaty may generally be entitled to claim benefits under the U.S. Treaty in respect of income, profits or gains derived through the LLC. Residents of the U.S. should consult their own tax advisors with respect to their eligibility for benefits under the U.S. Treaty, having regard to these rules.

25



This summary is based upon the current provisions of the U.S. Treaty and the Canadian Tax Act and our understanding of the current administrative policies and assessing practices of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals to amend the U.S. Treaty and the Canadian Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof. This summary does not otherwise take into account or anticipate changes in law or administrative policies and assessing practices, whether by judicial, regulatory, administrative or legislative decision or action, nor does it take into account provincial, territorial or foreign tax legislation or considerations, which may differ from those discussed herein.
        This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice generally or to any particular holder. Holders should consult their own tax advisors with respect to their own particular circumstances.
Gains on Disposition of Common Shares
In general, a U.S. Holder will not be subject to tax under the Canadian Tax Act on capital gains arising on the disposition of such holder’s common shares unless the common shares are “taxable Canadian property” to the U.S. Holder and are not “treaty-protected property”.
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Tax Act), (iii) “timber resource property” (as such terms are defined in the Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property.
Common shares will be treaty-protected property where the U.S. Holder is exempt from income tax under the Canadian Tax Act on the disposition of common shares because of the U.S. Treaty. Common shares owned by a U.S. Holder will generally be treaty-protected property where the value of the common shares is not derived principally from real property situated in Canada, as defined in the U.S. Treaty.
Dividends on Common Shares
Dividends paid or credited on the common shares or deemed to be paid or credited on the common shares to a U.S. Holder that is the beneficial owner of such dividends will generally be subject to non-resident withholding tax under the Canadian Tax Act and the U.S. Treaty at the rate of (a) 5% of the amounts paid or credited if the U.S. Holder is a company that owns (or is deemed to own) at least 10% of our voting stock, or (b) 15% of the amounts paid or credited in all other cases. The rate of withholding under the Canadian Tax Act in respect of dividends paid to non-residents of Canada is 25% where no tax treaty applies.
Securities Authorized for Issuance under Equity Compensation Plans
Information required under this Item will be included in our definitive proxy statement for the 2013 Annual Meeting of Shareholders expected to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Form 10-K (the “2013 Proxy Statement”), and such required information is incorporated herein by reference.
Purchases of Equity Securities by the Company and Affiliated Purchases
On November 4, 2010, we announced that our board of directors had approved a securities repurchase program, pursuant to which we could make purchases of our common shares, convertible notes and/or senior notes, from time to time, up to an aggregate maximum value of $1.5 billion, subject to any restrictions in our financing agreements and applicable law. On August 29, 2011, we announced that our board of directors had approved an increase of $300.0 million under our securities repurchase program (the “2010 Securities Repurchase Program”). As a result, under the 2010 Securities Repurchase Program, we were able to repurchase up to $1.8 billion of our convertible notes, senior notes, common shares and/or other notes or shares that were issued prior to the completion of the program. The 2010 Securities Repurchase Program terminated on November 7, 2011.
On November 3, 2011, we announced that our board of directors had approved a new securities repurchase program (the “2011 Securities Repurchase Program”). Under the 2011 Securities Repurchase Program, which commenced on November 8, 2011, we could make purchases of up to $1.5 billion of our convertible notes, senior notes, common shares and/or other future debt or shares. The 2011 Securities Repurchase Program terminated on November 7, 2012.

26



On November 19, 2012, we announced that our board of directors had approved a new securities repurchase program (the “2012 Securities Repurchase Program”). Under the 2012 Securities Repurchase Program, which commenced on November 15, 2012, we may make purchases of up to $1.5 billion of our senior notes, common shares and/or other future debt or shares. The 2012 Securities Repurchase Program will terminate on November 14, 2013 or at such time as we complete our purchases. The amount of securities to be purchased and the timing of purchases under the 2012 Securities Repurchase Program may be subject to various factors, which may include the price of the securities, general market conditions, corporate and regulatory requirements, alternate investment opportunities and restrictions under our financing agreements and applicable law. The securities to be repurchased will be funded using our cash resources. The board of directors also approved a sub-limit under the 2012 Securities Repurchase Program for the repurchase of an amount of common shares equal to the greater of 10% of our public float or 5% of our issued and outstanding common shares, in each case calculated as of the date of the commencement of the 2012 Securities Repurchase Program. We are permitted to make purchases of up to 15,172,149 common shares on the open market through the facilities of the NYSE, representing approximately 5% of our issued and outstanding common shares on the date of the commencement of the 2012 Securities Repurchase Program. Subject to completion of appropriate filings with and approval by the TSX, the Company may also make purchases of our common shares over the facilities of the TSX. Purchases of common shares will be made at prevailing market prices of such shares on the NYSE or the TSX, as the case may be, at the time of the acquisition and shall be made in accordance with the respective rules and guidelines of the NYSE and the TSX. All common shares purchased under the 2012 Securities Repurchase Program will be cancelled.
During the year ended December 31, 2012, under the 2011 Securities Repurchase Program, we repurchased $1.1 million principal amount of our 5.375% Convertible Notes for a purchase price of $4.0 million. In addition, in the year ended December 31, 2012, under the 2011 Securities Repurchase Program, we repurchased 5,257,454 of our common shares for an aggregate purchase price of $280.7 million. In the three-month period ended December 31, 2012, we did not make any purchases of our senior notes or common shares under the 2012 Securities Repurchase Program.
In connection with the 2011 Securities Repurchase Program, through to the termination date of November 7, 2012, we repurchased approximately $442.4 million, in the aggregate, of our convertible notes, common shares and senior notes.
In connection with the 2010 Securities Repurchase Program, through to the termination date of November 7, 2011, we repurchased approximately $1.5 billion, in the aggregate, of our convertible notes, common shares and senior notes.
Item 6.    Selected Financial Data
The following table of selected consolidated financial data of our Company has been derived from financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The data is qualified by reference to, and should be read in conjunction with the consolidated financial statements and related notes thereto prepared in accordance with U.S. GAAP (see Item 15 of this Form 10-K) as well as the discussion in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. All dollar amounts are expressed in thousands of U.S. dollars, except per share data.
 
 
Years Ended December 31,
 
 
2012(1)(2)
 
2011(1)(2)
 
2010(1)
 
2009
 
2008
Consolidated operating data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,546,626

 
$
2,463,450

 
$
1,181,237

 
$
820,430

 
$
757,178

Operating income (loss)
 
79,685

 
299,959

 
(110,085
)
 
181,154

 
124,109

Net (loss) income
 
(116,025
)
 
159,559

 
(208,193
)
 
176,455

 
199,904

(Loss) earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.38
)
 
$
0.52

 
$
(1.06
)
 
$
1.11

 
$
1.25

Diluted
 
$
(0.38
)
 
$
0.49

 
$
(1.06
)
 
$
1.11

 
$
1.25

Cash dividends declared per share
 
$

 
$

 
$
1.28

 
$
0.65

 
$
1.50

 

27



 
 
At December 31,
 
 
2012(1)(2)
 
2011(1)(2)
 
2010(1)
 
2009
 
2008
Consolidated balance sheet:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
916,091

 
$
164,111

 
$
394,269

 
$
114,463

 
$
317,547

Working capital
 
954,699

 
433,234

 
327,710

 
93,734

 
223,198

Total assets
 
17,950,379

 
13,108,119

 
10,795,117

 
2,059,290

 
1,623,565

Long-term obligations
 
11,015,625

 
6,651,011

 
3,595,277

 
326,085

 

Common shares
 
5,940,652

 
5,963,621

 
5,251,730

 
1,465,004

 
1,463,873

Shareholders’ equity (net assets)
 
3,717,398

 
3,929,830

 
4,911,096

 
1,354,372

 
1,201,599

Number of common shares issued and outstanding (000s)
 
303,861

 
306,371

 
302,449

 
158,311

 
158,216

___________________
(1)
Amounts for 2012, 2011, and 2010 include the impact of several acquisitions of businesses, including the Merger on September 28, 2010. For more information regarding our acquisitions, see note 3 of notes to consolidated financial statements in Item 15 of this Form 10-K.
(2)
In 2012, we wrote off an IPR&D asset of $133.4 million, relating to the IDP-107 program, which was acquired in September 2010 as part of the Merger. Through discussion with various internal and external Key Opinion Leaders, we completed our analysis of the Phase 2 study results for IDP-107 during the third quarter of 2012. This led to our decision in the third quarter of 2012 to terminate the program and fully impair the asset. As attempts to identify a partner for the program were not successful, we do not believe the program has value to a market participant.
In 2011, we recognized impairment charges on IPR&D assets of $105.2 million in the fourth quarter of 2011, relating to the A002, A004, and A006 programs acquired as part of the Aton Pharma, Inc. acquisition in 2010, as well as the IDP-109 and IDP-115 dermatology programs. The impairment charges were triggered in the fourth quarter of 2011 due to unfavorable study results, feedback received from the FDA which would result in the incurrence of higher costs to perform additional studies, reassessment of risk and the probability of success, and/or pipeline prioritization decisions resulting in the re-allocation of Company resources to other research and development programs.
For information regarding other impairment charges, see note 7 and note 12 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

28


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


INTRODUCTION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the audited consolidated financial statements, and notes thereto, prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) as of December 31, 2012 and 2011 and each of the three years in the period ended December 31, 2012 (the “2012 Financial Statements”).
Additional information relating to the Company, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Form 10-K”), is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission (the “SEC”) website at www.sec.gov.
Unless otherwise indicated herein, the discussion and analysis contained in this MD&A is as of February 28, 2013.
All dollar amounts are expressed in U.S. dollars, unless otherwise noted.
COMPANY PROFILE
On September 28, 2010 (the “Merger Date”), Biovail Corporation (“Biovail”) completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) through a wholly-owned subsidiary pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” (“we”, “us”, “our” or the “Company”).
We are a multinational, specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products and medical devices. Our specialty pharmaceutical and over-the-counter (“OTC”) products are marketed under brand names and are sold in the U.S., Canada, Australia and New Zealand, where we focus most of our efforts on products in the dermatology and neurology therapeutic classes. We also have branded generic, branded and OTC operations in Central and Eastern Europe, Latin America, Southeast Asia and South Africa.
Our strategy is to focus our business on core geographies and therapeutic classes, manage pipeline assets either internally or through strategic partnerships with other pharmaceutical companies and deploy cash with an appropriate mix of selective acquisitions, debt repurchases and repayments, and share buybacks. We believe this strategy will allow us to improve both our growth rate and profitability and to enhance shareholder value.
Our low risk research and development model described below is one key element to this business strategy. It will allow us to progress certain development programs to drive future commercial growth, while minimizing our research and development expense. This will be achieved in four ways:
focusing our efforts on niche therapeutic areas such as dermatology, podiatry, ophthalmology and life-cycle management programs for currently marketed products;
acquiring dossiers and registrations for branded generic products, which require limited manufacturing start-up and development activities; 
selling internal development capabilities to third parties, thereby allowing higher utilization and infrastructure cost absorption; and
structuring partnerships and collaborations so that our partners share development costs.
We are diverse not only in our sources of revenues from our broad drug portfolio, but also among the therapeutic classes and geographic segments we serve. We focus on those businesses that we view to have the potential for strong operating margins and solid growth, while providing natural balance across geographies.
We measure our success through total shareholder return and, on that basis, as of February 22, 2013, the market price of our common shares on both the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) has increased approximately 150% since the Merger Date, as adjusted for the post-Merger special dividend of $1.00 per common share (the “post-Merger special dividend”). For more information regarding the post-Merger special dividend, see note 3 of notes to consolidated financial statements in Item 15 of this Form 10-K.
ACQUISITIONS AND DISPOSITIONS

29


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We continue to focus the business on core geographies and therapeutic classes through selective acquisitions, dispositions and strategic partnerships with other pharmaceutical companies. Since 2010, we have completed several transactions to expand our product portfolio, including, among others, the following acquisitions and dispositions.
 
 
Acquisition
 Date
Acquisitions of businesses and product rights
 
2013
 
 
Certain assets of Eisai Inc. (“Eisai”)
 
February 20, 2013
Natur Produkt International, JSC (“Natur Produkt”)
 
February 1, 2013
2012
 
 
Medicis Pharmaceutical Corporation (“Medicis”)(1)
 
December 11, 2012
Certain assets of Johnson & Johnson Consumer Companies, Inc. (“J&J ROW”)
 
October 2, 2012
Certain assets of Johnson & Johnson Consumer Companies, Inc. (“J&J North America”)
 
September 28, 2012
Certain assets of QLT Inc. and QLT Ophthalmics, Inc. (collectively, “QLT”)
 
September 24, 2012
OraPharma Topco Holdings, Inc. (“OraPharma”)
 
June 18, 2012
Certain assets of University Medical Pharmaceuticals Corp. (“University Medical”)
 
May 23, 2012
Certain assets of Atlantis Pharma (“Atlantis”)
 
May 2, 2012
Certain assets of Gerot Lannach
 
March 13, 2012
Probiotica Laboratorios Ltda. (“Probiotica”)
 
February 1, 2012
2011
 
 
iNova
 
December 21, 2011
Dermik, a dermatological unit of Sanofi in the U.S. and Canada
 
Deember 16, 2011
Ortho Dermatologics division of Janssen Pharmaceuticals, Inc.
 
December 12, 2011
Afexa Life Sciences Inc. (“Afexa”)
 
October 17, 2011
AB Sanitas (“Sanitas”)
 
August 19, 2011
Elidel®/Xerese® license agreement(2)
 
June 29, 2011
Zovirax®
 
February 22, 2011/March 25, 2011
PharmaSwiss S.A. (“PharmaSwiss”)
 
March 10, 2011
Lodalis™
 
February 9, 2011
2010
 
 
Biovail Merger with Valeant(3)
 
September 28, 2010
 
 
 
 
 
Disposition
 Date
Dispositions
 
2012
 
 
Divestitures of 1% clindamycin and 5% benzoyl peroxide gel (“IDP-111”) and 5% fluorouracil cream (“5-FU”)
 
February 3, 2012
2011
 
 
Out-license product rights to Cloderm® Cream, 0.1% to Promius Pharma LLC
 
March 31, 2011
____________________________________
(1)
The Medicis acquisition included acquired IPR&D assets of $153.8 million related to the development of several programs, including Luliconazole Cream Metronidazole 1.3%, and other dermatology and aesthetics programs. The projected cash flows were adjusted for the probability of successful development and commercialization of the products. In determining fair value for these assets, we assumed that significant cash inflows for these products would commence in 2015, and we estimated that we will incur development costs of approximately $40 million, in the aggregate, to complete the development of these IPR&D assets.
(2)
The Elidel®/Xerese® acquisition included an acquired IPR&D asset of $33.5 million related to the development of a Xerese® life-cycle product. The projected cash flows from the acquired IPR&D assets were adjusted for the probability of successful development and commercialization of the product. Subsequently, during the fourth quarter of 2012, we recognized an impairment charge of $24.7 million related to this IPR&D asset due to higher projected development spend and revised timelines for potential commercialization.
(3)
With respect to the Biovail merger with Valeant, the significant components of the acquired IPR&D assets of $1.4 billion related to the development of ezogabine/retigabine in collaboration with Glaxo Group Limited, a subsidiary of GlaxoSmithKline plc (the entities within The Glaxo Group of Companies are referred throughout as “GSK”), and a number of dermatology products. Subsequently, during 2011 and 2012, we recognized impairment charges associated with these assets, which are described below under Results of Operations - In-Process Research and Development Impairments and Other Charges. As of December 31, 2012, we have estimated that we will incur development costs of approximately $100 million, in the aggregate, of which $34.6 million has been incurred through December 31, 2012, to complete the remaining products in development.

30


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

For more information regarding our acquisitions and dispositions, see note 3, note 4 and note 27 of notes to consolidated financial statements in Item 15 of this Form 10-K.
PRODUCTS IN DEVELOPMENT
The following products, among others, are currently or were in clinical development during 2012:
Potiga™ (Ezogabine/Retigabine)  
In collaboration with GSK, we developed and launched in the second quarter of 2012 immediate release Potiga™ (ezogabine/retigabine) in the U.S. as an adjunctive treatment for partial-onset seizures in patients with epilepsy. We continue to work with GSK to develop a modified release formulation with a goal to improve patient convenience, compliance and tolerability. A lead formulation has been selected for evaluation in patients.
Dermatology Products
With the Medicis acquisition in December 2012, we added several ongoing projects to our research and development portfolio, including:
Luliconazole, a new imidazole, antimycotic cream for the treatment of tinea cruris, pedis and corporis. A New Drug Application (“NDA”) was submitted to the FDA on December 11, 2012 and we have received a Prescription Drug User Fee Act (“PDUFA”) date of December 11, 2013 with respect to this application.
Metronidazole 1.3%, a topical antibiotic for the treatment of bacterial vaginosis.
Several unique formulation development programs focused on improving the tolerability of existing acne vulgaris treatments, as well as a number of aesthetics programs.
We also have a number of dermatology product candidates in development including:
IDP-108 (efinaconazole), a novel triazole compound, is an antifungal targeted to treat onychomycosis, a fungal infection of the fingernails and toenails primarily in older adults. Valeant holds an exclusive license from Kaken Pharmaceutical Co., Ltd., to commercialize efinaconazole in North America, Central America, South America and the European Union. The mechanism of antifungal activity appears similar to other antifungal triazoles, i.e., ergosterol synthesis inhibition. We filed the NDA in the U.S. on July 26, 2012 and the NDS in Canada on October 15, 2012. In the U.S., we have received a PDUFA date of May 24, 2013 with respect to this application.
Topical and other life-cycle management projects, including IDP-118.
COLLABORATION AGREEMENTS
See note 5 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information regarding our License and Collaboration Agreement with GSK, joint ventures with Meda AB, collaboration and option agreements with Bristol-Myers Squibb Company and various collaboration agreements assumed in connection with the Medicis acquisition.
RESTRUCTURING AND INTEGRATION
Medicis Acquisition-Related Cost-Rationalization and Integration Initiatives
The complementary nature of the Company and Medicis businesses has provided an opportunity to capture significant operating synergies from reductions in sales and marketing, general and administrative expenses, and research and development. In total, we have identified approximately $275 million of cost synergies on a run rate basis that we expect to achieve by the end of 2013. This amount does not include potential revenue synergies or the potential benefits of expanding the Company corporate structure to Medicis’s operations.
We have implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:
workforce reductions across the Company and other organizational changes;
closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;

31


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

leveraging research and development spend; and
procurement savings.
We estimated that we will incur total costs in the range of up to $275 million in connection with these cost-rationalization and integration initiatives, which are expected to be substantially completed by the end of 2013. $85.6 million has been incurred as of December 31, 2012. These costs include: employee termination costs payable to approximately 750 employees of the Company and Medicis who have been or will be terminated as a result of the Medicis acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. These estimates do not include a charge of $77.3 million recognized and paid in the fourth quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, and share appreciation rights for Medicis employees that was triggered by the change in control.
See note 6 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information summarizing the major components of costs incurred in connection with our Medicis acquisition-related initiatives through December 31, 2012.
Merger-Related Cost-Rationalization and Integration Initiatives
The complementary nature of the Biovail and Valeant businesses has provided an opportunity to capture significant operating synergies from reductions in research and development, sales and marketing, and general and administrative expenses. In total, we have realized approximately $350 million of annual cost synergies as of December 31, 2012. Approximately $315 million of cost synergies were realized in 2011, and the full amount of $350 million was realized in 2012. We have implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:
workforce reductions across the Company and other organizational changes;
closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;
leveraging research and development spend; and
procurement savings.
We estimated that we will incur total costs in the range of up to $200 million (of which the non-cash component, including share-based compensation, is expected to be approximately $55 million) in connection with these cost-rationalization and integration initiatives, of which $196.2 million has been incurred as of December 31, 2012. These costs include: employee termination costs (including related share-based payments) payable to approximately 500 employees of Biovail and Valeant who have been terminated as a result of Merger; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees, asset impairment charges to write down property, plant and equipment to fair value; and contract termination and lease cancellation costs.
See note 6 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information summarizing the major components of costs incurred in connection with our Merger-related initiatives through December 31, 2012.
U.S. HEALTHCARE REFORM
In March 2010, the Patient Protection and Affordable Care Act (the “Act”) was enacted in the United States. The Act contains several provisions that impact our business. Provisions of the Act include: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on covered drugs; (ii) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and (iii) the expansion of the 340(B) Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers.
Commencing in 2011, the new legislation requires that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap. In addition, commencing in 2011, a new fee has been assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). This fee is calculated based upon each entity’s relative share of total applicable branded prescription drug sales to specified U.S. government programs for the preceding calendar year. The aggregate industry wide fee is expected to total $28.0 billion through 2019, ranging from $2.5 billion to $4.1 billion annually.

32



Additional provisions of the Act will be implemented in the next several years. For example, in 2013 federal subsidies will begin to be phased in for brand-name prescription drugs filled in the Medicare Part D cover gap. Also in January 2013, CMS issued final regulations to implement the physician payment disclosure provisions of Act, which requires pharmaceutical and medical device manufacturers to disclose publicly certain payments to physicians. In 2014, the Act’s private health insurance exchanges will begin to operate along with the mandate on individuals to purchase health insurance. The Act also allows states to expand Medicaid coverage with most of the expansion’s cost paid for by the federal government. While some states have decided to pursue such expansions, others have indicated they will not do so or are still considering doing so.
The Act did not have a material impact on our financial condition or results of operation in 2012, 2011 or 2010. In 2012 and 2011, we made a total payment of $1.8 million and $0.6 million, respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). We also incurred a cost of $9.8 million and $6.0 million on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”) in 2012 and 2011, respectively.
While the Supreme Court upheld the core provisions of the Affordable Care Act, additional challenges to various provisions of the Act continue to work their way through the courts. We cannot predict at this time what impact these challenges will have on our business. Similarly, we cannot predict the how the numerous regulations and requirements still to be proposed or finalized by the Administration and the states will impact our business.
SELECTED FINANCIAL INFORMATION
Our results of operations, financial condition and cash flows reflect Biovail’s stand-alone operations as they existed prior to the completion of the Merger. The results of Valeant’s business have been included in our results of operations, financial condition and cash flows only for the period subsequent to the completion of the Merger. Therefore, our financial results for 2010 do not reflect a full year of Valeant’s operations.
The following table provides selected financial information for each of the last three years:
 
 
Years Ended December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s, except per share data)
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Revenues
 
3,546,626

 
2,463,450

 
1,181,237

 
1,083,176

 
44
 
1,282,213

 
109
Net (loss) income
 
(116,025
)
 
159,559

 
(208,193
)
 
(275,584
)
 
NM
 
367,752

 
NM
Basic (loss) earnings per share
 
(0.38
)
 
0.52

 
(1.06
)
 
(0.90
)
 
NM
 
1.58

 
NM
Diluted (loss) earnings per share
 
(0.38
)
 
0.49

 
(1.06
)
 
(0.87
)
 
NM
 
1.55

 
NM
Cash dividends declared per share
 

 

 
1.280

 

 
 
(1.280
)
 
NM
 
 
 
As of December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s)
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Total assets
 
17,950,379

 
13,108,119

 
10,795,117

 
4,842,260

 
37
 
2,313,002

 
21
Long-term debt, including current portion
 
11,015,625

 
6,651,011

 
3,595,277

 
4,364,614

 
66
 
3,055,734

 
85
____________________________________
NM — Not meaningful
Financial Performance
Changes in Revenues
Total revenues increased $1,083.2 million, or 44%, to $3,546.6 million in 2012, compared with $2,463.5 million in 2011, primarily due to:
incremental product sales revenue of $709.2 million, in the aggregate, from all 2011 acquisitions, primarily from the iNova, Dermik, Ortho Dermatologics, Sanitas, PharmaSwiss, Elidel®/Xerese® and Afexa acquisitions. We also recognized incremental product sales revenue in 2012 of $280.7 million, in the aggregate, from all 2012 acquisitions, primarily from the Probiotica, OraPharma, Medicis, Gerot Lannach, University Medical and Atlantis acquisitions. The

33


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

incremental product sales revenue from the 2011 and 2012 acquisitions includes a negative foreign exchange impact of $33.3 million, in the aggregate, in 2012;
incremental product sales revenue of $286.9 million in 2012, related to growth from the existing business, excluding the impact of generic competition in the U.S. Neurology and Other segment and the Canada and Australia segment described below. Slightly more than half of this increase was based on volume, and the remainder was a result of pricing actions taken during 2012 and 2011;
alliance revenue of $122.7 million, primarily related to (i) alliance revenue of $66.3 million on the sale of the IDP-111 and 5-FU products in the first quarter of 2012, and (ii) the 45.0 million milestone payment received from GSK in connection with the launch of Potiga™ recognized in the second quarter of 2012; and
incremental service revenue of $29.0 million in 2012, primarily from the Dermik acquisition.
Those factors were partially offset by:
a negative impact from divestitures and discontinuations of $81.8 million in 2012, including a decrease of $42.8 million in 2012, related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012;
decrease in product sales of Cardizem® CD, Ultram® ER, Diastat® and Wellbutrin XL® in the U.S. Neurology and Other segment of $80.8 million, or 28%, in the aggregate, to $206.2 million in 2012, compared with $287.0 million in 2011, due to generic competition;
a negative foreign currency exchange impact on the existing business of $67.2 million in 2012;
alliance revenue of $43.0 million in 2011, primarily related to the $36.0 million out-license of the Cloderm® product rights that did not similarly occur in 2012;
alliance revenue of $40.0 million recognized in the second quarter of 2011 related to the milestone payment received from GSK in connection with the launch of Trobalt®; and
decrease in product sales of Cesamet® in the Canada and Australia segment of $35.0 million, or 54%, to $29.4 million in 2012, compared with $64.4 million in 2011, due to generic competition.
Total revenues increased $1,282.2 million, or 109%, to $2,463.5 million in 2011, compared with $1,181.2 million in 2010, primarily due to:
incremental product sales revenue of $1,083.6 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from the Valeant, PharmaSwiss, Sanitas, Elidel®/Xerese®, Afexa, Ortho Dermatologics and Dermik acquisitions. The incremental product sales revenue from the 2010 and 2011 acquisitions includes a negative foreign exchange impact of $59.0 million in 2011;
incremental product sales revenue of $103.1 million in 2012, related to growth from the existing business, excluding the impact of generic competition in the U.S. Neurology and Other segment described below, as well as an increase in alliance and royalty revenue of $137.4 million, mainly related to the incremental royalty (IDP-111) revenue from Valeant of $64.3 million, alliance revenue of $40.0 million in the second quarter of 2011 related to the milestone payment from GSK in connection with the launch of Trobalt® and the alliance revenue of $36.0 million recognized in the first quarter of 2011 on the out-license of the Cloderm® product rights in March 2011. The majority of this increase was based on volume, and the remainder was a result of pricing actions taken during 2011 and 2010; and

an increase in service revenue of $23.2 million, primarily from the Valeant and PharmaSwiss acquisitions.
Those factors were partially offset by:
a decrease in product sales of Wellbutrin XL®, Diastat®, Cardizem® CD and Ultram® ER in the U.S. Neurology and Other segment of $35.5 million, or 12%, in the aggregate, to $266.5 million in 2011, compared with $302.0 million in 2010, due to generic competition;
a negative foreign currency exchange impact on the existing business of $24.0 million in 2011; and
a negative impact from divestitures and discontinuations of $5.4 million in 2011.
Changes in Earnings

34


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Net loss was $116.0 million (basic and diluted loss per share of $0.38) in 2012, compared with net income of $159.6 million (basic and diluted earnings per share (“EPS”) of $0.52 and $0.49, respectively) in 2011, reflecting the following factors:
an increase of $371.1 million in amortization expense primarily related to (i) the acquired identifiable intangible assets of iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis of $210.5 million, in the aggregate, in 2012, and (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011;
an increase of $246.7 million in restructuring, integration and other costs, as described below under “Results of Operations — Operating Expenses — Restructuring, Integration and Other Costs”;
an increase of $183.6 million in selling, general and administrative expense, as described below under “Results of Operations — Operating Expenses — Selling, General and Administrative Expenses”; 
an increase of $140.4 million in interest expense, as described below under “Results of Operations — Non-Operating Income (Expense) — Interest Expense”;
an increase of $80.7 million in in-process research and development impairments and other charges, as described below under “Results of Operations — Operating Expenses — In-Process Research and Development Impairments and Other Charges”;
an increase of $73.9 million in cost of alliance and service revenues, as described below under “Results of Operations — Operating Expenses — Cost of Alliance and Service Revenues”;
an increase of $45.6 million in acquisition-related costs, as described below under “Results of Operations — Operating Expenses — Acquisition-Related Costs”;
an increase of $44.9 million in legal settlements, as described below under “Results of Operations — Operating Expenses — Legal Settlements”;
a net realized gain of $21.3 million on the disposal of our equity investment in Cephalon, Inc. (“Cephalon”) realized in 2011 that did not similarly occur in 2012, as described below under “Results of Operations — Non-Operating Income (Expense) — Gain (Loss) on Investments, Net”; and
a $19.1 million net gain realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss in 2011 that did not similarly occur in 2012, as described below under “Results of Operations — Non-Operating Income (Expense) — Foreign Exchange and Other”.
Those factors were partially offset by:
an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization of intangible assets) of $817.1 million, mainly related to the incremental contribution of Dermik, iNova, Ortho Dermatologics, Sanitas, OraPharma, Zovirax®, Medicis, PharmaSwiss, Elidel®/Xerese®, Probiotica and Gerot Lannach;
an increase of $100.6 million in recovery of income taxes, as described below under “Results of Operations — Income Taxes”; and
a decrease of $16.8 million in loss on extinguishment of debt, as described below under “Results of Operations — Non-Operating Income (Expense) — Loss on Extinguishment of Debt”.
Net income increased $367.8 million to $159.6 million (basic and diluted EPS of $0.52 and $0.49, respectively) in 2011, compared with net loss of $208.2 million (basic and diluted loss per share of $1.06) in 2010, reflecting the following factors:
an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization of intangible assets) of $833.5 million, mainly related to the incremental contribution of Valeant, PharmaSwiss, Sanitas, Elidel®/Xerese®, Afexa, Ortho Dermatologics and Dermik. In addition, the increase was due to higher volumes and pricing for the Xenazine® product and a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®;
an increase in the recovery of income taxes of $149.5 million, mainly attributable to significant expenses in the U.S., including but not limited to IPR&D charges, amortization, and interest expense. The U.S. has the highest statutory rate

35


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

relative to all other tax jurisdictions in which we do business, resulting in an overall net book tax recovery for the worldwide income tax provision;
an increase in alliance and royalty revenue of $137.4 million, mainly related to the incremental royalty (IDP-111) revenue from Valeant of $64.3 million, alliance revenue of $40.0 million in the second quarter of 2011 related to the milestone payment from GSK in connection with the launch of Trobalt® and the alliance revenue of $36.0 million recognized in the first quarter of 2011 on the out-license of the Cloderm® product rights in March 2011;
decreases of $43.2 million in restructuring charges and integration costs, as described below under “Results of Operations — Operating Expenses — Restructuring, Integration and Other Costs”;
decreases of $40.8 million in legal settlements, as described below under “Results of Operations — Operating Expenses — Legal Settlements”;
a $21.3 million net realized gain on the disposal of our equity investment in Cephalon, which was realized in the second quarter of 2011 (as described below under “Results of Operations — Non-Operating Income (Expense) — Gain (loss) on Investments, Net”); and
a $19.1 million net gain realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss in 2011, as described below under “Results of Operations — Non-Operating Income (Expense) — Foreign Exchange and Other”.
Those factors were partially offset by:
increases of $338.1 million in amortization expense, primarily related to the acquired identifiable intangible assets of Valeant, Elidel®/Xerese®, PharmaSwiss, Zovirax®, and Sanitas of $331.8 million, in the aggregate, the impairment charges of $7.9 million and $19.8 million related to the write-down of the carrying values of the IDP-111 and 5-FU intangible assets, respectively, to their estimated fair values, less costs to sell, as well as an impairment of intangible assets of $12.8 million related to certain OTC products sold in Brazil;
an increase of $295.9 million in selling, general and administrative expense, as described below under “Results of Operations — Operating Expenses — Selling, general and administrative”;
increases of $248.7 million in interest expense, reflecting $243.4 million related to the legacy Valeant debt assumed as of the Merger Date (partially reduced by the repayment of the Term Loan A Facility in the first quarter of 2011) and the post-Merger issuances of senior notes in the fourth quarter of 2010 and first quarter of 2011, $25.3 million related to the borrowings under our senior secured term loan facility in the third quarter of 2011 and the borrowings under our senior secured credit facilities in the fourth quarter of 2011, partially offset by a decrease of $19.2 million in interest expense related to the repurchases of 5.375% Convertible Notes (as described below under “Financial Condition, Liquidity and Capital Resources — Financial Assets (Liabilities)”); and
increases of $20.0 million in in-process research and development impairments and other charges. We recognized IPR&D impairment charges in the fourth quarter of 2011 of $105.2 million, as described below under “Results of Operations — Operating Expenses — In-Process Research and Development Impairments and Other Charges”.
Cash Dividends
No dividends were declared or paid in 2012 and 2011. While our board of directors will review our dividend policy from time to time, we currently do not intend to pay dividends in the foreseeable future. In addition, the covenants contained in the Third Amended and Restated Credit and Guaranty Agreement include restrictions on the payment of dividends. In 2010, prior to the Merger, we declared cash dividends per share of $0.28. Following the Merger, we declared the post-Merger special dividend of $1.00 per share, which was paid on December 22, 2010.
RESULTS OF OPERATIONS
Reportable Segments
As a result of the acquisition of iNova in December 2011, we began operating in five new territories: Malaysia, Philippines, Singapore, Hong Kong and South Africa, with a distribution business in Thailand, Taiwan and some sub-Saharan Africa markets. iNova also distributes through partners in China, Korea and Japan. Consequently, our Chief Executive Officer (“CEO”), who is our Chief Operating Decision Maker (“CODM”), began to manage the business differently, which necessitated a realignment of

36


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

the segment structure, effective in the first quarter of 2012. Pursuant to this change, we now have four reportable segments: (i) U.S. Dermatology, (ii) U.S. Neurology and Other, (iii) Canada and Australia and (iv) Emerging Markets. Accordingly, we have restated prior period segment information to conform to the current period presentation. The following is a brief description of our segments:
U.S. Dermatology consists of pharmaceutical and OTC product sales, and alliance and contract service revenues, in the areas of dermatology and topical medication, aesthetics (including medical devices), dentistry, ophthalmology and podiatry.
U.S. Neurology and Other consists of sales of pharmaceutical products indicated for the treatment of neurological and other diseases, as well as alliance revenue from the licensing of various products we developed or acquired.
Canada and Australia consists of pharmaceutical and OTC products sold in Canada, Australia and New Zealand.
Emerging Markets consists of branded generic pharmaceutical products, as well as OTC products and agency/in-licensing arrangements with other research-based pharmaceutical companies (where we distribute and market branded, patented products under long-term, renewable contracts). Products are sold primarily in Central and Eastern Europe (Poland, Serbia, and Russia), Latin America (Mexico, Brazil and exports out of Mexico to other Latin American markets), Southeast Asia and South Africa.
As described in Item 1 titled “Business” of this Form 10-K, we are planning to change our segment structure effective in 2013.
Revenues By Segment
Our primary sources of revenues are the sale of pharmaceutical and OTC products; the out-licensing of products; and contract services. The following table displays revenues by segment for each of the last three years, the percentage of each segment’s revenues compared with total revenues in the respective year, and the dollar and percentage change in the dollar amount of each segment’s revenues. Percentages may not sum due to rounding.
 
 
Years Ended December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s)
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
U.S. Dermatology
 
1,158,600

 
33
 
575,798

 
23
 
220,667

 
19
 
582,802

 
101
 
355,131

 
161
U.S. Neurology and Other
 
793,503

 
22
 
821,789

 
33
 
656,653

 
56
 
(28,286
)
 
(3)
 
165,136

 
25
Canada and Australia
 
544,128

 
15
 
340,240

 
14
 
161,568

 
14
 
203,888

 
60
 
178,672

 
111
Emerging Markets
 
1,050,395

 
30
 
725,623

 
29
 
142,349

 
12
 
324,772

 
45
 
583,274

 
NM
Total revenues
 
3,546,626

 
100
 
2,463,450

 
100
 
1,181,237

 
100
 
1,083,176

 
44
 
1,282,213

 
109
____________________________________
NM — Not meaningful
Total revenues increased $1,083.2 million, or 44%, to $3,546.6 million in 2012, compared with $2,463.5 million in 2011, mainly attributable to the effect of the following factors:
in the U.S. Dermatology segment:
the incremental product sales revenue of $492.3 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from (i) Dermik (mainly driven by BenzaClin®, Carac® and Sculptra® Aesthetics product sales) and Ortho Dermatologics (mainly driven by Retin-A Micro® product sales); and (ii) OraPharma, Medicis and University Medical product sales;
an increase in product sales from the existing business of $137.0 million, or 32%, driven by continued growth of the core dermatology brands, including Zovirax®, Elidel®, Acanya® and CeraVe®. The growth of these seasonal brands has increased the impact of seasonality on our business, particularly during the third quarter “back to school” season; and
alliance revenue of $66.3 million on the sale of the IDP-111 and 5-FU products in the first quarter of 2012.
Those factors were partially offset by:

37


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

a negative impact from divestitures and discontinuations of $56.2 million in 2012, including a decrease of $42.8 million in 2012 related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012;
alliance revenue of $43.0 million in 2011, primarily related to the $36.0 million out-license of the Cloderm® product rights that did not similarly occur in 2012; and
a decrease in service revenue of $9.7 million in 2012.
in the U.S. Neurology and Other segment:
an increase in product sales from the existing business, excluding the declines described below, of $48.5 million, or 6%, in 2012; and
alliance revenue of $45.0 million recognized in the second quarter of 2012, related to the milestone payment received from GSK in connection with the launch of Potiga™.
Those factors were more than offset by:
a decrease in product sales of Cardizem® CD, Diastat®, Ultram® and Wellbutrin XL® of $80.8 million, or 28%, in the aggregate, to $206.2 million in 2012, compared with $287.0 million in 2011, due to generic competition. We anticipate a continuing decline in sales of Cardizem® CD and Diastat® due to continued generic erosion, however the rate of decline is expected to decrease in the future, and these brands are expected to represent a declining percentage of total revenues primarily due to anticipated growth in other parts of our business and recent acquisitions; and
alliance revenue of $40.0 million recognized in the second quarter of 2011, related to the milestone payment received from GSK in connection with the launch of Trobalt®.
in the Canada and Australia segment:
the incremental product sales revenue of $172.2 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from iNova (mainly driven by Duromine®, Difflam® and Duro-Tuss® product sales), Afexa and Dermik;
incremental service revenue of $41.8 million in 2012, primarily from the Dermik acquisition; and
an increase in product sales from the existing business, excluding the decline described below, of $27.6 million, or 8%, in 2012.
Those factors were partially offset by:
a decrease in product sales of Cesamet® of $35.0 million, or 54%, to $29.4 million in 2012, compared with $64.4 million in 2011, due to the introduction of a generic version of Cesamet® by a competitor in March 2012. We anticipate continuing declines in Cesamet® product sales due to generic erosion, however the rate of decline is expected to decrease in the future; and
a negative foreign currency exchange impact on the existing business of $2.0 million in 2012.
in the Emerging Markets segment:
the incremental product sales revenue of $322.9 million (which includes a negative foreign currency exchange impact of $33.2 million in 2012), in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from (i) the 2011 acquisitions of iNova (mainly driven by Duromine® and Difflam® product sales), Sanitas, and PharmaSwiss; and (ii) the 2012 acquisitions of Probiotica and Gerot Lannach;
an increase in product sales from the existing business of $76.5 million, or 11%, in 2012; and
an increase in alliance revenue of $14.4 million.
Those factors were partially offset by:
a negative foreign currency exchange impact on the existing business of $65.2 million in 2012; and
a negative impact from divestitures and discontinuations of $23.2 million in 2012.

38


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Total revenues increased $1,282.2 million, or 109%, to $2,463.5 million in 2011, compared with $1,181.2 million in 2010, mainly attributable to the effect of the following factors:
in the U.S. Dermatology segment:
the incremental product sales revenue of $194.6 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from Valeant, Elidel® and Xerese®, Dermik and Ortho Dermatologics product sales;
an increase in alliance and royalty revenue of $101.2 million, primarily related to the incremental royalty (IDP-111) revenue from Valeant of $64.3 million and the alliance revenue of $36.0 million in the first quarter of 2011 related to the out-license of the Cloderm® product rights;
an increase in product sales from the existing business of $48.9 million, or 24%, primarily driven by a growth of the core dermatology brands, including Zovirax®, CeraVe®, and Acanya®; and

incremental service revenue of $15.8 million in 2011, primarily from the Valeant acquisition.
Those factors were partially offset by:
a negative impact from divestitures and discontinuations of $5.4 million in 2011.
in the U.S. Neurology and Other segment:
the incremental product sales revenue of $168.4 million from all 2010 acquisitions, primarily from Valeant product sales;

alliance revenue of $40.0 million in the second quarter of 2011 related to the milestone payment from GSK in connection with the launch of Trobalt®; and

an increase in product sales from the existing business (excluding the impact of generic competition and the increase in the product sales of Tiazac® in 2010 that did not similarly occur in 2011 as described below) of $29.2 million in 2011, primarily driven by an increase in Xenazine® product sales.
Those factors were partially offset by:
a decrease in product sales of Wellbutrin XL®, Diastat®, Cardizem® CD and Ultram® ER of $35.5 million, or 12%, in the aggregate, to $266.5 million in 2011, compared with $302.0 million in 2010, due to generic competition;

a decrease in product sales of generic Tiazac® of $25.8 million, or 68%, to $12.2 million in 2011, compared with $38.0 million in 2010, which was attributable to competitors’ manufacturing issues in 2010 that did not similarly occur in 2011; and

a decrease in service revenue of $5.4 million.
in the Canada and Australia segment:
the incremental product sales revenue of $155.9 million (which includes a negative foreign currency exchange impact of $18.2 million in 2011), in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from Valeant and Afexa product sales;

an increase in product sales from the existing business of $18.9 million, or 12%; and

incremental service revenue of $4.3 million in 2011, primarily from the Valeant acquisition.
in Emerging Markets segment:
the incremental product sales revenue of $564.7 million (which includes a negative foreign currency exchange impact of $40.8 million in 2011), in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from Valeant, PharmaSwiss and Sanitas product sales;

an increase in product sales from the existing business of $31.8 million, or 22%; and

39


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)


incremental service revenue of $8.5 million in 2011, primarily from the PharmaSwiss acquisition.
Those factors were partially offset by:
a negative foreign currency exchange impact on the existing business of $23.4 million in 2011.
Segment Profit
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as restructuring and acquisition-related costs, legal settlements and in-process research and development impairments and other charges, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance. In addition, share-based compensation is not allocated to segments, since the amount of such expense depends on company-wide performance rather than the operating performance of any single segment.
The following table displays profit by segment for each of the last three years, the percentage of each segment’s profit compared with corresponding segment revenues in the respective year, and the dollar and percentage change in the dollar amount of each segment’s profit. Percentages may not add due to rounding.
 
 
Years Ended December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%
 
$
 
%
U.S. Dermatology
 
444,545

 
38
 
182,888

 
32
 
46,209

 
21
 
261,657

 
143
 
136,679

 
NM
U.S. Neurology and Other
 
274,154

 
35
 
417,514

 
51
 
252,657

 
38
 
(143,360
)
 
(34)
 
164,857

 
65
Canada and Australia
 
46,433

 
9
 
105,335

 
31
 
51,043

 
32
 
(58,902
)
 
(56)
 
54,292

 
106
Emerging Markets
 
117,159

 
11
 
14,915

 
2
 
16,757

 
12
 
102,244

 
NM
 
(1,842
)
 
(11)
Total segment profit
 
882,291

 
25
 
720,652

 
29
 
366,666

 
31
 
161,639

 
22
 
353,986

 
97
____________________________________
(1) — Represents profit as a percentage of the corresponding revenues.
NM — Not meaningful
Total segment profit increased $161.6 million, or 22%, to $882.3 million in 2012, compared with $720.7 million in 2011, mainly attributable to the effect of the following factors:
in the U.S. Dermatology segment:
an increase in contribution of $391.2 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from the product sales of Dermik, Ortho Dermatologics, OraPharma, Medicis and University Medical, including the impact of acquisition accounting adjustments related to inventory of $41.3 million, in the aggregate; and
an increase in contribution from product sales from the existing business of $160.6 million (including a favorable impact of $7.8 million related to the Merger-related acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012), driven by (i) continued growth of the core dermatology brands, including Zovirax®, Elidel®, Acanya® and CeraVe®, and the growth of these seasonal brands has increased the impact of seasonality on our business, particularly during the third quarter “back to school” season and (ii) a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, such that we retain a greater share of the economic interest in the brand.
Those factors were partially offset by:
an increase in operating expenses (including amortization expense) of $211.1 million in 2012, primarily associated with the acquisitions of new businesses within the segment;
a decrease in contribution of $72.3 million in 2012, primarily related to divestitures and discontinuations. The largest contributor to the decrease was a reduction in IDP-111 royalty revenue of $42.8 million in 2012, as a result of the sale of IDP-111 in February 2012; and
a decrease in service revenue contribution of $6.7 million in 2012.
in the U.S. Neurology and Other segment:

40


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

alliance revenue of $45.0 million recognized in the second quarter of 2012, related to the milestone payment received from GSK in connection with the launch of Potiga™; and
an increase in contribution from product sales from the existing business, excluding the declines described below, of $33.3 million, including the impact from higher sales of Xenazine® which carries a lower margin than the rest of the neurology portfolio (also including a favorable impact of $9.3 million related to the Merger-related acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012).
Those factors were more than offset by:
higher amortization expense of $109.8 million in 2012 related to ezogabine/retigabine, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011; 
lower sales of higher margin products such as Cardizem® CD, Diastat®, Ultram® ER and Wellbutrin XL®, which resulted in a decrease in contribution of $71.0 million, in the aggregate, in 2012; and
alliance revenue of $40.0 million recognized in the second quarter of 2011, related to the milestone payment received from GSK in connection with the launch of Trobalt®.
in the Canada and Australia segment:
an increase in contribution of $103.9 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions in 2012, primarily from the sale of iNova, Dermik and Afexa products, including the impact of acquisition accounting adjustments related to inventory of $26.6 million, in the aggregate, in 2012;
an increase in contribution from product sales from the existing business (excluding the declines described below) of $39.4 million in 2012, including a favorable impact of $3.3 million related to the Merger-related acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012; and
incremental contribution from service revenue of $3.6 million in 2012, primarily from the Dermik acquisition.
Those factors were more than offset by:
an increase in operating expenses (including amortization expense) of $167.5 million in 2012, primarily associated with the acquisitions of new businesses within the segment; and
lower sales of Cesamet®, which resulted in a decrease in contribution of $34.1 million, in the aggregate, in 2012.
in the Emerging Markets segment:
an increase in contribution of $202.3 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, in 2012, primarily from the sale of iNova, Sanitas, PharmaSwiss, Probiotica and Gerot Lannach products, including lower acquisition accounting adjustments related to inventory of $21.0 million, in the aggregate, in 2012;
an increase in contribution from product sales from the existing business of $39.0 million in 2012, including a favorable impact of $6.8 million related to the Merger-related acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012; and
an increase in alliance revenue of $14.4 million.
Those factors were partially offset by:
an increase in operating expenses (including amortization expense) of $109.6 million in 2012, primarily associated with the acquisitions of new businesses within the segment;
a negative foreign currency exchange impact on the existing business contribution of $33.2 million in 2012; and
a negative impact from divestitures and discontinuations of $10.6 million in 2012.
Total segment profit increased $354.0 million, or 97%, to $720.7 million in 2011, compared with $366.7 million in 2010, mainly attributable to the effect of the following factors:
in the U.S. Dermatology segment:

41


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

an increase in contribution of $154.4 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from the product sales of Valeant, Elidel® and Xerese®, Dermik and Ortho Dermatologics, including the impact of acquisition accounting adjustments related to inventory of $9.5 million, in the aggregate; 
an increase in alliance revenue contribution of $70.4 million primarily related to the revenue from Valeant and the alliance revenue related to the out-license of the Cloderm® product rights in the first quarter of 2011;
an increase in contribution from product sales from the existing business of $60.8 million driven by a growth of the core dermatology brands, including Zovirax®, CeraVe®, and Acanya®;
a favorable impact of $48.7 million in 2011 due to the effect of a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights, such that we retain a greater share of the economic interest in the brand; and
an increase in service revenue contribution of $7.5 million in 2011, primarily from the Valeant acquisition.
Those factors were partially offset by:
an increase in operating expenses (including amortization expense) of $200.3 million in 2011, primarily associated with the acquisitions of new businesses within the segment; and

a decrease in contribution of $4.9 million in 2011 related to divestitures and discontinuations.

in the U.S. Neurology and Other segment:

an increase in contribution of $140.5 million from all 2010 acquisitions primarily from the product sales of Valeant, including the impact of acquisition accounting adjustments related to inventory of $9.3 million; 

an increase in contribution from product sales from the existing business of $55.6 million (excluding the impact of generic competition described below) primarily driven by Xenazine® product sales; and

alliance revenue of $40.0 million in the second quarter of 2011 related to the Trobalt® milestone payment from GSK;.
Those factors were partially offset by:
an increase in operating expenses (including amortization expense) of $41.8 million in 2011, primarily associated with the acquisitions of new businesses within the segment; and

lower sales of higher margin products such as Wellbutrin XL®, Diastat®, Cardizem® CD and Ultram® ER, which resulted in a decrease in contribution of $27.4 million in 2011.

in the Canada and Australia segment:

an increase in contribution of $99.0 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from the product sales of Valeant and Afexa, including the impact of acquisition accounting adjustments related to inventory of $9.6 million, in the aggregate; 

an increase in contribution from product sales from the existing business of $16.3 million, which includes the positive contribution impact from product sales of Wellbutrin® XL due to higher sales of Wellbutrin® XL reflecting repositioning of product promotion; and

an increase in service revenue contribution of $1.5 million in 2011, primarily from the Valeant acquisition.
Those factors were partially offset by:
an increase in operating expenses (including amortization expense) of $62.5 million in 2011, primarily associated with the acquisitions of new businesses within the segment.

in Emerging Markets segment:


42


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

an increase in contribution of $270.4 million, in the aggregate, from all 2010 acquisitions and all 2011 acquisitions, primarily from the product sales of Valeant, PharmaSwiss and Sanitas, including the impact of acquisition accounting adjustments related to inventory of $30.8 million, in the aggregate; 

a positive foreign exchange impact on the existing business contribution of $11.1 million in 2011;

an increase in contribution from product sales from the existing business of $9.0 million; and

an increase in service revenue contribution of $8.3 million in 2011, primarily from the PharmaSwiss acquisition.
Those factors were more than offset by:
an increase in operating expenses (including amortization expense) of $302.4 million in 2011, primarily associated with the acquisitions of new businesses within the segment.
Operating Expenses
The following table displays the dollar amount of each operating expense category for each of the last three years, the percentage of each category compared with total revenues in the respective year, and the dollar and percentage changes in the dollar amount of each category. Percentages may not sum due to rounding.
 
 
Years Ended December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%
 
$
 
%
Cost of goods sold (exclusive of amortization of intangible assets shown separately below)
 
921,533

 
26
 
683,750

 
28
 
395,595

 
33
 
237,783

 
35
 
288,155

 
73
Cost of alliance and service revenues
 
116,983

 
3
 
43,082

 
2
 
10,155

 
1
 
73,901

 
172
 
32,927

 
NM
Selling, general and administrative
 
756,083

 
21
 
572,472

 
23
 
276,546

 
23
 
183,611

 
32
 
295,926

 
107
Research and development
 
79,052

 
2
 
65,687

 
3
 
68,311

 
6
 
13,365

 
20
 
(2,624
)
 
(4)
Amortization of intangible assets
 
928,885

 
26
 
557,814

 
23
 
219,758

 
19
 
371,071

 
67
 
338,056

 
154
Restructuring, integration and other costs
 
344,387

 
10
 
97,667

 
4
 
140,840

 
12
 
246,720

 
NM
 
(43,173
)
 
(31)
In-process research and development impairments and other charges
 
189,901

 
5
 
109,200

 
4
 
89,245

 
8
 
80,701

 
74
 
19,955

 
22
Acquisition-related costs
 
78,604

 
2
 
32,964

 
1
 
38,262

 
3
 
45,640

 
NM
 
(5,298
)
 
(14)
Legal settlements
 
56,779

 
2
 
11,841

 
 
52,610

 
4
 
44,938

 
NM
 
(40,769
)
 
(77)
Acquisition-related contingent consideration
 
(5,266
)
 
 
(10,986
)
 
 

 
 
5,720

 
(52)
 
(10,986
)
 
NM
Total operating expenses
 
3,466,941

 
98
 
2,163,491

 
88
 
1,291,322

 
109
 
1,303,450

 
60
 
872,169

 
68
____________________________________
(1) — Represents the percentage for each category as compared to total revenues.
NM — Not meaningful
Cost of Goods Sold
Cost of goods sold includes: manufacturing and packaging; the cost of products we purchase from third parties; royalty payments we make to third parties; depreciation of manufacturing facilities and equipment; and lower of cost or market adjustments to inventories. Cost of goods sold excludes the amortization of intangible assets described separately below under “— Amortization of Intangible Assets”.
Cost of goods sold increased $237.8 million, or 35%, to $921.5 million in 2012, compared with $683.8 million in 2011. The percentage increase in cost of goods sold in 2012 was lower than the corresponding 47% increase in product sales in 2012, respectively, primarily due to:
a favorable impact from product mix and the benefits realized from worldwide manufacturing rationalization initiatives; and
the effect of the lower supply price for Zovirax® inventory purchased from GSK as a result of a new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, which favorably impacted cost of goods sold during the first and second quarters of 2012.

43


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

These factors were partially offset by:
an unfavorable foreign exchange impact on contribution, as the foreign exchange benefit to Cost of Goods Sold was more than offset by the negative foreign exchange impact on product sales;
increased sales of Xenazine® which has a lower margin than the rest of the neurology portfolio;
decreased sales of Cesamet® in Canada which has a higher margin than the rest of the Canadian portfolio; and
the impact of higher acquisition accounting adjustments of $19.5 million, to $78.8 million in 2012, compared with $59.3 million in 2011, related to acquired inventories that were subsequently sold in 2012.
Cost of goods sold increased $288.2 million, or 73%, to $683.8 million in 2011, compared with $395.6 million in 2010. The cost of goods sold as a percentage of total revenue decreased from 33% in 2010 to 28% in 2011, primarily due to the effect of a lower supply price for Zovirax® inventory purchased from GSK, as a result of a new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, which favorably impacted cost of goods sold by $48.7 million in 2011.
Cost of Alliance and Service Revenues
Cost of alliance and services revenues reflects the costs associated with providing contract services to, and generating alliance revenue from, external customers.
Cost of alliance and service revenues increased $73.9 million, or 172%, to $117.0 million in 2012, compared with $43.1 million in 2011, primarily due to the inclusion of the carrying amounts of the IDP-111 and 5-FU intangible assets of $69.2 million, in the aggregate, which were expensed on the sale of these products in the first quarter of 2012, and the inclusion of cost of service revenue from Dermik of $35.7 million, partially offset by the $30.7 million carrying amount of the Cloderm® intangible asset, which was expensed on the out-license of the product rights in the first quarter of 2011.
Cost of alliance and service revenues increased $32.9 million to $43.1 million in 2011, compared with $10.2 million in 2010, primarily due to the inclusion of the $30.7 million carrying amount of the Cloderm® intangible asset, which was expensed on the out-license of the product rights in the first quarter of 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include: employee compensation costs associated with sales and marketing, finance, legal, information technology, human resources, and other administrative functions; outside legal fees and consultancy costs; product promotion expenses; overhead and occupancy costs; depreciation of corporate facilities and equipment; and other general and administrative costs.
Selling, general and administrative expenses increased $183.6 million, or 32%, to $756.1 million in 2012, compared with $572.5 million in 2011 (as a percentage of revenue, Selling, general and administrative expenses decreased to 21% in 2012 as compared to 23% in 2011), primarily due to:
increased expenses in our U.S Dermatology segment ($112.9 million), Canada and Australia segment ($59.0 million) and Emerging Markets segment ($48.2 million), primarily driven by the acquisitions of new businesses within these segments.
This factor was partially offset by:
decreases of $24.9 million in share-based compensation expense charged to selling, general and administrative expenses in 2012, primarily due to the vesting of performance stock units as a result of achieving specified performance criteria recognized in 2011 and the impact of the stock option modification recognized in the first quarter of 2011, partially offset by an incremental charge of $4.8 million in 2012 as some of our performance-based RSU grants triggered a partial payout as a result of achieving certain share price appreciation conditions. Refer to note 17 to the 2012 Financial Statements for further details.
Selling, general and administrative expenses increased $295.9 million, or 107%, to $572.5 million in 2011, compared with $276.5 million in 2010, primarily due to:
the addition of Valeant’s selling, general and administrative expenses, including incremental advertising costs of $64.4 million, partially offset by the realization of operating synergies and cost savings from the Merger;

44


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

the addition of selling, general and administrative expenses relating to PharmaSwiss ($60.8 million), Sanitas ($13.4 million), Elidel®/Xerese® ($2.5 million) and Afexa ($2.4 million); and
increases of $45.6 million in share-based compensation expense charged to selling, general and administrative expenses in 2011, including an increase of approximately $21.5 million related to the amortization of the fair value increment on Valeant stock options and RSUs converted into the Company awards and the equitable adjustment to certain vested stock option awards, in connection with the post-Merger special dividend of $1.00 per common share declared and paid in the fourth quarter of 2010.
Research and Development Expenses
Expenses related to research and development programs include: employee compensation costs; overhead and occupancy costs; depreciation of research and development facilities and equipment; clinical trial costs; clinical manufacturing and scale-up costs; and other third-party development costs.
Research and development expenses increased $13.4 million, or 20%, to $79.1 million in 2012, compared with $65.7 million in 2011, primarily reflecting spending for a Phase 4 study for Wellbutrin XL® and life-cycle management programs, partially offset by lower spending on ezogabine/retigabine reflecting the U.S. launch in the second quarter of 2012 and the IDP-108 program (an antifungal targeted to treat onychomycosis, a fungal infection of the fingernails and toenails). In July 2012, the Company submitted an NDA with the FDA for IDP-108, also known as efinaconazole, and we have received a Prescription Drug User Fee Act (“PDUFA”) date of May 24, 2013 with respect to this application.
Research and development expenses declined $2.6 million, or 4%, to $65.7 million in 2011, compared with $68.3 million in 2010, which was attributable to the net effect of the termination of certain of our specialty CNS drug development programs in the fourth quarter of 2010 partially offset by the addition of a full year of Valeant’s research and development expenses in 2011.
Amortization of Intangible Assets
Amortization expense increased $371.1 million, or 67%, to $928.9 million in 2012, compared with $557.8 million in 2011, primarily due to (i) the amortization of the iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis identifiable intangible assets of $210.5 million, in the aggregate, in 2012, (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011, (iii) impairment charges of $31.3 million related to the write-down of the carrying values of intangible assets related to certain suncare and skincare brands sold primarily in Australia, which are classified as assets held for sale as of December 31, 2012, to their estimated fair values less costs to sell, (iv) an $18.7 million impairment charge related to the write-down of the carrying value of the Dermaglow® intangible asset, which is classified as an asset held for sale as of December 31, 2012, to its estimated fair value less costs to sell, and (v) impairment charges of $13.3 million related to the discontinuation of certain products in the Brazilian and Polish markets. As part of our ongoing assessment of potential impairment indicators related to our intangible assets, we will closely monitor the performance of our product portfolio, including ezogabine/retigabine which is marketed under a collaboration agreement with GSK and has an intangible asset with a carrying amount of $682.5 million as of December 31, 2012. If our assessment reveals indications of impairment to our assets, we may determine that an impairment charge is necessary and such charge could be material.
Amortization expense increased $338.1 million, or 154%, to $557.8 million in 2011, compared with $219.8 million in 2010, primarily due to (i) the amortization of the Valeant, PharmaSwiss, Elidel®/Xerese®, Zovirax®, and Sanitas identifiable intangible assets of $331.8 million, in the aggregate, in 2011; and (ii) $7.9 million and $19.8 million of impairment charges related to the write-down of the carrying values of the IDP-111 and 5-FU intangible assets, respectively, to their estimated fair values, less costs to sell.
Restructuring, Integration and Other Costs
We recognized restructuring, integration, and other costs of $344.4 million in 2012, compared with $97.7 million and $140.8 million in 2011 and 2010, respectively, primarily related to the Medicis acquisition, the Merger, and other acquisitions. Refer to note 6 to the 2012 Financial Statements for further details.
In-Process Research and Development Impairments and Other Charges
In-process research and development impairments and other charges represents impairments and other costs associated with compounds, new indications, or line extensions under development that have not received regulatory approval for marketing at the time of acquisition. IPR&D acquired through an asset acquisition is written off at the acquisition date if the assets have no alternative future use. IPR&D acquired in a business combination is capitalized as indefinite-lived intangible assets (irrespective

45


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

of whether these assets have an alternative future use) until completion or abandonment of the related research and development activities. Costs associated with the development of acquired IPR&D assets are expensed as incurred.
In 2012, we recorded charges of $189.9 million, primarily due to (i) $133.4 million for the write-off of an acquired IPR&D asset related to the IDP-107 dermatology program, which was acquired in September 2010 as part of the Merger, (ii) an impairment charge of $24.7 million related to a Xerese® life-cycle product due to higher projected development spend and revised timelines for potential commercialization, (iii) $12.0 million related to a payment to terminate a research and development commitment with a third party, (iv) $5.0 million related to an upfront payment to acquire the North American rights to Emervel®, (v) $5.0 million related to the IDP-108 program, including an upfront payment to expand our rights to IDP-108 to include additional territories as well as a milestone payment, and (vi) $4.3 million related to the write-off of an acquired IPR&D asset related to the termination of the MC5 program (a topical treatment for acne vulgaris), acquired as part of the Ortho Dermatologics acquisition in 2011. With respect to the IDP-107 program mentioned above, through discussion with various internal and external Key Opinion Leaders, we completed our analysis of the Phase 2 study results for IDP-107 during the third quarter of 2012. This led to our decision in the third quarter of 2012 to terminate the program and fully impair the asset. As attempts to identify a partner for the program were not successful, we do not believe the program has value to a market participant.
In 2011, we recorded charges of $109.2 million related to the impairment of acquired IPR&D assets relating to the A002, A004, and A006 programs acquired as part of the Aton acquisition in 2010, as well as the IDP-109 and IDP-115 dermatology programs ($105.2 million). The impairment charges were triggered in the fourth quarter of 2011 due to unfavorable study results, feedback received from the FDA which would result in the incurrence of higher costs to perform additional studies, reassessment of risk and the probability of success, and/or pipeline prioritization decisions resulting in the re-allocation of our resources to other research and development (“R&D”) programs. In addition in 2011, we recorded a charge of $4.0 million related to the acquisition of the Canadian rights to Lodalis™, which was accounted for as a purchase of IPR&D assets with no alternative future use.
Acquisition-Related Costs
Acquisition-related costs increased $45.6 million, to $78.6 million in 2012, compared with $33.0 million in 2011, reflecting increased acquisition activity during 2012, primarily driven by costs associated with the Medicis acquisition. The Medicis costs included $39.2 million of expenses incurred with respect to an agreement with Galderma S.A (“Galderma”) which, among other things, resolved all claims asserted in Galderma’s pending litigation related to our acquisition of Medicis. Refer to note 3 to the 2012 Financial Statements for further details.
Acquisition-related costs declined $5.3 million, or 14%, to $33.0 million in 2011, compared to $38.3 million in 2010, reflecting lower Merger-related expenses incurred in 2011, partially offset by acquisition-related expenses for PharmaSwiss, Sanitas, Dermik, Ortho Dermatologics, Afexa and iNova.
Legal Settlements
In 2012, we recorded legal settlement charges of $56.8 million, primarily due to a settlement of antitrust litigation and the associated legal fees. Refer to note 24 to the 2012 Financial Statements for further details.
In 2011, we recorded legal settlement charges of $11.8 million primarily due to the settlement of litigation and disputes related to revenue-sharing arrangements with, or other payment obligations to, third parties.
In 2010, we recorded legal settlement charges of $52.6 million in connection with agreements or agreements in principle to settle certain Biovail legacy litigation and regulatory matters.
Acquisition-Related Contingent Consideration
In 2012, we recognized an acquisition-related contingent consideration gain of $5.3 million, primarily driven by (1) a net gain of $10.3 million related to the iNova acquisition due to changes in the estimated probability of achieving the related milestones, partially offset by (2) a net loss of $6.5 million related to the Elidel®/Xerese® license agreement entered into in June 2011, due to fair value adjustments to reflect accretion for the time value of money, partially offset by changes in the projected revenue forecast. Refer to note 3 to the 2012 Financial Statements for further details.
In 2011, we recognized an acquisition-related contingent consideration gain of $11.0 million, primarily driven by the changes in fair value of acquisition-related contingent consideration as follows: (1) a gain of $13.2 million and $9.2 million related to the PharmaSwiss and Aton acquisitions, respectively, partially offset by (2) a loss of $11.2 million related to the Elidel®/Xerese® license agreement entered into in June 2011.
Non-Operating Income (Expense)

46


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table displays each non-operating income or expense category for each of the last three years, and the dollar and percentage changes in the dollar amount of each category.
 
 
Years Ended December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s; Income (Expense))
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Interest income
 
5,986

 
4,084

 
1,294

 
1,902

 
47
 
2,790

 
NM
Interest expense
 
(473,396
)
 
(333,041
)
 
(84,307
)
 
(140,355
)
 
42
 
(248,734
)
 
NM
Write-down of deferred financing charges
 
(8,200
)
 
(1,485
)
 
(5,774
)
 
(6,715
)
 
NM
 
4,289

 
(74)
Loss on extinguishment of debt
 
(20,080
)
 
(36,844
)
 
(32,413
)
 
16,764

 
(45)
 
(4,431
)
 
14
Foreign exchange and other
 
19,721

 
26,551

 
574

 
(6,830
)
 
(26)
 
25,977

 
NM
Gain (loss) on investments, net
 
2,056

 
22,776

 
(5,552
)
 
(20,720
)
 
(91)
 
28,328

 
NM
Total non-operating expense
 
(473,913
)
 
(317,959
)
 
(126,178
)
 
(155,954
)
 
49
 
(191,781
)
 
152
____________________________________
NM — Not meaningful
Interest Expense
Interest expense increased $140.4 million, or 42%, to $473.4 million in 2012, compared with $333.0 million in 2011, primarily reflecting the following:
interest expense of $167.9 million, in the aggregate, in 2012, related to the borrowings under our senior secured credit facilities and our senior notes.
This factor was partially offset by:
a decrease of $10.7 million in 2012, related to the repurchases and the settlement of 5.375% senior convertible notes due 2014 (the “5.375% Convertible Notes”) (as described below under “Financial Condition, Liquidity and Capital Resources — Financial Assets (Liabilities)”);
a decrease of $10.0 million in 2012 due to the repayment of our previous term loan A facility in the first quarter of 2011;
a decrease of $4.8 million in 2012 due to an adjustment to amortization of debt issuance costs related to a prior period; and
a decrease of $4.4 million in 2012 related to the redemption of 4.0% convertible subordinated notes due 2013 (the “4% Convertible Notes”) in the second quarter of 2011.
Interest expense in 2012 includes non-cash amortization of debt discounts and deferred financing costs of $28.2 million, in the aggregate.
Interest expense increased $248.7 million to $333.0 million in 2011, compared with $84.3 million in 2010, reflecting $243.4 million related to the legacy Valeant debt assumed as of the Merger Date (partially reduced by the repayment of the Term Loan A Facility in the first quarter of 2011) and the post-Merger issuances of senior notes in the fourth quarter of 2010 and first quarter of 2011, $25.3 million related to the borrowings under our senior secured term loan facility in the third quarter of 2011 and the borrowings under our senior secured credit facilities in the fourth quarter of 2011, partially offset by a decrease of $19.2 million in interest expense related to the repurchases of 5.375% Convertible Notes (as described below under “Financial Condition, Liquidity and Capital Resources — Financial Assets (Liabilities)”). Interest expense in 2011 includes non-cash amortization of debt discounts and deferred financing costs of $25.6 million, in the aggregate.
Write-Down of Deferred Financing Charges
In 2012, we recorded a write-off of $8.2 million of deferred financing costs primarily due to the termination of the commitment letter entered into in connection with the financing of the Medicis acquisition. Refer to note 14 to the 2012 Financial Statements for further details.
In 2011, we recorded $1.5 million of charges primarily due to a write-off of $1.0 million of deferred financing costs as a result of the amendment and restatement of the credit agreement on October 20, 2011.

47


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In 2010, we recorded a write-off of $5.8 million of deferred financing costs as a result of the termination of the Biovail secured revolving credit facility as of the Merger Date.
Loss on Extinguishment of Debt
In 2012, we recognized losses of $20.1 million, mainly on refinancing of our term loan B facility on October 2, 2012 and the settlement of the 5.375% Convertible Notes (as described below under “Financial Condition, Liquidity and Capital Resources — Financial Assets (Liabilities)”).
In 2011, we recognized losses of $36.8 million, primarily related to the repurchase of a portion of the 5.375% Convertible Notes ($31.6 million) (as described below under “Financial Condition, Liquidity and Capital Resources — 2010 Securities Repurchase Program and 2011 Securities Repurchase Program”) and the share settlement of the 4.0% Convertible Notes ($4.7 million) (as described below under “Financial Condition, Liquidity and Capital Resources — Financial Assets (Liabilities)”).
In 2010, we recognized losses of $32.4 million, primarily related to the repurchase of a portion of the 5.375% Convertible Notes ($20.7 million) (as described below under “Financial Condition, Liquidity and Capital Resources — 2010 Securities Repurchase Program”) and on the cash settlement of the written call options on our common shares ($10.1 million).
Foreign Exchange and Other
Foreign exchange and other gain decreased $6.8 million, or 26%, to $19.7 million in 2012, compared with $26.6 million in 2011. The gain in 2012 was primarily due to a gain of $29.4 million related to an intercompany loan that was not designated as permanent in nature, and therefore the impact of changes in foreign currency exchange rates was recognized in our consolidated statements of (loss) income. As of December 31, 2012, $24.0 million of the gain on the intercompany loan was realized, all of which was realized during the first quarter of 2012. This was partially offset by the translation losses from our European operations in 2012.
Foreign exchange and other increased $26.0 million to $26.6 million in 2011, compared with $0.6 million in 2010, primarily due to the $16.4 million and $2.7 million net gains realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss, respectively, in 2011.
Gain (Loss) on Investments, Net
In March 2011, in connection with an offer to acquire Cephalon, we invested $60.0 million to acquire shares of common stock of Cephalon. On May 2, 2011, Cephalon announced that it had agreed to be acquired by Teva Pharmaceutical Industries Inc. and, consequently, we disposed of our entire equity investment in Cephalon for net proceeds of $81.3 million, which resulted in a net realized gain of $21.3 million that was recognized in earnings in the second quarter of 2011.
In August 2010, we disposed of our entire portfolio of auction rate securities for cash proceeds of $1.4 million and recorded a loss related to an other-than-temporary decline in the estimated fair value these securities of $5.6 million in 2010.
Income Taxes
The following table displays the dollar amount of the current and deferred provisions for income taxes for each of the last three years, and the dollar and percentage changes in the dollar amount of each provision. Percentages may not sum due to rounding.
 
 
Years Ended December 31,
 
Change
 
 
2012
 
2011
 
2010
 
2011 to 2012
 
2010 to 2011
($ in 000s; (Income) Expense)
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Current income tax expense
 
63,526

 
39,891

 
27,333

 
23,635

 
59
 
12,558

 
46
Deferred income tax benefit
 
(341,729
)
 
(217,450
)
 
(55,403
)
 
(124,279
)
 
57
 
(162,047
)
 
NM
Total recovery of income taxes
 
(278,203
)
 
(177,559
)
 
(28,070
)
 
(100,644
)
 
57
 
(149,489
)
 
NM
____________________________________
NM — Not meaningful
In 2012, our effective tax rate was impacted by (i) the release of valuation allowance against a portion of the deferred tax assets in respect of our Canadian tax attributes recognized to the extent of deferred tax liabilities from acquisition; (ii) the increase in liabilities for uncertain tax positions; (iii) the increase of taxable foreign income in Canada; (iv) non-deductible stock based compensation and realized foreign exchange gains where a full valuation allowance is recorded against tax loss carryforwards, (v) income earned in jurisdictions with a lower statutory rate than in Canada; (vi) losses in a jurisdiction with a higher statutory

48


Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

tax rate than in Canada, and (vii) non-deductible transaction costs incurred in connection with the Medicis acquisition.
In each of the fourth quarters of 2011 and 2010, we assessed the realizability of a portion of our deferred tax assets related to operating loss carryforwards in the U.S. In 2011, management determined that U.S. federal losses previously subject to a valuation allowance due to limitation restrictions should be written off and the corresponding valuation allowance reversed as of December 31, 2011. In Canada, we released valuation allowance against a portion of the deferred tax assets in respect of our Canadian tax attributes recognized to the extent of deferred tax liabilities from acquisition. In 2010, the Merger resulted in U.S. federal and state tax loss carryforwards becoming subject to the ownership change limitations of the U.S. Internal Revenue Code and similar state legislation. As a result, we increased the valuation allowance by $45.4 million in the fourth quarter of 2010, with a corresponding decrease to net income. In Canada, due to deferred tax liabilities arising from the Merger, we reduced valuation allowance by $46.9 million in the fourth quarter of 2010, with a corresponding increase to net income. In determining the amount of the valuation allowance that was necessary, we considered the amount of U.S. tax loss carryforwards, Canadian tax loss carryforwards, scientific research and experimental development pool, and investment tax credits that we would more likely than not be able to utilize based on future sources of income.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table presents a summary of our unaudited quarterly results of operations and operating cash flows in 2012 and 2011:
 
 
2012
 
2011
 
 
Q1
 
Q2
 
Q3
 
Q4
 
Q1
 
Q2
 
Q3
 
Q4
($ in 000s)
 
$
 
$
 
$
 
$
 
$
 
$
 
$
 
$
Revenue
 
856,103

 
820,090

 
884,140

 
986,293

 
565,026

 
609,387

 
600,584

 
688,453

Expenses
 
794,607

 
733,280

 
854,676

 
1,084,378

 
490,283

 
490,921

 
488,226

 
694,061

Operating income (loss)
 
61,496

 
86,810

 
29,464

 
(98,085
)
 
74,743

 
118,466

 
112,358

 
(5,608
)
Net (loss) income
 
(12,921
)
 
(21,607
)
 
7,645

 
(89,142