20-F 1 a2190203z20-f.htm FORM 20-F

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TABLE OF CONTENTS GENERAL INFORMATION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 20-F

o
Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934

OR

ý
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2008

OR

o
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

OR

o
Shell Company Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

    Commission file number 001-14956

    BIOVAIL CORPORATION
    (Exact Name of Registrant as Specified in its Charter)

    Not Applicable
    (Translation of Registrant's Name into English)

    Canada
    (Jurisdiction of incorporation or organization)

    7150 Mississauga Road
    Mississauga, Ontario
    CANADA, L5N 8M5
    (Address of principal executive offices)

Securities registered or to be 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 or to be registered pursuant to Section 12(g) of the Act: NONE

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 158,216,132 Common Shares, no par value, as of December 31, 2008.

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     Yes    ý                  No    o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes    o                No    ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    ý                No    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer    ý

  Accelerated filer    o   Non-accelerated filer    o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP    ý   International Financial Reporting Standards as issued by the International Accounting Standards Board    o   Other    o           

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17    o                Item 18    ý

If this is an annual report, 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



TABLE OF CONTENTS

GENERAL INFORMATION

 
   
   
  Page
    PART I    
Item 1   Identity of Directors, Senior Management and Advisors   1
    A.   Directors and Senior Management   1
    B.   Advisors   1
    C.   Auditors   1
Item 2   Offer Statistics and Expected Timetable   1
    A.   Offer Statistics   1
    B.   Method and Expected Timetable   1
Item 3   Key Information   1
    A.   Selected Financial Data   1
    B.   Capitalization and Indebtedness   2
    C.   Reasons for the Offer and Use of Proceeds   2
    D.   Risk Factors   2
Item 4   Information on the Company   22
    A.   History and Development of the Company   22
    B.   Business Overview   22
    C.   Organizational Structure   48
    D.   Property, Plants and Equipment   48
Item 4A   Unresolved Staff Comments   57
Item 5   Operating and Financial Review and Prospects   57
Item 6   Directors, Senior Management and Employees   107
    A.   Directors and Senior Management   107
    B.   Compensation   112
    C.   Board of Directors Practices   156
    D.   Employees   161
    E.   Share Ownership   161
Item 7   Major Shareholders and Related Party Transactions   162
    A.   Major Shareholders   162
    B.   Related Party Transactions   164
    C.   Interests of Experts and Counsel   164
Item 8   Financial Information   164
    A.   Consolidated Statements and Other Financial Information   164
    B.   Significant Changes   164
Item 9   The Offer and Listing   164
    A.   Offer and Listing Details   164
    B.   Plan of Distribution   166
    C.   Markets   166
    D.   Selling Shareholders   166
    E.   Dilution   166
    F.   Expenses of the Issue   166

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  Page
Item 10   Additional Information   166
    A.   Share Capital   166
    B.   Memorandum and Articles of Association   166
    C.   Material Contracts   170
    D.   Exchange Controls   170
    E.   Taxation   170
    F.   Dividends and Paying Agents   174
    G.   Statements by Experts   174
    H.   Documents on Display   174
    I.   Subsidiary Information   174
Item 11   Quantitative and Qualitative Disclosures About Market Risk   174
Item 12   Description of Securities Other Than Equity Securities   174
    A.   Debt Securities   174
    B.   Warrants and Rights   174
    C.   Other Securities   174
    D.   American Depository Shares   174
    PART II    
Item 13   Defaults, Dividend Arrearages and Delinquencies   175
Item 14   Material Modification to the Rights of Security Holders and Use of Proceeds   175
Item 15   Controls and Procedures   175
Item 16   [RESERVED]   175
Item 16A   Audit Committee Financial Expert   175
Item 16B   Code of Ethics   176
Item 16C   Principal Accountant Fees and Services   176
Item 16D   Exemptions from the Listing Standards for Audit Committee   176
Item 16E   Purchases of Equity Securities by the Company and Affiliated Purchases   177
Item 16G   Corporate Governance   177
    PART III    
Item 17   Financial Statements   178
Item 18   Financial Statements   178
Item 19   Exhibits   178

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Basis of Presentation

General

        Except where the context otherwise requires, all references in this Form 20-F to the "Company", "Biovail", "we", "us", "our" or similar words or phrases are to Biovail Corporation and its subsidiaries, taken together. In this Form 20-F, references to "$" and "US$" are to United States dollars and references to "C$" are to Canadian dollars. Unless otherwise indicated, the statistical and financial data contained in this Form 20-F are presented as at December 31, 2008.

        Unless otherwise noted, prescription and market data are derived from information provided by IMS Health Inc. ("IMS") and are as of its December 31, 2008 report. IMS is a provider of information solutions to the pharmaceutical and healthcare industries, including market intelligence and performance statistics.

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: ATTENADE™, A Tablet Design (Apex Down)®, A Tablet Design (Apex Up)®, APLENZIN™, ATIVAN®, ASOLZA™, BIOVAIL®, BIOVAIL CORPORATION INTERNATIONAL®, BIOVAIL & SWOOSH DESIGN®, BPI®, BVF®, CARDISENSE™, CARDIZEM®, CEFORM®, CRYSTAAL CORPORATION & DESIGN®, DITECH™, FLASHDOSE®, GLUMETZA®, INSTATAB™, ISORDIL®, JOVOLA™, JUBLIA™, MIVURA™, ONELZA™, ONEXTEN™, ORAMELT™, PALVATA™, RALIVIA®, SHEARFORM™, SMARTCOAT™, SOLBRI™, TESIVEE™, TIAZAC®, TITRADOSE™, TOVALT™, UPZIMIA™, VASERETIC®, VASOCARD™, VASOTEC®, VEMRETA™, VOLZELO™ and ZILERAN™.

        WELLBUTRIN®, WELLBUTRIN® SR, WELLBUTRIN® XL, WELLBUTRIN® XR, Zovirax® and Zyban® are trademarks of The GlaxoSmithKline Group of Companies ("GSK") and are used by us under license. ULTRAM® is a trademark of Ortho-McNeil, Inc. ("OMI") (now known as PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.) and is used by us under license. XENAZINE® and NITOMAN® are trademarks of Cambridge Laboratories (Ireland) Ltd. ("Cambridge") and are used by us under license.

        In addition, we have filed trademark applications for many of our other trademarks in the U.S., Barbados, 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" statement under the U.S. Private Securities Litigation Reform Act of 1995:

        To the extent any statements made in this Form 20-F 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 (the "Exchange Act"), 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, our objectives, goals, strategies, beliefs, intentions, plans, estimates and outlook, including, without limitation, our intent and ability to implement and effectively execute plans and initiatives associated with our New Strategic Focus (as defined below) and the anticipated impact of the New Strategic Focus, our beliefs related to pricing, reimbursement, and exclusivity periods for products in the specialty Central Nervous System ("CNS") markets, our intent to complete in-license agreements and acquisitions and to successfully integrate such in-license agreements and acquisitions into our business and operations and to achieve the anticipated benefits of such in-license agreements and acquisitions, our expectations regarding the development of products outside the therapeutic area of specialty CNS disorders, our manufacturing abilities, the timing regarding the planned closure of our Puerto Rico manufacturing operations, the associated costs and anticipated impact of such closure, our ability to sell or divest these facilities and possible impact on our manufacturing processes, our intent and timing of the sale on our recently closed Dublin, Ireland research and development facility, our intent regarding and timing of the planned disposals of non-core assets and the anticipated proceeds of such dispositions, the amount of expected loss on disposal of our corporate headquarters, the availability

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of benefits under tax treaties, the continued availability of low effective tax rates for our operations, the amount, timing, results and progress of investment in research and development efforts and the expected tracking of research and development expenses, additional expected charges and anticipated annual savings related to ongoing or planned efficiency initiatives, the anticipated manufacturing and commercialization of, and the amount and timing of expected contribution from, pipeline products that are successfully developed, our intent and ability to make future dividend payments, our intent and ability to continue the repurchase of shares of our common stock (our "Common Shares") under our share repurchase program, the limited number of customers from which a significant portion of our revenue is derived, our intent regarding the development of non-tetrabenazine products acquired in the acquisition of Prestwick Pharmaceuticals Inc. ("Prestwick") and the expected impact of the acquisition of Prestwick on earnings per share and cash flows, the timing of the commercial launch of Aplenzin™ by our strategic marketing partner, sanofi-aventis U.S. LLC, the expected future taxable income in determining any required deferred tax asset valuation allowance, the anticipated effect of the utilization of U.S. tax loss carryforwards on future effective tax rates, the anticipated supply price for Wellbutrin® XL in 2009 and beyond and the expected impact of generic competition to the 150 mg Wellbutrin® XL product, our views and beliefs related to the outcome of patent infringement trial proceedings regarding the timing of the introduction of generic competition related to Ultram® ER, the expected timing of the introduction of a generic version of Cardizem® LA, the impact that generic competition to the 360 mg strength of Cardizem® CD may have on our product sales and the carrying value of the associated intangible asset, our intent regarding the defence of our intellectual property against infringement, the expected timing to address any shortfall in our supply of the Ultram® ER 100 mg tablets, the timing, results, and progress of research and development efforts, including efforts to locate a development partner for BVF-045 and to initiate Phase III studies for BVF-324, the investment recovery, liquidity, valuation and impairment conclusions associated with our investment in auction rate securities, our intent and ability to hold auction rate securities until a recovery in market value occurs (or until maturity if necessary), our beliefs and positions related to, results of, and costs associated with, certain legacy litigation and regulatory proceedings, including, but not limited to, the outcome of the court hearing to approve an agreement reached between a subsidiary of our Company and the U.S. Attorney's Office of Massachusetts related to activities surrounding the 2003 commercial launch of Cardizem® LA, the timing, costs and expected impact of the resolution of certain legacy litigation and regulatory proceedings and the impact associated with a recently announced litigation proceeding, the availability of Director and Officer liability insurance as a result of the settlement of certain litigation and the anticipated amount of premiums to be paid in respect of Director and Officer liability insurance, the sufficiency of cash resources (including those available under the accordion feature of our existing credit facility) to support future spending requirements, expected potential milestone payments in connection with research and development arrangements, expected capital expenditures and business development activities, the impact of market conditions on our ability to access additional funding at reasonable rates, our ability to manage exposure to foreign currency exchange rate changes and interest rates, expected stock-based compensation expense, the impact of short-term fluctuations in our share price on the fair value of our Company's reporting unit for purposes of testing goodwill for impairment, the expected impact of the adoption of new accounting standards, and our intent to continue to follow U.S. GAAP and resulting comparability with our U.S.-based industry peers. Forward-looking statements can generally be identified by the use of words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may", "target" 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. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 20-F 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 statements, including, but not limited to, factors and assumptions regarding prescription trends, pricing and the formulary and/or Medicare/Medicaid positioning for our products; the competitive landscape in the markets in which we compete, including, but not limited to, the availability or introduction of generic formulations of our products; timelines associated with the development of, and receipt of regulatory approval for, our new products; the opportunities present in the market for therapies for specialty CNS disorders; and the resolution of insurance claims relating to certain litigation and regulatory proceedings. 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 difficulty of predicting U.S. Food and Drug Administration ("FDA") and Canadian Therapeutic Products Directorate ("TPD") approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the results of continuing safety and efficacy studies by industry and government agencies, uncertainties associated with the development, acquisition and launch

iv


of new products, contractual disagreements with third parties, availability of capital and ability to generate operating cash flows and satisfy applicable laws for dividend payments, the continuation of the recent market turmoil, market liquidity for our Common Shares, our ability to secure third-party manufacturing arrangements, our satisfaction of applicable laws for the repurchase of our Common Shares, our ability to retain the limited number of customers from which a significant portion of our revenue is derived, the impact of a decline in our market capitalization on the carrying value of goodwill, reliance on key strategic alliances, delay in or transition issues arising from the closure of our Puerto Rico and Ireland facilities, the successful implementation of our New Strategic Focus, our eligibility for benefits under tax treaties, the availability of raw materials and finished products, the regulatory environment, the unpredictability of protection afforded by our patents and other intellectual and proprietary property, the mix of activities and income in various jurisdictions in which we operate, successful challenges to our generic products, infringement or alleged infringement of the intellectual property rights of others, the ability to manufacture and commercialize pipeline products, unanticipated interruptions in our manufacturing operations or transportation services, the expense, timing and uncertain outcome of legal and regulatory proceedings and settlements thereof, payment by insurers of insurance claims, currency and interest rate fluctuations, consolidated tax rate assumptions, fluctuations in operating results, the market liquidity and amounts realized for our auction rate securities held as investments, 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, 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 in the body of this Form 20-F, and in particular under Item 3.D, "Key Information — Risk Factors". 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 our Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We undertake no obligation to update or revise any forward-looking statement.

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PART I

Item 1. Identity of Directors, Senior Management and Advisors

A.    Directors and Senior Management

        Not applicable.

B.    Advisors

        Not applicable.

C.    Auditors

        Not applicable.


Item 2. Offer Statistics and Expected Timetable

A.    Offer Statistics

        Not applicable.

B.    Method and Expected Timetable

        Not applicable.


Item 3. Key Information

A.    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 ("U.S. 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 18, "Financial Statements"). All dollar amounts are expressed in thousands of U.S. dollars, except per share data.

 
  Years Ended December 31  
 
  2008   2007   2006   2005   2004  

Consolidated operating data:

                               

Revenue

  $ 757,178   $ 842,818   $ 1,067,722   $ 938,343   $ 879,156  

Operating income

    124,109 (1)   188,014 (3)   238,867 (5)   313,279 (8)   259,081 (11)
 

Income from continuing operations

    199,904 (2)   195,539 (4)   215,474 (6)   257,015 (9)   165,014 (12)
 

Net income

    199,904 (2)   195,539 (4)   211,626 (7)   246,440 (10)   159,799 (12)

Basic and diluted earnings per share:

                               
 

Income from continuing operations

    1.25 (2)   1.22 (4)   1.35 (6)   1.61 (9)   1.04 (12)
 

Net income

    1.25 (2)   1.22 (4)   1.32 (7)   1.54 (10)   1.00 (12)

Cash dividends declared per share

    1.50     1.50     1.00     0.50    
 

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  At December 31  
 
  2008   2007   2006   2005   2004  

Consolidated balance sheet:

                               

Cash and cash equivalents

  $ 317,547   $ 433,641   $ 834,540   $ 445,289   $ 34,324  

Working capital

    223,198     339,439     647,337     414,033     124,414  

Total assets

    1,623,565     1,782,115     2,192,442     2,036,820     1,711,060  

Long-term obligations

            410,525     436,058     474,498  

Common Shares

    1,463,873     1,489,807     1,476,930     1,461,077     1,457,065  

Shareholders' equity (net assets)

    1,201,599     1,297,819     1,302,257     1,228,364     1,053,913  

Number of Common Shares issued and outstanding (000s)

    158,216     161,023     160,444     159,588     159,383  

(1)
Includes charges of $70,202 for restructuring costs; $32,565 for legal settlements; and $13,606 for management succession and proxy contest costs.

(2)
Includes charges of $70,202 for restructuring costs; $32,565 for legal settlements; $13,606 for management succession and proxy contest costs; $9,869 for loss on impairment of investments; and an equity loss of $1,195. Those charges were partially offset by a $90,000 deferred income tax benefit; and a gain of $6,534 on disposal of investments.

(3)
Includes charges of $95,114 for legal settlements (net of insurance recoveries); $9,910 for intangible asset impairments; and $668 for restructuring costs. Those charges were partially offset by a $1,735 contract recovery.

(4)
Includes charges of $95,114 for legal settlements (net of insurance recoveries); $9,910 for intangible asset impairments; $668 for restructuring costs; $12,463 for loss on early extinguishment of debt; $8,949 for loss on impairment of investments; and an equity loss of $2,528. Those charges were partially offset by a $1,735 contract recovery; and a gain of $24,356 on disposal of investments.

(5)
Includes charges of $143,000 for intangible asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; and $14,400 for legal settlements.

(6)
Includes charges of $143,000 for intangible asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; $14,400 for legal settlements; and an equity loss of $529.

(7)
Includes charges of $143,000 for intangible asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; $14,400 for legal settlements; an equity loss of $529; and $1,084 for asset impairments of discontinued operation.

(8)
Includes charges of $25,833 for intangible asset impairments; $19,810 for restructuring costs; and $4,862 for write-off of inventory.

(9)
Includes charges of $25,833 for intangible asset impairments; $19,810 for restructuring costs; $4,862 for write-off of inventory; $3,397 for loss on impairment of investments; and an equity loss of $1,160.

(10)
Includes charges of $25,833 for intangible asset impairments; $19,810 for restructuring costs; $4,862 for write-off of inventory; $3,397 for loss on impairment of investments; an equity loss of $1,160; and $5,570 for asset impairments of discontinued operation.

(11)
Includes charges of $8,640 for acquired research and development; and $2,883 for intangible asset impairments (net of gain on disposal of $1,471).

(12)
Includes charges of $8,640 for acquired research and development; $2,883 for intangible asset impairments (net of gain on disposal of $1,471); $37,802 for loss on impairment of investments; and an equity loss of $4,179.

B.    Capitalization and Indebtedness

        Not applicable.

C.    Reasons for the Offer and Use of Proceeds

        Not applicable.

D.    Risk Factors

        Investment in shares of our common stock ("Common Shares") involves a degree of risk. These risks should be carefully considered before any investment is made. The following are some of the key risk factors generally associated with our business. However, the risks described below are not the only ones that we face.

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Additional risks not currently known to us or that we currently deem immaterial may also impair our business operations.

I.     COMPANY-SPECIFIC RISKS

1.     Product Development and Commercialization

a.
Our future revenue growth and profitability are dependent upon our ability to develop, in-license or otherwise acquire new commercially viable products and obtain associated regulatory approvals in multiple jurisdictions. Our failure to do so successfully could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Our future revenues, profitability and financial condition depend, to a significant extent, on our ability to successfully develop, in-license or otherwise acquire new commercially viable products.

        New product development is subject to a great deal of uncertainty, risk and expense. Development of pharmaceutical candidates may fail or be terminated at various stages of the research and development ("R&D") process, often after substantial financial and other resources have been invested in their exploration and development.

        FDA and TPD approval is required before any prescription drug product, including generic drug products, can be sold in the U.S. and Canada, respectively. Other countries may also have similar regulatory approval requirements before products can be sold in those countries. The process of obtaining FDA, TPD and other regulatory approvals to manufacture and market new and generic pharmaceutical products is rigorous, time consuming, costly and largely unpredictable. The timing and cost of obtaining FDA, TPD and other regulatory approvals, or the failure to obtain such approvals, could adversely affect our product introduction plans, business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Beyond our internal research and development efforts, we rely, and in the future may continue to rely, on the acquisition, in-licensing or other access to products or technologies from third-party drug-development companies. See Item 4.B, "Information on the Company — Business Overview — Development Strategy for Specialty CNS — Research and Development", for a discussion of our recent efforts with third-party drug-development companies. Supplementing our product portfolio in this manner requires the commitment of substantial effort and expense in seeking out, evaluating and negotiating collaboration agreements. In addition, product in-licensing involves inherent risks, including uncertainties due to matters that may affect the successful development or commercialization of the in-licensed product, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination rights. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both human and financial, to an opportunity that may not result in a successfully developed, or commercialized, product.

b.
Our New Strategic Focus targets unmet medical needs for specialty CNS disorders. A failure in our efforts to develop or enhance our existing specialty CNS products, to in-license or acquire specialty CNS compounds in late-stage development or to commercialize any specialty CNS compounds that we develop or acquire could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        On May 7, 2008, we announced our New Strategic Focus, which focuses on specialty CNS as our product development and acquisition strategy. See Item 4.B, "Information on the Company — Business Overview — New Strategic Focus", for a description of the New Strategic Focus. Accordingly, we currently anticipate that from 2008 through 2012, we will invest $600 million in research and development, which, in addition to primary R&D, includes in-licensing and milestone payments but excludes acquisition costs (such as those incurred in connection with the Prestwick transaction). Such investment is for the exploration, further development and regulatory approval of niche in-licensed products and new chemical entities ("NCEs"), new indications, and in-house reformulation opportunities in the specialty CNS disorder market. Our success in implementing this New Strategic Focus is subject to a number of risks, including:

    our ability to identify, evaluate and acquire high priority compounds;

    our ability to further develop competitive in-house research and development expertise in specialty CNS;

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    our ability to further develop competitive commercial expertise in specialty CNS; and

    our ability to successfully commercialize, with or without capable commercialization partners, any CNS compounds that we develop, in-license or acquire.

        In addition, the implementation of these strategies may cause disruptions to our ongoing business, including relationships with our personnel, suppliers and partners. We may not be successful in the commercialization of new specialty CNS products, which are dependent on finding commercialization partners or on developing the necessary in-house sales capability. While specialty CNS products generally exhibit favourable reimbursement and pricing characteristics, there is a risk that final pricing models may require us to make reimbursements beyond the level anticipated in our business model.

        The failure to successfully implement our New Strategic Focus may have an adverse impact on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

c.
Our approved products may not achieve or maintain expected levels of market acceptance, 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 Shares to decline.

        Even if we are able to obtain regulatory approvals for our new pharmaceutical products, generic or branded, the success of those products is dependent upon achieving and maintaining market acceptance. 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:

    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;

    difficulty in, or excessive costs to, manufacture;

    infringement or alleged infringement of the patents or intellectual property rights of others;

    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.

        In addition, the success of any new product will depend on our ability to either successfully build our in-house sales capabilities or to secure third-party marketing or distribution partners in the U.S. Seeking out, evaluating and negotiating marketing or distribution agreements may involve the commitment of substantial time and effort and may not ultimately result in an agreement. In addition, our current structure, which is dependent on our in-house sales capabilities or third-party marketing or distribution partners, may make us less attractive to third-party marketers, distributors and licensors of new products, and this may affect our ability to secure such partners. If we are unable to commercialize new products successfully, whether through a failure to achieve market acceptance, a failure to build our own in-house sales capabilities or a failure to secure marketing partners, there may be a material adverse effect on our business, financial condition and results of operations and it could cause the market value of our Common Shares to decline.

        As a condition to granting marketing approval of a product, the FDA may require a company to conduct additional clinical trials. The results generated in these trials 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. On September 27, 2007, the Food and Drug Administration Amendments Act of 2007 ("FDAA") was enacted, giving the FDA enhanced post-market authority, including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety information and compliance with FDA-approved risk

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evaluation and mitigation strategies. The FDA's exercise of this new authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with new post-approval regulatory requirements and potential restrictions on sales of approved products. Post-marketing studies, whether conducted by us or by others and whether mandated by regulatory agencies or undertaken voluntarily, and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of our products. Such studies, which increasingly employ sophisticated methods and techniques, may call into question the utilization, safety and efficacy of previously marketed products. In some cases, studies may result in the discontinuance of product marketing or the need for risk management programs. In addition, government agencies may determine that a product should be scheduled as a controlled substance, as is currently being proposed by Health Canada under the Controlled Drugs and Substances Act (the "CDSA") for our tramadol products. If one of our products is scheduled under the CDSA, such regulation would reduce practitioner prescriptions for such product, which may lead to a reduction in revenues from such product. Such regulation may also increase the costs of manufacturing and distributing such product in order to meet the regulatory requirements applicable to controlled substances, such as process upgrades and renovations required at our facilities and changes to our manufacturing, storage and transportation practices.

        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.

        These situations, should they occur, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

d.
We will not be able to commercialize our pipeline products if our preclinical studies do not produce successful results or if our clinical trials do not demonstrate safety and efficacy in humans.

        We must 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.

        Our success will depend on the success of our clinical trials. It can take several years to complete the clinical trials of a product, and a failure of one or more of our clinical trials can occur at any stage of testing. We believe that the development of each of our pipeline products involves significant risks at each stage of testing. If clinical trial difficulties and failures arise, our pipeline products may never be approved for sale or become commercially viable. We do not believe that any of our pipeline products have alternative uses if we are not successful in developing them as pharmaceutical products.

        There are a number of difficulties and risks associated with clinical trials. These difficulties and risks may result in the failure to receive regulatory approval to continue to test or to sell our pipeline products or the inability to commercialize any of our pipeline products. For instance, we may discover that a pipeline product does not exhibit the expected therapeutic results in humans, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use if approved. The risk of clinical trial failure is even greater where the pipeline product contains a new chemical entity, and where the pipeline product uses a novel or not fully known mechanism of action. Likewise, the risk of discovering harmful side effects is greater where the pipeline product contains a new chemical entity.

        In addition, the possibility exists that:

    the results from early clinical trials may not be statistically significant or predictive of results that will be obtained from expanded, advanced clinical trials;

    institutional review boards or regulators, including the FDA and TPD, may hold, suspend or terminate our clinical research or the clinical trials of our pipeline products for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;

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    subjects may drop out of our clinical trials;

    our preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials; and

    the cost of our clinical trials may be greater than we currently anticipate.

        If we do not receive regulatory approval to sell our pipeline products or cannot successfully commercialize our pipeline products, we would not be able to generate revenues in future periods, 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 Shares to decline.

e.
If our clinical trials for our pipeline products are delayed, we may be unable to commercialize our pipeline products on a timely basis, 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 Shares to decline.

        Planned clinical trials may not begin on time, may take longer to complete than anticipated, or may need to be restructured after they have begun. Clinical trials can be delayed for a variety of reasons, including delays related to:

    obtaining an effective investigational new drug application, or Investigational New Drug Application ("IND"), or regulatory approval to commence a clinical trial;

    identifying and engaging a sufficient number of clinical trial sites;

    negotiating acceptable clinical trial agreement terms with prospective trial sites;

    obtaining institutional review board approval to conduct a clinical trial at a prospective site;

    recruiting qualified subjects to participate in clinical trials in a timely manner;

    competition in recruiting clinical investigators;

    shortage or lack of availability of supplies of drugs for clinical trials;

    the need to repeat clinical trials as a result of inconclusive results or poorly executed testing;

    the placement of a clinical hold on a study;

    the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely fashion; and

    exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the trial.

        Our pipeline products have significant milestones to reach, including the successful completion of clinical trials, before commercialization. If we experience significant delays in or termination of clinical trials, our financial results and the commercial prospects for our pipeline products or any other products that we may develop will be adversely impacted. In addition, our product development costs would increase and our ability to generate revenue could be impaired.

f.
A relatively small group of products represents a significant portion of our revenues, gross profit and earnings from time to time. If the volume or pricing of any of these products declines or the costs of related manufacturing, distribution or marketing increase, 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 Shares to decline.

        Sales of a limited number of our products represent a significant portion of our revenues, gross profit and earnings. As the volume or pricing of our existing significant products declines in the future, our business, financial condition, and results of operations could be materially adversely affected and this could cause the market value of our Common Shares to decline. The genericization of our existing products is one of the reasons for the current or continued decline in volume and pricing of our products. For example, the genericization in

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2008 of Wellbutrin® XL has resulted in and may continue to result in a decline in the volume and pricing of this product. In 2008, sales of Wellbutrin® XL decreased by 43% or approximately $92 million, as compared to 2007. Following the initial pricing and volume impact of genericization, pricing and volume may either decrease further or increase dependent upon market and competitive conditions. In addition, if this or any of our other key products were to become subject to any other issues, such as material adverse changes in prescription growth rates, unexpected side effects, regulatory proceedings, material product liability litigation, publicity affecting doctor or patient confidence or pressure from competitive products, the adverse impact on our business, financial condition and results of operations and market value of our Common Shares could be significant.

g.
A significant portion of our revenues is derived from sales to a limited number of customers. Any significant reduction of business with any of these customers could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        In 2008, our five largest customers, McKesson Corporation, GSK, Cardinal Health, Inc., Teva Pharmaceuticals Industries Ltd. ("Teva") and OMI (now known as PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.), accounted for 22%, 16%, 16%, 11% and 11%, respectively, of our total revenues. Any significant reduction or loss of business with one or more of these customers could have a material adverse effect on our business, financial condition, and results of operations and could cause the market value of our Common Shares to decline.

h.
We have entered into distribution agreements with other companies to distribute certain of our generic products in exchange for payments based on sales. Declines in the pricing and/or volume, over which we have no control, of such generic products, and therefore the amounts paid to us, may have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Our portfolio of generic products is the subject of various agreements, pursuant to which we manufacture and sell generic products to other companies, which distribute such products in the U.S. and Canada and make payments to us, typically based on net sales. These companies make all distribution and pricing decisions independently of Biovail. If the pricing and/or volume of such generic products declines, our revenues could 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 Shares to decline.

2.     Intellectual Property

a.
We may be unable to effectively protect our intellectual and other proprietary property, 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 Shares 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. Generic drug manufacturers seek to sell and, in a number of cases have sold generic versions of many of our most important products prior to the expiration of our patents, and have exhibited a readiness to do so for other products in the future. As a result, we expect that patents related to our products will be routinely challenged, and our patents may not be upheld. If we are not successful in defending an attack on our patents and maintaining exclusive rights to market one or more of our major products still under patent protection, we could lose a significant portion of sales 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 Shares to decline. See Item 4.B, "Information on the Company — Business Overview — Patents and Proprietary Rights", for more information on our intellectual property rights and Item 4, "Information on the Company — Legal Proceedings — Intellectual Property", for a discussion of intellectual property-related proceedings in which we are involved.

        In addition, we rely on trade secrets, know-how and other proprietary information to provide additional legal protection to various aspects of our business, including information about our formulations, manufacturing methods and analytical procedures, as well as information contained in our Company documents and regulatory filings. Although we require our employees and other vendors and suppliers to sign confidentiality agreements,

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we may not have adequate remedies in the event of a breach of these confidentiality agreements. Furthermore, the trade secrets and proprietary technology upon which we rely may otherwise become known or be independently developed by our competitors without infringing upon any proprietary technology. Our success will depend, in part, on our ability in the future to protect those trade secrets and other proprietary information.

        The cost of responding to challenges to our patents and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, and to protect our other intellectual property could be substantial and could preclude or delay commercialization of products. Such litigation could also require a substantial commitment of our management's time.

b.
We may be subject to intellectual property litigation and infringement claims, 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 Shares to decline.

        Our success will depend, in part, on our ability in the future to obtain patents and to operate without infringing on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes competitive with those we are developing. The patents of our competitors may impair our ability to do business in a particular area.

        In the event we discover that we may be infringing third-party patents or other intellectual property rights, we may not be able to obtain licenses from those third parties on commercially attractive terms or at all. We may have to defend against charges that we violated patents or the proprietary rights of third parties. Litigation is costly and time-consuming, and diverts the attention of our management and technical personnel. In addition, 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. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our products, 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 Shares to decline. See Item 4, "Information on the Company — Legal Proceedings — Intellectual Property", for a discussion of intellectual property-related proceedings in which we are involved.

3.     Income Tax

a.
Our effective tax rates may increase.

        We have operations in various countries that have differing tax laws and rates. A significant portion of our revenue and income is earned in Barbados, which has low domestic tax rates. Dividends from such after-tax business income are received tax-free in Canada. Our tax structure 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 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 allocated or 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 an increase in the effective tax rate on all or a portion of our income to a rate possibly exceeding the statutory income tax rate of Canada or the U.S. See Item 4.B, "Information on the Company — Business Overview — Taxation".

        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 must 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 has been provided for by us. The final outcome of any audits by

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taxation authorities may differ from the estimates and assumptions we have used 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.

        We have recorded a valuation allowance on deferred tax assets primarily relating to a portion of our U.S. operating losses, our Canadian operating losses, Scientific Research and Experimental Development pool, investment tax credit carryforward balances, provisions for legal settlements, and future tax depreciation. We have assumed that the deferred tax assets in respect of our Canadian operating losses, Scientific Research and Experimental Development pool and investment tax credit are more likely than not to remain unrealized.

        Our deferred tax assets and 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 the valuation allowance against the net deferred tax asset is dependent upon several factors, including estimates of the realization of deferred income tax assets, which realization is 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 the valuation allowance required could materially increase or decrease our provision for income taxes in a given period.

4.     Marketing, Manufacturing and Supply

a.
Manufacturing difficulties or delays may adversely affect our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        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 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, equipment failures or delays in obtaining components or replacements, construction delays or defects and other events, both within and outside of our control. In addition, for certain of our products, we do not have a secondary or back-up manufacturing facility in place to assist with these manufacturing and other processes should any of these events occur. The closure of our Puerto Rico facilities, which we intend to close in 2010, will concentrate all of our in-house manufacturing at our Steinbach, Manitoba facility. Any interruption in our manufacture of high-volume 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 Shares to decline.

b.
Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and Canadian regulations, we could lose our marketing approvals, 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 Shares to decline.

        Following initial regulatory approval of any drugs we or our partners may develop, we will be subject to continuing regulatory review by the FDA and the TPD, including the review of adverse drug events and clinical results that are reported after product candidates become commercially available. This may include results from any post-marketing follow-up studies or other reporting required as a condition to approval. The manufacturing, labeling, packaging, storage, distribution, advertising, promotion, reporting and recordkeeping related to the product will also be subject to extensive ongoing regulatory requirements. In addition, incidents of adverse drug reactions ("ADRs"), 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. Similarly, our Contract Research Division ("CRD") operations could suffer a loss of business or be subject to liability should a serious ADR occur during the course of their conduct of a study.

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        All products manufactured by us or for us by third-party manufacturers must be made in a manner consistent with FDA-mandated and TPD-mandated good manufacturing practices ("GMP"). Compliance with GMP regulations requires substantial expenditures of time, money and effort in such areas as production, quality control and quality assurance to ensure full technical, facility and system compliance. The FDA, TPD and other regulatory authorities inspect on a regular basis our and our third-party manufacturers' manufacturing facilities for compliance. Failure to comply with GMP regulations could occur for various reasons, including failure of a product to meet or maintain specifications, stability issues or unexpected trends in patient ADRs. If the regulatory agencies were to require one of our or our third-party manufacturers' manufacturing facilities to cease or limit production, our business could be adversely affected, in part because regulatory approval to manufacture a drug is generally site-specific. The closure of our Puerto Rico facilities, which we intend to close in 2010, will concentrate all of our in-house manufacturing at our Steinbach, Manitoba facility. Delay and cost in obtaining regulatory approval to manufacture at a different facility also could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        In addition, if we or our third-party manufacturers fail to comply with applicable continuing regulatory requirements, our business could be seriously harmed because a regulatory agency may:

    issue warning letters;

    suspend or withdraw our regulatory approval for approved or in-market products;

    seize or detain products or recommend a product recall;

    refuse to approve pending applications or supplements to approved applications filed by us;

    suspend any of our ongoing clinical trials;

    impose restrictions or obligations on our operations, including costly new manufacturing requirements;

    close our facilities or those of our contract manufacturers; or

    impose civil or criminal penalties.

        Under certain circumstances, the FDA and TPD also have the authority to revoke previously granted drug approvals. These policies may change and additional U.S. or Canadian federal, provincial, state or local governmental regulations or foreign governmental regulations may be enacted that could affect our ability to maintain compliance. We cannot predict the likelihood, nature or extent of adverse governmental regulation that may arise from future legislation or administrative action.

        If we or our third-party manufacturers were deemed to be deficient regarding regulatory compliance in any significant way, it could have a material adverse effect on our business, financial condition and results of operations and it could cause the market value of our Common Shares to decline.

c.
If we are unable to optimize the use of or expand our manufacturing facilities or secure cost-effective third-party manufacturing arrangements in a timely manner, we may be unable to meet market demand for our products, which could affect our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        We have, in past years, operated some of our manufacturing facilities on a 24-hour-a-day, seven-day-a-week production cycle to meet the market demand for current in-market products and anticipated product launches. Successfully operating on that basis and meeting the anticipated market demand requires minimal equipment failures and product rejections. In addition, we manufacture products that employ a variety of technology platforms. Some of our manufacturing facilities may, at times, be scheduled in excess of rated capacity, while others may be under-utilized. Unless our manufacturing processes are optimized or our manufacturing facilities are expanded where appropriate, or we secure cost-effective third-party manufacturing arrangements in a timely manner, we may have difficulty fulfilling all demand for new large volume products, which could adversely affect our results of operations, financial condition and cash flows. In addition, if we are required to expand any of our facilities, it may require significant capital investment. If we are unable to complete any expansion projects in a

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timely and cost-efficient manner or adequately equip the expanded facilities in a timely and cost-effective manner or we experience delays in receiving FDA and TPD approvals for these expanded facilities, 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 Shares to decline.

d.
Disruptions of delivery of our products could adversely impact our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        The supply of our products to our customers is subject to and dependent upon the use of transportation services. Disruption of transportation services could adversely impact our financial results. In addition, our manufacturing facilities are located outside the continental U.S. and most of our sales are within the U.S. We also purchase products from third parties outside the U.S. As such, any change in policy or policy implementation relating to U.S. border controls may have an adverse impact on our access to the U.S. marketplace that, in turn, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

e.
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 may 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 Shares 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. Such suppliers must be qualified in accordance with applicable regulatory requirements and the process of qualifying a supplier can be costly and time consuming. In the event an existing supplier becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source and we do not have a second supplier, we will attempt to locate a qualified alternative; however, 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 ingredient ("API"), or finished product or the occurrence of quality deficiencies in the products which our suppliers provide could have a material adverse effect on our business, financial condition and results of operations, and the market value of our Common Shares could decline.

        Our arrangements with foreign suppliers are subject to certain additional risks, including the availability of government clearances, export duties, transport issues, political instability, currency fluctuations and restrictions on the transfer of funds. Arrangements with international raw material suppliers are subject to, among other things, FDA and TPD regulation, various import duties and required government clearances. Acts of governments outside the U.S. and Canada may affect the price or availability of raw materials needed for the development or manufacture of our products. The degree of impact such a situation could have would, in part, depend on the product affected and, as such, interruption of supply for Ultram® ER would have a more significant adverse impact than the interruption of supply of a less important product.

        In addition, we rely on third-party manufacturers to supply certain products that we market and/or distribute, including Cardizem® CD, Vasotec®, Vaseretic®, Zovirax®, Ativan®, Wellbutrin® SR, Zyban®, Glumetza® 500 mg, Isordil®, Xenazine® and Nitoman®. Our manufacturers may suffer an interruption, including due to manufacturing or shipping problems, financial insolvency, regulatory inspections or difficulty in sourcing components or raw materials or financial insolvency. We are also vulnerable to a supply interruption should we be unable to renew or replace, or successfully transfer, such supply arrangements when our current agreements with our third-party manufacturers expire, in which case we may experience an interruption in our supply. Any such supply interruption could have an adverse impact on our operations.

f.
Delays or transition issues arising from closure of our Puerto Rico manufacturing facilities may adversely affect our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        In support of the implementation of our New Strategic Focus, we are consolidating our manufacturing resources through the closure of our two Puerto Rico manufacturing facilities and the transfer of certain

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manufacturing processes to our Steinbach, Manitoba facility. If we experience a delay in transitioning such manufacturing processes to Steinbach, or if we experience other disruptions or issues in transitioning these manufacturing processes to Steinbach, we could fail to deliver our products in a timely manner, which could adversely affect our relationships with our customers and business partners, which, in turn, could adversely affect our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

5.     Litigation and Regulatory Investigations

a.
We are involved in various legal proceedings in the U.S. and Canada and may experience unfavorable outcomes of such proceedings, or of future proceedings, 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 Shares to decline.

        We are involved in the following class actions in the U.S.:

    Antitrust Class Actions — We are a defendant in several antitrust class actions in the U.S. related to our Tiazac® and generic Adalat products as well as our Wellbutrin® XL product.

    U.S. Securities Class Action — We, along with several of our officers and former officers, have been named in a securities class action lawsuit has been filed in the U.S. District Court of the Southern District of New York which relates to statements alleged to have been made by us in respect of Aplenzin™ (bupropion hydrobromide tablets) during the product's U.S. regulatory approval process.

        We are also a party to several other actions or may become a party to actions that could similarly impact our business. The above actions are more fully described at Item 4, "Information on the Company — Legal Proceedings".

        In all cases, the resolution of these actions could have a material adverse effect on our business, financial condition and results of operations or could cause the market price of our Common Shares to decline. In addition, we may continue to incur expenses associated with our defense of these actions, and the pending actions may divert the efforts and attention of our management team from normal business operations.

b.
We could be subject to fines, penalties or other sanctions as a result of ongoing investigations and inquiries by the U.S. Attorney's office for the Eastern District of New York (the "EDNY").

        We have been the subject of an investigation by the EDNY into our accounting and financial disclosure practices that occurred between 2001 and March 2004, certain transactions associated with a corporate entity acquired by the Company in 2002 and the trading and ownership of our Common Shares.

        The above investigation is more fully described at Item 4, "Information on the Company — Legal Proceedings — Governmental and Regulatory Inquiries".

        We cannot predict the outcome or timing of the resolution of this governmental investigation. Should this investigation reach adverse conclusions, we or our former officers and directors could be subject to fines, penalties or criminal sanctions, which may have a material adverse effect on our business, financial condition or results of operations or could cause the market value of our Common Shares to decline. During 2008 we settled an investigation by the SEC, and on January 9, 2009 we settled an investigation by the Ontario Securities Commission (the "OSC"), relating generally to the same matters being investigated by the EDNY. Four individuals, including former officers and a director, remain under investigation by the SEC and one of these individuals remains under investigation by the OSC, relating generally to the same matters being investigated by the EDNY. We are indemnifying those individuals for legal expenses in accordance with indemnification agreements.

        In addition, as a result of the recent settlements in a number of legal and regulatory proceedings, we will have exhausted our coverage under our Director and Officer liability insurance for claims reported in respect of our 2002-2004 policy period. This may result in an increase in amounts payable by us in connection with the investigations described above or any other existing or new matters for such period.

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c.
We could be subject to counterclaims or other suits in response to actions we have initiated or may initiate, including our complaint against various parties alleging a stock market manipulation scheme.

        From time to time, we initiate actions or file counterclaims. We could be subject to counterclaims or other suits in response to actions we initiate. For example, on February 22, 2006, we filed a lawsuit, seeking $4.6 billion in damages, from 22 defendants who, the complaint alleges, participated in a stock market manipulation scheme. For further details related to this matter, see Item 4, "Information on the Company — Legal Proceedings — Biovail Action Against S.A.C. and Others". The defendants in this complaint may file counterclaims or take other actions in their defense that may require us to respond, which would require us to incur additional expense and could result in our payment of damages, which could have a material adverse effect on our business, financial condition and results of operations and which could cause the market value of our Common Shares to decline. We cannot reasonably predict the outcome of these proceedings, some of which could involve the payment of significant legal fees and damages.

6.     Dividend Policy

a.
The payment of dividends will depend on various factors, many of which are beyond our control.

        Our current dividend policy contemplates quarterly dividends of $0.375 per Common Share to our shareholders. The declaration and payment of dividends, if any, is always subject to the discretion of the Board of Directors. The amount of future cash flows generated by the Company may not be sufficient to support the payment of dividends, whether in accordance with the current dividend policy or otherwise. In addition, we currently intend to give business development activities designed to accelerate our plans under our New Strategic Focus first priority for use of our cash flows. As a result, the amount of cash available for dividend payments could be reduced. Our ability to pay dividends, and the actual amounts of the dividends, will be dependent on numerous factors, including but not limited to:

    our profitability;

    our prioritization of business development activities, including acquisitions, as contemplated by our New Strategic Focus;

    fluctuations in working capital, research and development and capital and operating expenditure requirements;

    the sustainability of margins;

    payment of income taxes;

    quarterly variations in operating results;

    obligations under applicable credit facilities;

    availability of debt and equity financing;

    fines or litigation settlement payments;

    changes in the market price of the products we develop;

    restrictions in debt instruments;

    trends in the biotechnology and pharmaceuticals industry and the markets in which we operate;

    current events affecting the economic situation generally in Canada, Barbados and the U.S.; or

    applicable laws,

many of which are beyond our control and all of which are susceptible to a number of risks and other factors beyond our control.

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b.
Our dividend policy may have an impact on our payment of capital and operating expenditures and our liquidity and capital requirements, our deficit and our ability to execute our New Strategic Focus.

        The dividend payments contemplated under the dividend policy may increase our deficit or make the payment of capital and operating expenditures, including those required by us to execute on our strategy, dependent on increased cash flow or additional financing in the future. Lack of, or inability to access, those funds could limit our future growth and our ability to execute on our strategy.

        As a result of payments of dividends under our dividend policy, we may in the future need to draw on our existing credit facility, issue new debt or issue equity to maintain the payment of dividends. We may be unable to obtain new debt financing or renew our existing credit facility at its maturity in 2010 or execute either on terms affordable to us or to otherwise raise new capital, and, as a result, we may be unable to continue to pay dividends. If we are only able to raise funds on less favorable and/or more restrictive terms, this may have a material adverse effect on our revenues, financial condition and results of operations. If we raise funds through the issuance of debt or equity, any debt securities or preferred shares issued may have rights and preferences and privileges senior to those of holders of our Common Shares. The terms of the debt securities may impose restrictions on our operations that may have an adverse impact on our financial condition. If we raise funds through the issuance of equity, the proportional ownership interests of our shareholders could be diluted.

7.     Other Company Risks

a.
If the companies in which we invest, or with which we partner or co-develop products, are not successful, 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 Shares to decline.

        Actions by third parties who control the promotion, pricing, trade rebate levels, product availability or other items for products we supply to them could have a material adverse impact on our financial results. For example, with our acquisition of Prestwick Pharmaceuticals Inc. ("Prestwick") in September 2008, we rely on Ovation Pharmaceuticals, Inc. ("Ovation") to commercialize and market Xenazine® (tetrabenazine) in the U.S. As a further example, we rely on OMI (now known as PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.) to commercialize our product Ultram® ER (tramadol) in the U.S. which we manufacture and supply to them.

        Economic, governmental, industry and other factors outside our control affect companies with which we may partner or co-develop products. Some of the material risks relating to such companies include:

    the ability of these companies to successfully develop, manufacture and obtain necessary governmental approvals for the products which serve as the basis for our investments in, or relationship with, such companies;

    the ability of competitors of these companies to develop similar or more effective products, making the products developed by these companies difficult or impossible to market;

    the ability of these companies to adequately secure patents for their products and protect their proprietary rights;

    the ability of these companies to enter the marketplace without infringing upon competitors' patents or other intellectual property;

    the ability of these companies to remain financially solvent;

    the ability of these companies to remain technologically competitive; and

    the dependence of these companies upon key scientific and managerial personnel.

        We may have limited or no control over the resources that any such company may devote to develop the products for which we collaborate with them. Any such company may not perform as expected. These companies may breach or terminate their agreements with us or otherwise fail to conduct product discovery and development activities successfully, or in a timely manner. The occurrence of any of these events could have a

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material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

b.
If we are unable to successfully complete strategic in-licensing agreements or acquisitions as contemplated by our New Strategic Focus, or are unable to integrate or develop businesses or products we may in-license or acquire, we may not be able to successfully implement our current strategies to grow our business and our future revenues and operating results may suffer.

        We pursue product or business licenses or acquisitions that could complement or expand our business. However, we may not be able to execute appropriate licenses or acquisitions in the future and, accordingly, we may not be able to grow our business successfully. In addition, future licenses or acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:

    we may fail to identify product licenses or acquisitions that enable us to execute our business strategy;

    we may compete with others to license products or acquire products or companies in an increasingly competitive market with decreased availability of, or increased prices for, suitable license or acquisition candidates;

    we may be unable to successfully negotiate the terms of any license or acquisition or finance any such licenses or acquisitions;

    we may not be able to obtain the necessary regulatory approvals, including the approval of antitrust and competition regulatory bodies, in countries where we are seeking to consummate licenses or acquisitions;

    we may ultimately fail to consummate a license or acquisition even if we announce that we plan to make such license or acquisition;

    potential licenses or acquisitions may divert management's attention away from our existing products and business, resulting in the loss of key customers or personnel and exposing us to unanticipated liabilities;

    we may fail to successfully integrate licensed products or acquisitions into our existing products and business;

    we may not be able to retain the skilled employees and experienced management that may be necessary to operate the businesses or products we license or acquire and, if we cannot retain such personnel, we may not be able to attract new skilled employees and experienced management to replace them;

    we may acquire a company or license a product that has contingent liabilities that include, among others, known or unknown intellectual property, Federal Trade Commission or product liability claims or suits; and

    we may indemnify a counterparty to a license or acquisition transaction against liabilities relating to taxes and consequently may be subject to tax-related liabilities in respect of an acquired company or license materially in excess of our reserves.

        Furthermore, any acquisition funded through forfeiture of our dividends could cause the market value of our Common Share to decline. Finally, any acquisition funded through debt is exposed to the refinancing of that debt in 2010; refinancing might not be available or may only be available at very high rates.

c.
We may not be able to successfully divest or monetize certain of our non-core business assets, which could have an adverse impact on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        As part of our New Strategic Focus, we intend to divest or monetize certain of our non-core business assets. We may fail to realize the anticipated proceeds in connection with such divestiture and monetization efforts, and such failure may have an adverse impact on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

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d.
Our continued success is dependent on our continued ability to attract and retain key personnel. Any failure to attract and retain key personnel could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Much of our success to date has resulted from the particular scientific and management skills of personnel available to us. If these individuals are not available, we might not be able to attract or retain employees with similar skills. The continued availability of such individuals is important to our ongoing success. If we are unsuccessful in retaining key employees, 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 Shares to decline.

e.
We may not have sufficient cash and may be limited in our ability to access financing for future capital requirements, which may prevent us from expanding our business and our portfolio of products.

        We may in the future need to incur additional debt or issue equity to satisfy working capital and capital expenditure requirements, as well as to make acquisitions and other investments, to continue to pay dividends under our dividend policy or to acquire Common Shares under our share repurchase program. To the extent we are unable to renew our existing credit facility or raise new capital, we may be unable to expand our business. If we raise funds through the issuance of new debt or equity, any debt securities or preferred shares issued may have rights and preferences and privileges senior to those of holders of our Common Shares. The terms of the debt securities may impose restrictions on our operations that may have a material adverse effect on our financial condition. If we raise funds through the issuance of equity, the proportional ownership interests of our shareholders could be diluted.

        In addition, we may choose to raise additional funds or, upon its maturity in 2010, renew our existing credit facility in order to capitalize on perceived opportunities in the marketplace that may accelerate our growth objectives. Our ability to secure such financing in the future will depend in part on the prevailing capital market conditions as well as our business performance. We may not be successful in our efforts to secure financing, if needed, on terms satisfactory to us.

f.
The recent deterioration in the global credit and capital markets could have a material adverse impact on our liquidity and capital resources.

        The credit and capital markets have experienced significant deterioration in 2008, including the failure of a number of significant and established financial institutions in the U.S. and abroad, and may continue to deteriorate in 2009, all of which will have an impact on the availability of credit and capital in the near term. If uncertainties in these markets continue, or these markets deteriorate further, it could have a material adverse impact on our liquidity and our ability to raise capital.

g.
The current economic downturn, coupled with the current regulatory environment, could have a negative impact on the pharmaceutical industry, which in turn could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        The recent economic downturn and adverse conditions in the national and global markets may negatively affect our operations in the future. Our revenues are contingent upon our ability to develop, license or otherwise acquire new commercially viable products and obtain associated regulatory approvals in multiple jurisdictions. Recently, companies in the pharmaceutical industry have found it difficult to raise capital in the equity and debt markets or through traditional credit markets to fund research and development. In addition, the increased regulatory environment from the FDA has increased the costs of research and development for pharmaceutical companies. For example, on September 27, 2007, the FDAA was enacted, giving the FDA enhanced post-market authority, including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety information and compliance with FDA-approved risk evaluation and mitigation strategies. The FDA's exercise of this new authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with new post-approval regulatory requirements and potential restrictions on sales of approved products. Accordingly, faced with the difficulty of raising capital and the potential for increased costs due to regulatory changes, many pharmaceutical companies have recently cut costs, including canceling current clinical trials and not pursuing additional clinical trials. These changes in

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both the economic and regulatory environments directly affect our business, and, in the event we are unable to conduct necessary research and development activities, our ability to generate revenues could be hindered, 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 Shares to decline.

h.
We are exposed to risks relating to currency exchanges.

        We operate internationally, but a majority of our revenue and expense activities and capital expenditures are denominated in U.S. dollars. Our only other significant transactions are denominated in Canadian dollars and our Canadian dollar expenses may not be entirely offset by our Canadian dollar revenues. We also face foreign currency exposure on the translation of our non-U.S. dollar functional operations from their local currencies to the U.S. dollar. A 50% change in foreign currency exchange rates could have a material adverse effect on our consolidated results of operations or cash flows.

        As of December 31, 2008, we do not have any outstanding forward foreign exchange contracts to hedge against foreign currency risk.

i.
We may be exposed in the future to risks related to interest rates.

        The primary objective of our policy for the investment of temporary cash surpluses is the protection of principal and, accordingly, we invest in investment grade securities with varying maturities, but typically less than 90 days. Our credit facility bears interest based on London Interbank Offering Rates, U.S. dollar base rate, Canadian dollar prime rate or Canadian dollar bankers' acceptance rates. While we currently do not have any outstanding borrowings under this facility, to the extent we borrow material amounts under this facility in the future, a change in interest rates could have a material adverse effect on our results of operations, financial condition or cash flows.

        As of December 31, 2008, we do not have any outstanding interest rate swap contracts to hedge against interest rate risk.

j.
Lack of liquidity in the market for auction rate securities has had and may continue to have an adverse impact on the fair value of such securities and our ability to liquidate such securities.

        Our marketable securities portfolio currently includes $26.8 million of principal invested in auction rate securities. These securities have long-term maturities for which the interest rates are reset through a Dutch auction, typically each month. These auctions historically had provided a liquid market for these securities. However, with the liquidity issues experienced in global credit and capital markets, these securities have experienced multiple failed auctions because the amount of securities submitted for sale has exceeded the amount of purchase orders. We have recorded an impairment charge of $8.6 million at December 31, 2008 (including $4.4 million reclassified from other comprehensive income), reflecting the portion of our auction rate securities that we have concluded has an other-than-temporary decline in fair value, and we have recorded an unrealized loss of $3.4 million in other comprehensive income, reflecting adjustments to our auction rate securities that we have concluded have a temporary decline in fair value.

        The credit and capital markets have seen significant deterioration in 2008, including the failure of a number of significant and established U.S. financial institutions. If uncertainties in these markets continue, or these markets deteriorate further, or we experience any additional ratings downgrades on our auction rate securities, we may incur additional impairments to our investment portfolio, which could have a negative impact on our results of operations, financial condition and cash flows.

        If market liquidity does not return and we hold these securities until maturity, this may have a material adverse effect on our short-term cash position and could impact future expenditures and result in additional write downs on our auction rate securities, which will impact our profitability.

k.
Our securities are subject to price volatility.

        Stock market trading prices for the securities of pharmaceutical and biotechnology companies, including our own, have historically been highly volatile, and such securities have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. For

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example, during the 12-month period ended December 31, 2008, the price of our Common Shares ranged from a low of $6.65 to a high of $14.90 on the New York Stock Exchange ("NYSE").

l.
Our failure to comply with applicable environmental laws and regulations worldwide could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares 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.

m.
Rising insurance costs or our inability to obtain insurance could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        The cost of insurance, including insurance for directors and officers, workers' compensation, property, product liability and general liability insurance, may increase in future years. Such insurance may also become unavailable to us. For example, as a result of the recent settlements in a number of legal and regulatory proceedings, we will have exhausted our coverage under our Director and Officer liability insurance for claims reported in respect of our 2002-2004 policy period. Rising insurance costs or the inability to obtain insurance could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline. In response to increased costs, we may increase deductibles or decrease certain coverages to mitigate cost increases. These increases, and our increased risk due to increased deductibles and reduced coverages, could have a material adverse effect on our business, financial condition and results of operations.

n.
We are exposed to risks if we are unable to comply with laws and future changes to laws affecting public companies, including the Sarbanes-Oxley Act of 2002 ("SOX"), and also to increased costs associated with complying with such laws.

        Any future changes to the laws and regulations affecting public companies, as well as compliance with existing provisions of SOX in the U.S. and Part XXIII.1 of the Securities Act (Ontario), R.S.O. 1990, c. S.5 (the "Ontario Securities Act") and related rules and applicable stock exchange rules and regulations, may cause us to incur increased costs as we evaluate the implications of new rules and respond to new requirements. Although we are currently exempt from certain requirements under the U.S. securities laws and applicable U.S. stock exchange rules and regulations due to our status as a foreign private issuer, if our status changes, we may be subject to additional requirements, which may also cause us to incur such an increase in costs. Delays, or a failure to comply with any new laws, rules and regulations that apply to us, could result in enforcement actions, the assessment of other penalties and civil suits. New laws and regulations could make it more expensive for us under indemnities we provide to our officers and directors and could make it more difficult for us to obtain certain types of insurance, including liability insurance for directors and officers; as such, we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on the Board of Directors or as officers. We may be required to hire additional personnel and

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utilize additional outside legal, accounting and advisory services — all of which could cause our general and administrative costs to increase beyond what we currently have planned. We are continuing to evaluate and monitor developments with respect to these laws, rules and regulations, and we cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

        We are required annually to review and report on the effectiveness of our internal control over financial reporting in accordance with applicable securities laws. The results of this review are reported in this Annual Report on Form 20-F and in our Management's Discussion and Analysis of Results of Operation and Financial Condition ("MD&A"). Our registered public accounting firm is also required to report on the effectiveness of our internal control over financial reporting.

        If we fail to maintain effective internal controls over our financial reporting, there is the possibility of errors or omissions occurring or misrepresentations in our disclosures which could have a material adverse effect on our business and financial condition and the value of our Common Shares.

o.
We rely on third parties to provide us with services in connection with the execution of our business.

        We outsource a number of commercial functions to unaffiliated third parties. For example, as part of the U.S. commercialization of Zovirax®, we entered into a service agreement with Publicis Selling Solutions, Inc. ("PSS") to promote Zovirax® to physicians in the U.S. This transition of the Zovirax® promotional services from Sciele Pharma, Inc. ("Sciele") (our prior promoter of Zovirax® to U.S. physicians) to PSS may not be successful and we may encounter difficulties during the remainder of the transition process. Services provided by third parties as a part of outsourcing initiatives could be interrupted as a result of many factors, such as force majeure events or contract disputes, and any failure by these third parties to provide us with these services on a timely basis, or at all, could result in a disruption of our business.

p.
Our quorum requirement for shareholders' meetings is high and could impact our ability to convene shareholders' meetings and effect changes to our business and operations.

        Our by-laws currently provide that quorum for a meeting of our shareholders is 51% of our issued and outstanding Common Shares. Failure to achieve quorum for our shareholders' meetings may limit our ability to effect changes to our business and operations where shareholder authorization is required. Moreover, we may be required to incur additional costs and expense in order to apply to a court to have our shareholder quorum reduced or our corporate actions validated. This could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

II.    NATURE OF OUR INDUSTRY AND OUR BUSINESS

1.     Pharmaceutical Industry Risks

a.
The pharmaceutical industry is highly competitive and is subject to rapid and significant technological change, which could render our technologies and products obsolete or uncompetitive.

        The pharmaceutical industry is highly competitive and is subject to rapid and significant technological change that could render certain of our products obsolete or uncompetitive. Many of our competitors are conducting research and development activities in therapeutic areas targeted by our products and our product development candidates. The introduction of competitive therapies as alternatives to our existing products may negatively impact our revenues from those products, and the introduction of products that directly compete with products in development could dramatically reduce the value of those development projects or chances of successfully commercializing those products, which could have a material adverse effect on our long-term financial success. For example, our Legacy Products (as defined below under Item 4.B, "Information on the Company — Business Overview — Priority Markets") face competition from conventional forms of drug delivery and from controlled release drug-delivery systems developed, or under development, by other companies.

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        We compete with companies in North America and internationally, including major pharmaceutical and chemical companies, specialized contract research organizations, research-and-development firms, universities and other research institutions. Many of our competitors have greater financial resources and selling and marketing capabilities, greater experience in clinical testing and human clinical trials of pharmaceutical products and greater experience in obtaining FDA, TPD and other regulatory approvals than we do. In addition, some of our competitors may have lower development and manufacturing costs. Our competitors may succeed in developing technologies and products that are more effective or less expensive to produce or use than any that we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, 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 Shares to decline. For more information on the effect of changes in the industry on our business, see Item 4.B, "Information on the Company — Business Overview — Transitioning Pharmaceutical Industry".

b.
We are 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 results, or is alleged to have resulted, in 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. As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase. Product liability claims, regardless of their merits or their ultimate outcomes, are costly, divert management's attention and may adversely affect our reputation and demand for our products and may result in significant damages.

        Although we currently carry product liability insurance that we believe is appropriate for the risks that we face, our 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. An inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the growth of our business or the number of products we can successfully market. Our obligation to pay indemnities, the withdrawal of a product following complaints, or a product liability claim could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

c.
We may experience reductions in the levels of reimbursement for or acceptance of pharmaceutical products by governmental authorities, health maintenance organizations ("HMOs") or other third-party payors. Any such reductions could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Various governmental authorities and private health insurers and other organizations, such as HMOs, managed care organizations ("MCOs") and provincial formularies provide reimbursement to consumers for the cost of certain pharmaceutical products. Our ability to successfully commercialize our products and product candidates — even if FDA or TPD approval is obtained — and the demand for our products depend, in part, on the extent to which reimbursement is available from such third-party payors.

        Third-party payors are increasingly becoming less willing to reimburse for medications which offer primarily convenience to and greater compliance among patients (such as once-daily formulations) and are focusing more on products that offer clinically meaningful benefits. If we are not able to execute our New Strategic Focus, which we believe is designed to address this shift, it could have a material adverse effect on our business, financial condition and results of operations.

        Third-party payors increasingly challenge the pricing of pharmaceutical products. In addition, the trend toward managed healthcare in the U.S., the growth of organizations such as HMOs and MCOs and legislative proposals to reform healthcare and government insurance programs, could significantly influence the purchase of pharmaceutical products, resulting in lower prices and/or a reduction in product demand. Such cost-containment measures and healthcare reform could affect our ability to sell our products at viable prices, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

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        Uncertainty exists about the reimbursement status of newly approved pharmaceutical products. Reimbursement in the U.S., Canada or foreign countries may not be available for some of our products. Any reimbursement granted may not be maintained, or limits on reimbursement available from third parties may reduce the demand for, or negatively affect the price of, those products. We are also unable to predict if additional legislation or regulation impacting the healthcare industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business. Any reimbursement may be reduced in the future, perhaps to the point that market demand for our products declines. Such decline could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        A number of legislative and regulatory proposals aimed at changing the healthcare system, and changes in the levels at which pharmaceutical companies are reimbursed for sales of their products, have been proposed. In addition, as a result of the focus on healthcare reform in connection with the new presidential administration in the U.S., there is risk that Congress may implement changes in laws and regulations governing healthcare service providers, including measures to control costs or reductions in reimbursement levels, which may have an adverse impact on our business. While we cannot predict when or whether any of these proposals will be adopted, or the effect these proposals may have on our business, the pending nature of these proposals, as well as the adoption of any proposal, may exacerbate industry-wide pricing pressures and could have a material adverse effect on our business, financial condition and results of operations.

        Changes to Medicare, Medicaid or similar governmental programs — or the amounts paid by those programs for our services — may adversely affect our earnings. These programs are highly regulated and subject to frequent and substantial changes and cost-containment measures. In recent years, changes in these programs have limited and reduced reimbursement to providers.

d.
We may incur significant liability if it is determined that we are promoting the "off-label" use of drugs.

        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, TPD or other applicable regulatory agencies. Physicians may prescribe drug products for off-label uses, and such off-label uses are common across medical specialties. Although the FDA, TPD and other regulatory agencies do not regulate a physician's choice of treatments, the FDA, TPD and other regulatory agencies do restrict communications by pharmaceutical companies or their sales representatives on the subject of off-label use. The FDA, TPD and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. 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. Notwithstanding the regulatory restrictions on off-label promotion, the FDA, TPD and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional speech concerning their products. Although we believe that all of our communications regarding all of our products are in compliance with the relevant regulatory requirements, the FDA, TPD or another regulatory authority may disagree, and we 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. Our distribution partners may also be the subject of regulatory investigations involving, or remedies or sanctions for, off-label uses of products we have licensed to them, which may have an adverse impact on sales of such licensed products, which may, in turn, have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

e.
An unfavourable audit result for our Contract Research Division business could result in an adverse effect on that business.

        Our CRD business provides us and other pharmaceutical companies with a broad range of Phase I and Phase II clinical-research services. Our CRD business is subject to strict regulation by Canadian governmental authorities. These regulations may change and these governmental authorities periodically conduct audits. The outcome of such an audit, should it be unfavorable, could result in an adverse effect on our CRD business including, without limitation, costs to remediate deficiencies, reputational impact of an adverse audit and our ability to solicit work for our CRD business.

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Item 4. Information on the Company

A.    History and Development of the Company

        Biovail Corporation 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 Corporation was continued under the Canada Business Corporations Act (the "CBCA") effective June 29, 2005. For additional information with respect to material developments in our Company's business see Item 4.B, "— Business Overview — New Strategic Focus", below.

        Our principal executive office is located at 7150 Mississauga Road, Mississauga, Ontario, Canada, L5N 8M5, telephone (905) 286-3000. Our agent for service in the U.S. is CT Corporation System, located at 111 Eighth Avenue, New York, New York, 10011, telephone number (212) 590-9331.

        Descriptions of our principal capital expenditures and divestitures and descriptions of acquisitions of material assets are found in our MD&A and in the notes to our consolidated financial statements included elsewhere in this annual report.

B.    Business Overview

General Overview

        We are a specialty pharmaceutical company. Beginning in the early 1990s, we applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines. Since that time, we have been engaged in the formulation, clinical testing, registration, manufacture and commercialization of pharmaceutical products. The primary markets for our products are the U.S. and Canada.

        Our business growth since the 1990s was driven by the development and large-scale manufacturing of pharmaceutical products incorporating our oral drug-delivery technologies. The application of these technologies to existing orally administered medications provided us, together with our partners, with the opportunity to extend product lifecycles through the development of novel formulations. Our successes in this regard include our products: Wellbutrin® XL, Ultram® ER and Cardizem® LA. While we continue to maintain a broad portfolio of proprietary drug-delivery technologies (including controlled release, enhanced and rapid absorption, taste masking and oral disintegration technologies), these technologies no longer represent our core business model.

        Over the last several years, there have been significant changes in the environment for oral controlled-release products, including increased sophistication and enhanced competition from manufacturers of generic drugs that compete with our products, an industry-wide slowdown in new drug approvals and increasing financial pressure on third-party reimbursement policies. This changing environment required us to reassess our core business model, which culminated in a comprehensive review in early 2008 of all aspects of our business, in an effort to identify and evaluate alternatives to enhance shareholder value. The result of that review was the development of our New Strategic Focus — one that targets the development of pharmaceuticals that address unmet medical needs in specialty central nervous system ("CNS") disorders such as epilepsy, Parkinson's disease and multiple sclerosis. We believe we are well-positioned for the shift in focus to specialty CNS, having regard to our strong balance sheet and our proven expertise in formulation, clinical development, regulatory affairs, manufacturing and marketing of prescription pharmaceutical products.

Transitioning Pharmaceutical Industry

Industry Overview

        IMS, a provider of information solutions to the pharmaceutical industries, including market intelligence and performance statistics, reports that the total U.S. prescription drug market was approximately $287.6 billion in 2008. The Canadian pharmaceutical market was valued by IMS at C$18.6 billion in 2008.

        The pharmaceutical industry, and the companies that comprise it, have experienced significant changes over the past several years. For example, based on IMS data, during the period 2009 to 2012, branded products with annual sales in excess of $68.9 billion will lose patent protection. In 2008, the loss of sales for branded products

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due to the introduction of generic competition is estimated to be $13.0 billion. To replace these revenues and reduce their dependence on internal development programs, large pharmaceutical companies often enter into strategic licensing arrangements with specialty pharmaceutical companies and/or augment their product pipelines by acquiring smaller pharmaceutical companies with development-stage pipeline programs and technologies. Large pharmaceutical companies also employ strategies to extend brand lifecycles and exclusivity periods and to establish product differentiation.

        In addition, factors such as increased enrollment in HMOs in the U.S., growth in managed care, an aging and more health-aware population, introduction of several major new drugs that bring significant therapeutic benefits, and increased use of new marketing approaches such as direct-to-patient advertising have forced many pharmaceutical companies to adjust their strategies. There has also been an industry-wide slowdown in the approval of new drugs, particularly those providing only advances in convenience and patient compliance. Furthermore, the pharmaceutical industry is subject to ongoing political pressure to contain the growth in spending on drugs and to expedite and facilitate bioequivalent (generic) competition to branded products. In the U.S., changes to Medicare prescription drug coverage have recently been implemented, and there are increasing financial pressures on the reimbursement policies of third-party payors, including incentives to pharmacies to substitute generics for branded products when available. Further, there is a risk that the new presidential administration in the U.S. could lead to further constraints on pharmaceutical pricing.

Transitioning of the Company's Business

        The environment described above, combined with the increasing technological sophistication of a number of generic pharmaceutical manufacturers, has reduced the average effective sales-exclusivity period for oral controlled-release products to only three to five years, down from the historic sales-exclusivity period of approximately five to seven years. This situation is exacerbated by the increasing number of generic manufacturers willing to launch their products "at risk" — a term used to describe a product launch that occurs prior to the final resolution of patent-infringement litigation. It is also becoming increasingly difficult to establish and defend intellectual property rights, particularly as they relate to reformulated or combination products.

        Our New Strategic Focus on specialty CNS was developed to address these challenges and to position Biovail for continued success in the new regulatory and market environment. By focusing our development and commercialization efforts on products that address unmet medical needs in specialty CNS disorders, we believe our products are likely to receive favourable formulary coverage, which will facilitate higher prescription volumes, favourable pricing and reimbursement acceptance and, consequently, higher revenues. By targeting new chemical entities ("NCEs") or new indications and/or geographies for existing products, we believe we may also enhance the intellectual-property protection for our products, potentially extending their life cycles beyond five years.

        Our New Strategic Focus provides us with an opportunity to leverage our existing technologies and capabilities, including formulation, clinical development, regulatory affairs, manufacturing and marketing, as well as other assets, such as our current product pipeline.

        With the adoption of our New Strategic Focus, our drug delivery technologies, while still important, are now no longer at the core of our business model. Our existing oral controlled-release products and our other commercial products provide and we expect will continue to provide us with a consistent source of revenue to support the investment in our New Strategic Focus. Our drug delivery technologies will remain and may allow for leveraging opportunities for future specialty CNS programs; however, our core business focus for the future will be unmet medical needs in specialty CNS disorders.

New Strategic Focus

Adoption of New Strategic Focus

        In January 2008, the Board of Directors established an independent committee of directors (the "Independent Committee") for the purpose of, among other things, considering strategic alternatives to enhance shareholder value. Following a review of a wide range of alternatives, the Independent Committee

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determined that the preferred course of action to enhance shareholder value was to explore operational strategies that would allow our Company to create sustainable growth and more effectively capitalize on our core capabilities. Under the Independent Committee's direction, and with financial advice from Morgan Stanley & Co. and management consultant support from a global consulting company with extensive experience in the pharmaceutical industry, we prepared the New Strategic Focus. The New Strategic Focus is based on leveraging existing capabilities in drug development and formulation for the development of products targeted towards specialty CNS disorders, with a core focus on neurological disorders.

        The New Strategic Focus was reviewed by the Independent Committee and then recommended for approval to the full Board of Directors. At its meeting in May 2008, the Board of Directors considered and unanimously approved the New Strategic Focus.

Specialty CNS Market Overview

        According to IMS, CNS disorders represent an approximately $70 billion market globally (approximately $45 billion in the U.S.), with growth expected to be in the low- to mid-double digits in many niche specialty CNS markets, such as those within the markets of Parkinson's disease and multiple sclerosis. Specialty CNS spans several sub-areas, including epilepsy, Parkinson's disease, Huntington's disease, amyotrophic lateral sclerosis (ALS, or Lou Gehrig's disease), Alzheimer's and multiple sclerosis, with a largely overlapping prescribing community, consisting primarily of neurologists. Since unmet medical needs are high within these markets, we believe financial pressures on reimbursement and reliance on third-party payors is less intense. Further, as many specialty CNS products target smaller patient populations, we believe competition from large multinational pharmaceutical companies may be less severe. Based on available industry data, the niche specialty CNS market also features a relatively small audience of experts and physicians, with approximately 30 highly-regarded opinion-leaders, 200 highly-regarded clinicians and local opinion influencers, 2,000 high-volume prescribers and 11,000 total prescribers. This allows for the deployment of a relatively small, specialized commercial sales organization, another objective of our New Strategic Focus.

Biovail and CNS

        We believe that the current state of the U.S. pharmaceutical market is a challenging one for small- to mid-sized pharmaceutical companies, and that our new business model may help us achieve our goals in this challenging environment. Our New Strategic Focus targets specialty CNS disorders where significant unmet medical needs exist. We believe that we are well-positioned to successfully capitalize on this opportunity, due in part to our unique expertise and successful track record in finding incremental value in existing drugs. We intend to capitalize on this expertise, together with our experience in clinical development, to build distinctive depth and expertise in targeted disease states and therapies in the specialty CNS therapeutic area of focus. Our long-term goal is to become the premiere pharmaceutical company in specialty CNS disorders and the partner of choice for biotechnology and emerging pharmaceutical companies with active development programs in this therapeutic area.

        In the long term, we believe we must create growth and long-term value by building and developing our specialty CNS pipeline, and establishing more efficient commercialization pathways through which to bring products to market, including through the development or acquisition of our own specialty sales force.

        We have already made significant progress in developing our specialty CNS pipeline, having acquired North American license rights to our first specialty CNS product, tetrabenazine tablets (known as Xenazine® in the U.S. and Nitoman® in Canada), in September 2008. Xenazine® is approved in the U.S. for the treatment of chorea associated with Huntington's disease and Nitoman® is approved in Canada to treat a broader range of hyperkinetic movement disorders. As described in more detail below, Xenazine® is the first and only FDA-approved treatment for any Huntington's disease-related symptom and became commercially available to U.S. specialist physicians in November 2008 through our marketing partner, Ovation. See "— Acquisitions of Businesses" below.

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Development Strategy for Specialty CNS

Product Origination and Business Development

        Our product origination strategy is designed to position us as a partner of choice in a market characterized by numerous small- and mid-sized specialty CNS originator companies. Our product origination strategy to enhance our product pipeline will include efforts to in-license or acquire specialty CNS compounds in late-stage development, with a particular interest in orphan drug categories and other specialty therapies targeting smaller patient and specialty physician populations, typically designed for fast-track regulatory review and offering the prospect of better pricing, favourable reimbursement and longer exclusivity. Our business development efforts within specialty CNS cover broad geographies and include public, private, academic and government sources.

        We are targeting the in-licensing or acquisition of four to five specialty CNS products through 2012. More specifically, we are targeting products with expected peak annual revenues of $100 million to $300 million and with at least five years of market exclusivity, where we believe competition from large pharmaceutical companies may be more limited. We are actively pursuing the in-licensing or acquisition of a number of product opportunities and are in varying stages of negotiations with a number of pharmaceutical companies with development-stage and/or commercial products in these markets. As described above, the acquisition of Xenazine®/Nitoman® significantly accelerates our timeline for the realization of revenues from in-licensed or acquired specialty CNS products.

        In contrast to our former reformulation-focused business model, we will look to in-license or acquire NCEs. To mitigate the risk profile associated with NCEs, we will focus our business development efforts on (a) late-stage (Phase II or Phase III) development compounds, (b) products that are approved in other countries, but not in the U.S. or Canada, and (c) medical compounds that are already FDA approved, but can be repurposed in a new indication in an economically viable way. We may also selectively, on an opportunistic basis, pursue earlier-stage opportunities that address unmet medical needs in specialty CNS disorders. Our goal is to build a robust and sustainable pipeline of products at varying stages of development that will allow us to support sustainable revenue growth.

        Whenever an opportunity is identified, we will apply rigorous financial and scientific analysis prior to making an investment decision. We also intend to pursue opportunities in adjacent therapeutic areas, such as in supportive care indications (for example, fatigue associated with multiple sclerosis). Where appropriate, we will continue to apply our drug-delivery and formulation capabilities, prioritizing opportunities to enhance in-licensed or acquired specialty CNS products. We may pursue traditional reformulation opportunities, but we will do so selectively, and only if those opportunities meet stringent financial and commercialization requirements. Our current pipeline includes a number of products that fit into this category, including BVF-045 and BVF-324 (described below).

Research and Development

        We are targeting an R&D investment of $600 million from 2008 to 2012, which, in addition to primary R&D, includes in-licensing and milestone payments, but excludes acquisition costs (such as those incurred in connection with the acquisition of Prestwick Pharmaceuticals Inc. ("Prestwick")). We believe this budget is sufficient to in-license or acquire four to five specialty CNS products in late-stage development by 2012.

        In addition to our efforts to build a robust pipeline of specialty CNS opportunities, we continue to work on the development of a number of pipeline products that originated from our prior business model. These include BVF-045, a combination product incorporating Aplenzin™ (bupropion hydrobromide) and an undisclosed selective serotonin reuptake inhibitor (an "SSRI"). By combining two different classes of anti-depressants, BVF-045 provides a single-tablet option for depression that targets all three neurotransmitters believed to play a role in the disease. We are pursuing a development partner to share the risks and costs associated with the clinical development of BVF-045. Another of our pipeline programs is BVF-324, an undisclosed product for the treatment of a prevalent sexual dysfunction. We currently anticipate initiating Phase III studies for BVF-324 in Europe in mid-2009 and are seeking a commercialization partner for the European market.

        With respect to generic pharmaceuticals, our R&D efforts have focused on difficult-to-manufacture products, where competition is more limited (relative to immediate-release products) and, consequently,

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commercial pricing and gross margins are potentially higher. In 2008, we submitted three abbreviated new drug applications ("ANDAs") to the FDA for generic formulations of Effexor® XR (extended-release venlafaxine tablets), Tricor® (fenofibrate tablets) and Seroquel® XR (extended-release quetiapine tablets). We do not currently have any other ANDA programs in our development pipeline. We intend to selectively add such programs only if strict financial and commercialization criteria are met.

        In 2008, our R&D expenses for internal research and development programs were $69.8 million, a 31% decrease as compared to our R&D expenses in 2007. This decrease is a result of the reorientation of our product-development efforts, and the subsequent termination of several pipeline programs, following the adoption of our New Strategic Focus. In 2006 and 2007, during which time we pursued a number of reformulation-type opportunities, our R&D expenses for internal research and development programs were $77.8 million and $100.6 million, respectively. Until we in-license or acquire new specialty CNS products, or initiate Phase III programs for BVF-324, we expect our quarterly R&D expenses to track below historical levels, reflecting reduced project spending and the closure of our R&D facility in Ireland.

Strengthened In-House Specialty CNS Expertise

        In connection with our New Strategic Focus, we have taken steps to significantly strengthen our scientific team and build upon our significant existing expertise in CNS disorders. In November 2008, we appointed a new Chief Scientific Officer, Dr. H. Christian Fibiger. Dr. Fibiger, a Fellow of the American College of Neuropsychopharmacology, was previously Chief Scientific Officer of MedGenesis Therapeutix Inc., a privately held biopharmaceutical company based in Victoria, British Columbia. From 2003 to 2007, Dr. Fibiger served as Vice-President and Global Therapeutic Area Head of Neuroscience for Amgen Inc. Prior to that, for five years he served as Vice-President of Neuroscience Discovery Research and Clinical Investigation at Eli Lilly & Co. From 1972 to 1998 Dr. Fibiger was Professor and Head of the Division of Neurological Sciences and Chair of the University Graduate Program in Neuroscience at the University of British Columbia.

        Dr. Fibiger has received numerous honors for his research contributions, including the Clark Institute Prize in Psychiatry, the Heinz Lehmann Award of the Canadian College of Neuropsychopharmacology, the Killam Research Prize, the Gold Medal in Health Sciences from the Science Council of British Columbia and the Tanenbaum Distinguished Scientist Award in Schizophrenia Research. Dr. Fibiger received his Ph.D. in Psychopharmacology from Princeton, has authored or co-authored over 400 publications and has made numerous contributions to neuroscience research.

        Dr. Fibiger will be responsible for overseeing the development of our product pipeline. He will also oversee the establishment of a new Scientific Advisory Board, which will provide guidance and input on our pipeline selection and development efforts.

        We also appointed Dr. Robert Butz as Vice-President, Medical and Scientific Affairs in June 2008. Dr. Butz brings over 30 years of experience in the pharmaceutical industry and has been instrumental in the development of numerous CNS programs. Before joining Biovail, Dr. Butz was employed by MDS Pharma Services, initially as Vice-President Global Regulatory Affairs and then as Vice-President & General Manager of that company's Development & Regulatory business. Prior to that, Dr. Butz's biotech career included positions as Co-Founder, President and Chief Operating Officer of Polymerix Corporation; Co-Founder, President and Chief Executive Officer of Copernicus Therapeutics; President and Chief Operating Officer of Sensus Drug Development Corporation; and Vice-President Development of Amylin Pharmaceuticals. Before that, Dr. Butz served as the first Vice-President Clinical Operations, and as Vice-President Strategic Business Research at Quintiles Transnational Corporation. Prior to that, Dr. Butz spent 11 years in basic and clinical research and development positions at Burroughs Wellcome & Co.

        Dr. Butz belongs to the American Society of Clinical Pharmacology and Therapeutics and the American Society of Pharmacology and Experimental Therapeutics and, before joining Biovail, chaired the Ethics and Clinical Practice Committee of the Association of Clinical Research Organizations. Dr. Butz also belongs to the Regulatory Affairs Professionals Society, the American Association of Pharmaceutical Scientists, and the Drug Information Association, where he has served on the Steering Committees for the Americas and for Biotechnology. Dr. Butz received an A.B. in Biology from Kenyon College, a Ph.D. in Pharmacology from Duke University, and holds nine U.S. patents in drug delivery and bioanalytical technology.

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        In August 2008, we further strengthened our in-house CNS expertise with the appointment of Dr. Neil M. Sussman as Vice-President, Neurologic and Psychiatric Development of Biovail Technologies, Ltd. ("BTL"). Prior to joining Biovail, Dr. Sussman was President of NMS Neuro Consulting, specializing in therapeutic areas such as dementia, mania, neuroprotection, multiple sclerosis and Parkinson's disease. Before that, Dr. Sussman was Senior Director, CNS Clinical Research of Kyowa Pharmaceutical, overseeing development-stage products in Parkinson's disease. Earlier in his career, Dr. Sussman held positions of increasing responsibly at Marion Merrell Dow; Abbott Laboratories, where he served as Venture Head, Neurotherapeutics; Bristol-Myers Squibb's CNS Clinical Research division; and Forest Laboratories, Inc. ("Forest"), as Director, CNS Clinical Development, where he was involved in the development of escitalopram (Lexapro). He also spent four years as Director, Medical Affairs with PRA International, a global clinical research organization.

        Dr. Sussman received his medical training at New York Medical College and completed his Neurology Residency at Thomas Jefferson University in Philadelphia. His post-graduate training includes Fellowships in Neurology, and Epilepsy and Electroencephalography. He is certified by the American Board of Psychiatry and Neurology, and was on the faculty of the Department of Neurology at the University of Pennsylvania, Medical College of Pennsylvania and Yale University School of Medicine, and he is a Fellow in the American Academy of Neurology. Dr. Sussman has co-authored over 30 peer-reviewed original papers in the area of CNS disorders.

Clinical, Medical and Regulatory Affairs

        We are implementing our New Strategic Focus using carefully designed strategies relating to clinical, medical and regulatory affairs. In this regard, our experienced in-house specialty CNS experts in clinical research and medical affairs are working to further enhance peer relationships with opinion leaders, on designing critical clinical trials, and in support of sourcing activities and due diligence. We will continue to rely heavily on contract research organizations for clinical trial execution, but it is anticipated that in-house clinical research expertise will be important to oversee matters such as physician recruitment and site selection.

Specialty Sales Force

        As part of our New Strategic Focus, at the appropriate time, we intend to build or acquire our own specialty sales force, which will promote our products directly to U.S. specialist physicians. Beyond allowing us to maintain a greater share of the economics of our product portfolio, an in-house sales force will provide strategic flexibility with respect to commercialization. At present, we are dependent on commercial partners to promote our products in the U.S.

Competitive Strengths

        The pharmaceutical industry is highly competitive. Through the 1990s, our broad portfolio of drug-delivery capabilities — among the broadest in the industry — provided us with the flexibility to pursue a wider range of opportunities in reformulating drugs relative to our peers. In recent years, however, as our competitors have become increasingly sophisticated, our capabilities are no longer as unique as they once were. With our New Strategic Focus, our drug-delivery technologies are now no longer at the core of our business model, but rather remain a valuable drug development resource that may be leveraged in future specialty CNS programs.

        As we implement our New Strategic Focus, we are leveraging a number of core strengths, including our strong balance sheet, which is supported by the cash flows generated by our existing commercial products; our in-house specialty CNS expertise, which has been recently bolstered by the additions of Dr. Christian Fibiger, Dr. Robert Butz and Dr. Neil Sussman; our strong track record of success in regulatory affairs and clinical development, with over 25 drugs approved and/or commercialized in North America; our manufacturing network, capable of large-scale commercial production, which allows us to maintain, where desired, control of the supply chain of our products and to realize a higher proportion of our products' economics; and our demonstrated ability to effectively market pharmaceuticals in Canada through our Biovail Pharmaceuticals Canada ("BPC") sales force.

        We have capabilities in many aspects of the drug-development process, including formulation and development of oral drugs, clinical testing, regulatory affairs, manufacturing, marketing (in Canada) and

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distribution. This integrated approach results in operational synergies, increased flexibility and enhanced cost efficiencies.

        Given the current global financial environment (including the economic downturn and the significantly more limited access to credit), we are seeing numerous and unique opportunities to in-license or acquire specialty CNS products and companies that might otherwise not be available to us. Many of the products we are screening belong to firms that are funded by venture capitalists or other private investors who are no longer willing and/or able to continue to provide financing. Many of these companies are development-stage companies that are not yet profitable and, in some cases, are facing the prospect of running out of cash prior to the completion of their product-development plans. Accordingly, these companies are more eager to discuss product-licensing or acquisition arrangements than they would have been only a year ago. We believe that companies that are financially strong, like Biovail, are well positioned to succeed in this environment.

Infrastructure and Cost Rationalization Strategy

        As previously noted, the New Strategic Focus was unanimously approved by the Board of Directors. In support of the implementation of our New Strategic Focus, we have also undertaken other activities that are intended to promote efficiency in our new business model, to significantly reduce our cost structure to better align expenses with current projected revenues and to free up capital that can be deployed in support of our new specialty CNS focus.

Cost Reductions

        In support of the implementation of our New Strategic Focus, we have undertaken the following infrastructure and cost rationalization actions:

    1.
    Consolidation of manufacturing resources through the closure of our two Puerto Rico manufacturing facilities and the transfer of certain manufacturing and packaging processes to our Steinbach, Manitoba facility. This component of the plan is intended to improve operating efficiency, reduce infrastructure costs and increase available capital. The ongoing process to wind down operations at our two Puerto Rico manufacturing facilities remains on schedule, and we anticipate that the facilities will be fully closed in 2010. We have begun the sale process relating to both of these facilities (See "— Property, Plants and Equipment — Manufacturing Facilities" below).

    2.
    Consolidation of our pharmaceutical sciences resources through the closure of our R&D facility in Dublin, Ireland and the consolidation of internal research and development program management at our facility in Chantilly, Virginia. This consolidation has reduced overhead and ongoing infrastructure costs. The closure is complete and all affected employees have been separated. We have initiated the sale process and currently expect to complete a sale transaction for the Ireland facility by 2010 (See "— Property, Plants and Equipment — Other Facilities" below). We expect that the closure of our R&D facility in Dublin along with the closure of our two Puerto Rico manufacturing facilities described above, will result in a reduction in total head count of approximately 300 employees or approximately 20% of our total workforce.

    3.
    Rationalization of general and administrative expenses by reducing legal expenses relating to legacy litigation and regulatory issues for the period from 2001 to March 2004. In furtherance of this plan, since December 2007, we have settled six legacy litigation/regulatory matters: (a) the SEC complaint in connection with our accounting and financial disclosure practices for the period of 2001 to March 2004; (b) the U.S. Attorney's Office investigation regarding the 2003 promotional and marketing activities surrounding the commercial launch at Cardizem® LA; (c) the securities class action lawsuit in the U.S. relating to statements made by the Company and certain former officers and directors between February 7, 2003 and March 2, 2004; (d) the Canadian securities class action lawsuit in respect of similar issues alleged in the U.S. class action; (e) the litigation with former Banc of America Securities LLC ("BAS") analyst Jerry H. Treppel; and (f) the investigation by the OSC related to specific accounting and financial disclosure practices that occurred between 2001 and March 2004.

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        We expect that the closure of our Puerto Rico and Ireland facilities and the implementation of other operating-efficiency initiatives, will result in total charges of approximately $80 million to $100 million, of which $72.8 million has been recognized in 2008 with the remainder to be recognized over future quarters (of which $20 million to $40 million is expected to comprise the cash component). We anticipate that these efficiency initiatives, once fully implemented, will result in annual savings of between $30 million to $40 million.

Sale of Non-Core Assets

        We are also in the process of divesting and monetizing certain non-core assets, and we continue to target approximately $100 million in total proceeds from this action. Through the end of 2008, we have realized approximately $25.4 million of this goal, including through the sale of our interest in Financiere Verdi, formerly Ethypharm, and a portion of our equity stake in Depomed Inc. We are also pursuing the sale/divestiture and/or monetization of other assets including our manufacturing facilities in Puerto Rico, our R&D facility in Ireland and our corporate headquarters in Mississauga, Ontario. For additional details, see Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis — Recent Developments — Disposal of Non-Core Assets" and "Operating and Financial Review and Prospects — Management's Discussion and Analysis — Recent Developments — Restructuring".

Priority Markets

        The primary markets for our products are the U.S. and Canada. According to IMS, the U.S. is the world's largest pharmaceutical market with total prescription spending of approximately $287.6 billion in 2008. While our business focus is primarily to develop products for the U.S. and Canadian markets, we have pursued opportunities to more fully exploit the commercial potential of our products by having them launched in new geographic markets through strategic marketing partners with expertise in their local markets.

        The following table summarizes our revenues by category of activity and geographic market for each of the last three fiscal years (all amounts expressed in thousands of U.S. dollars):

 
  2008   2007   2006  
 
  Product
Sales
  R&D   Royalty
and Other
  Total   Product
Sales
  R&D   Royalty
and Other
  Total   Product
Sales
  R&D   Royalty
and Other
  Total  

Canada

    77,153     11,508     291     88,952     68,811     5,946     294     75,051     82,513     7,344     63     89,920  

United States and Puerto Rico

    637,395     12,848     6,247     656,490     732,235     15,656     7,593     755,484     938,765     11,739     15,708     966,212  

Other countries

            11,736     11,736         2,227     10,056     12,283         2,510     9,080     11,590  
                                                   

    714,548     24,356     18,274     757,178     801,046     23,829     17,943     842,818     1,021,278     21,593     24,851     1,067,722  
                                                   

        Within the U.S. and Canadian markets, our commercial portfolio includes antiviral products and products that address cardiovascular disease, CNS disorders and pain management.

Cardiovascular Disease

        Our current portfolio of commercial products includes a number of cardiovascular products, for the treatment of hypertension, angina, congestive heart failure and acute myocardial infarction. Our U.S. commercial portfolio of cardiovascular therapeutic products includes Cardizem® LA (promoted by Kos Pharmaceuticals, Inc. ("Kos")) (hypertension/angina), Cardizem® CD (hypertension/angina), Tiazac® (hypertension/angina), Vasotec® (hypertension/congestive heart failure), Vaseretic® (hypertension/congestive heart failure), Isordil® (angina), and a number of generic pharmaceutical products. In Canada, our cardiovascular products include Cardizem® CD (hypertension/angina), Tiazac® XC (hypertension), Monocor® (hypertension) and Retavase® (acute myocardial infarction).

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CNS Disorders

        We also have a number of products that address CNS disorders. Our U.S. commercial portfolio in these markets includes Wellbutrin XL® (depression), Aplenzin™ (depression), Ativan® (anxiety) and Xenazine® (Huntington's chorea). In Canada, our CNS products include Wellbutrin® SR (depression), Wellbutrin® XL (depression), Zyban® (smoking cessation) and Nitoman® (hyperkinetic movement disorders, including Huntington's chorea).

Pain

        We also have a presence in the U.S. pain market through Ultram® ER, a once-daily formulation of tramadol hydrochloride developed by us and marketed by PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc. (formerly Ortho-McNeil, Inc.). Ultram® ER (chronic pain), which is indicated for moderate to moderately severe chronic pain, is the first extended-release tramadol product available in the U.S. market. In Canada, we market our extended-release tramadol under the brand name Ralivia™ (chronic pain of moderate to severe intensity).

Other

        Our commercial portfolio also includes antiviral products that target the herpes market. Zovirax® Ointment (genital herpes) and Zovirax® Cream (herpes labialis/cold sores) are topical antiviral products indicated for genital herpes and cold sores, respectively. Through October 2008, Sciele Pharma, Inc. ("Sciele") promoted this product line to U.S. physicians, but beginning in January 2009, Publicis Selling Solutions, Inc. ("PSS"), a contract sales organization, built a dedicated sales force that began promoting the product line. Within the topical herpes market, Zovirax® held a 74.3% share at the end of 2008. Oral therapeutic products for herpes represent the vast majority of the herpes market, with sales of $2.1 billion in 2008.

        We also have a presence in generic pharmaceutical products in the U.S., an industry valued at $64 billion in 2008, a 7% increase relative to 2007.

        We also own the U.S. rights to a number of branded pharmaceutical products that are not actively promoted, which we refer to as "Legacy Products". These are described further below.

Current Product Portfolio and Product Revenues

        The following table summarizes our product revenues by category for the fiscal years of 2008 and 2007:

 
  Revenues
($000)
   
  % of
Product
Revenues
 
 
  Change
%
 
Product / Product Line
  2008   2007   2008   2007  

Wellbutrin XL® (U.S. and European markets)

    120,745     212,325     (43 )   17     27  

Ultram® ER

    81,875     86,714     (6 )   11     11  

Zovirax®

    150,613     147,120     2     21     18  

Cardizem® LA

    48,002     69,300     (31 )   7     9  

BPC (1)

    70,580     61,889     14     10     8  

Legacy Products

    154,206     136,855     13     22     17  

Generic Products

    83,246     86,843     (4 )   12     11  

Glumetza® (U.S. market)

    1,545         NM          

Xenazine® / Nitoman® (2)

    3,736         NM     1      
                         

Total Product Revenues

    714,548     801,046     (11 )   100 (3)   100 (3)
                       

NM: not meaningful.

(1)
Effective December 1, 2008, BPC assumed the marketing and distribution of Nitoman®.

(2)
Includes Nitoman® sales made prior to December 1, 2008.

(3)
Percentages do not add up to 100 due to rounding.

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        Each of these categories and the products or product lines they include are described in more detail below:

Xenazine® (tetrabenazine)

        Approved by the FDA in August 2008, Xenazine® is indicated for the treatment of chorea associated with Huntington's disease. Huntington's disease is a rare, inherited neurological disorder that is passed from parent to child through a gene mutation. The disease causes a degeneration of specific brain cells that most frequently leads to problems associated with loss of motor control, psychiatric and behavioral symptoms, and cognitive impairment. Chorea is the most visible and perhaps the most disabling of the symptoms faced by people with Huntington's disease. Xenazine® is marketed to U.S. specialist physicians by Ovation's 48-member sales force. Pursuant to a supply-and-distribution agreement, we supply Xenazine® tablets to Ovation for a price based on a variable percentage of the product's annual net sales. For net sales up to $125 million, our supply price will be equal to 72% of net sales. Beyond $125 million, our supply price will be equal to 65% of net sales. At both tiers, we will pay a supply price equal to 50% of net sales to Cambridge. On November 24, 2008, we announced the U.S. commercial availability of Xenazine®.

Wellbutrin® XL (bupropion hydrochloride extended release tablets)

        Launched in the U.S. in September 2003 by GSK, Wellbutrin® XL, an extended-release formulation of bupropion indicated as first-line therapy for the treatment of depression in adults, was well received by U.S. physicians. Pursuant to our manufacturing and supply agreement with GSK, we are entitled to a tiered supply price based on GSK's net sales of Wellbutrin® XL.

        To date, GSK has opted not to launch an authorized generic version ("Authorized Generic") of Wellbutrin® XL. Pursuant to the February 2007 settlement agreement with a number of generic manufacturers, an Authorized Generic version of each strength of Wellbutrin® XL tablets could not be launched for a period of six months following the introduction of the first generic formulation. These six-month periods have expired. Should GSK decide to launch an Authorized Generic in the future, we would be the exclusive manufacturer of the product and would receive fixed contractual supply prices, which are substantially lower than the tiered supply price we receive on sales of Wellbutrin® XL brand product.

        In February 2006, GSK announced that it had submitted applications for regulatory approval of the product in several European markets. In January 2007, GSK announced the first European approval for Wellbutrin® XR in the Netherlands for the treatment of adult patients with major depressive episodes. Since then, Wellbutrin® XR has been launched in a number of other countries, including Austria, Belgium, Estonia, Germany, Greece, Iceland, Italy, Lithuania, Malta, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland and South Korea. We manufacture and supply Wellbutrin® XR to GSK at fixed contractual supply prices, which are substantially lower than the tiered supply price we receive on sales of Wellbutrin XL® in the U.S.

Ultram® ER (tramadol hydrochloride extended-release tablets)

        Launched in the U.S. in February 2006 by OMI (now known as PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.), a Johnson & Johnson company, Ultram® ER is an extended-release formulation of tramadol hydrochloride indicated for the management of moderate to moderately severe chronic pain in adults who require around-the-clock treatment of their pain for an extended period of time. According to IMS, over 26 million prescriptions were dispensed for tramadol-based medicines in the U.S. in 2008. Ultram® ER captured 4.8% of all tramadol-based prescriptions in the U.S. in 2008. In January 2009, a second once-daily formulation of tramadol was approved for sale in the U.S. We expect that this product will be launched in the second quarter of 2009.

        In November 2005, we entered into a 10-year supply agreement with OMI for the distribution of our extended release formulation of tramadol in the U.S. and Puerto Rico. Pursuant to the agreement, we are entitled to a supply price based on OMI's net selling price for Ultram® ER. In 2007 and 2008, our supply price was 37.5% of OMI's net selling price for Ultram® ER. In 2009, our supply price is 35% of Ultram® ER's net selling price.

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        In January 2008, we announced an exclusive supply agreement with Janssen Pharmaceutica NV ("Janssen") for the marketing and distribution of our once-daily, extended-release formulation of tramadol in Central and Eastern Europe, Middle East and Latin America. Under the terms of this agreement, which has a 10-year term, we will manufacture and supply once-daily extended-release tramadol hydrochloride tablets in dosage strengths of 100 mg, 200 mg and 300 mg to Janssen at contractually determined prices.

Zovirax® Ointment/Zovirax® Cream (acyclovir)

        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® Ointment was originally launched in 1982 by Burroughs Wellcome and although it was not promoted by Glaxo Wellcome, and subsequently GSK, since 1997, Zovirax® Ointment remains the market leader with approximately a 47.0% share of total prescriptions in the U.S. for topical anti-herpes products in 2008.

        Zovirax® Cream was approved by the FDA in December 2002 and launched by BTA in July 2003. Zovirax® Cream is a topical antiviral medication used for the treatment of herpes labialis (cold sores). According to IMS, Zovirax® Cream held a 27.4% share of the total prescriptions in the U.S. for topical anti-herpes products at the end of 2008.

        From December 2006 to October 2008, Sciele provided us with detailing and sampling support in the U.S. for Zovirax® Ointment and Zovirax® Cream pursuant to an exclusive promotional services agreement which provided for certain revenue-based payments to Sciele. In October 2008, we terminated our agreement with Sciele as a result of the acquisition of Sciele by Shionogi & Co. in accordance with the change-of-control provisions in the agreement. In January 2009, PSS, a contract sales organization ("CSO") resumed detailing of Zovirax® to U.S. physicians under Biovail's management of the brand. By switching to a CSO, we will retain a greater share of Zovirax®'s economics, as we do not have a revenue-sharing provision in our agreement with PSS.

Cardizem® LA (diltiazem)

        Cardizem® branded products have been leading calcium-channel blockers ("CCBs") for more than 20 years. In 2008, the U.S. CCBs market was valued at $2.1 billion, of which once-daily diltiazem products represented $523 million. These once-daily products generated 15 million prescriptions in the U.S. in 2008, of which 11.1 million were written for all Cardizem® products, representing a market of $416 million, including generics.

        In April 2003, we launched Cardizem® LA through the Biovail Pharmaceuticals Inc. sales force. Cardizem® LA is a graded, extended-release formulation of diltiazem hydrochloride that provides 24-hour blood pressure control with a single daily dose and offers physicians a flexible dosing range from 120 mg to 540 mg. Cardizem® LA is the only diltiazem product labelled to allow administration in either the morning or evening. With evening administration, clinical trials have shown Cardizem® LA improves reduction in blood pressure in the early morning hours, which is when patients are at the greatest risk of significant cardiovascular events, such as heart attack, stroke and death. We have arranged to have Kos (a subsidiary of Abbott) promote Cardizem® LA in the U.S. and, pursuant to our arrangement with Kos, we manufacture, supply and sell Cardizem® LA to Kos for prices based on Kos' net selling price.

        Pursuant to a settlement agreement between us and Watson Pharmaceuticals, Inc. relating to a consolidated civil action in the U.S., a generic version of Cardizem® LA can be marketed commencing April 2009 (See " — Legal Proceedings — Intellectual Property" below).

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Biovail Pharmaceuticals Canada

        BPC is our Canadian marketing and sales division. The following products are promoted and/or distributed by BPC:

Tiazac®/Tiazac® XC (diltiazem)

        Tiazac® is a CCB used in the treatment of hypertension and angina. Tiazac® is a once-daily formulation of diltiazem that delivers smooth blood pressure control over a 24-hour period. As a non-dihydropyridine CCB, Tiazac® provides specific renal protective benefits as well as blood pressure reduction, which is particularly important for diabetic hypertensive patients. At December 2008, Tiazac® and Tiazac® XC held a 21.8% share of the once-daily diltiazem market (measured as a percentage of total prescriptions for once-daily diltiazem products). In August 2004, we received TPD approval for Tiazac® XC for the treatment of hypertension and, in July 2007, we received TPD approval for Tiazac® XC for the treatment of angina. Tiazac® XC is a novel formulation of diltiazem taken at bedtime and specifically formulated to provide peak drug-plasma levels during the early morning hours when cardiac events are most likely to occur. In January 2005, the BPC sales force launched Tiazac® XC to Canadian physicians. Tiazac® XC is listed on all provincial formularies. Our generic version of Tiazac® is distributed in Canada by Novopharm, a subsidiary of Teva.

Wellbutrin® XL (extended-release bupropion hydrochloride)

        In February 2005, we submitted a supplemental new drug submission ("sNDS") to the TPD for Wellbutrin® XL, a once-daily formulation of bupropion developed by us. The submission received TPD approval in January 2006. Wellbutrin® XL was formally launched in April 2006 by the BPC sales force. By December 2008, Wellbutrin® XL had captured 51.7% share of the Canadian bupropion market (measured as a percentage of total prescriptions for bupropion products). In February 2008, Wellbutrin® XL received TPD approval for a new indication for the prevention of seasonal major depressive illness.

Wellbutrin® SR (bupropion)/Zyban® (bupropion hydrochloride)

        We acquired the Canadian rights to Wellbutrin® SR and Zyban® from GSK in December 2002. Wellbutrin® SR (sustained-release bupropion) is indicated as a first-line therapy for the treatment of depression. Wellbutrin® SR's anti-depressant activity appears to be mediated by noradrenergic and dopaminergic mechanisms that differentiate it from SSRIs and other known anti-depressant agents. In addition to anti-depressant efficacy, Wellbutrin® SR has a low propensity to cause sexual dysfunction, a common side effect of some other anti-depressant therapies. Zyban®, the same chemical entity as Wellbutrin® SR, is indicated as an aid to smoking cessation treatment. In 2003, GSK Canada marketed Wellbutrin® SR and Zyban® in Canada under contract for BPC, as our detailing efforts were focused on Celexa® pursuant to a co-promotion agreement with H. Lundbeck A/S. With the termination of the Celexa® agreement at the end of 2003, BPC assumed full responsibility for Wellbutrin® SR on January 1, 2004. Generic competition for Wellbutrin® SR in Canada commenced in 2005. Zyban® is marketed through non-sales force mediated, direct marketing activities.

Monocor® (bisoprolol fumarate)

        Monocor® is a cardio selective beta-blocker indicated for the treatment of mild to moderate hypertension and congestive heart failure. Monocor® first faced generic competition in July 2003.

Retavase® (reteplase recombinant)

        Retavase®, which was originally licensed from Centocor Inc., is a tissue plasminogen activator used in thrombolytic therapy. The medication is administered to patients immediately after the incidence of acute myocardial infarction ("AMI" or heart attack) and acts to clear arterial blockage. The fibrolytic market has been relatively flat since 2001 averaging about C$45 million each year over the past 8 years. Limited promotion and limited therapeutic window for use of fibrolytics results in the market size being relatively stable.

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Glumetza® (extended-release metformin hydrochloride)

        Glumetza® is a once-daily formulation of metformin, indicated for the control of hyperglycemia in adult patients with type 2 (non-insulin dependent, mature onset) diabetes, as an adjunct to dietary management, exercise, and weight reduction, or when insulin therapy is not appropriate. Glumetza® (500 mg and 1,000 mg) received TPD approval in May 2005, and the 500 mg tablet was formally launched by the BPC sales force in Canada in November 2005. Glumetza® is the first and only once-daily metformin formulation available in Canada. A second application for a once-daily formulation of Glumetza® 1,000 mg tablets was filed with the TPD in February 2007 and received a NOC in October 2007. The BPC sales force formally launched Glumetza® 1,000 mg tablets to Canadian physicians in January 2008.

Ralivia™ (extended-release tramadol hydrochloride)

        A New Drug Submission ("NDS") for our once-daily formulation of tramadol hydrochloride, comprising 100 mg, 200 mg and 300 mg tablets, was accepted for review in November 2006, and received TPD approval in August 2007. In November 2007, the BPC sales force launched Ralivia® to Canadian physicians. Ralivia®, which competes with two other once-daily tramadol formulations in Canada, is indicated for the management of pain of moderate severity in patients who require continuous treatment for several days or more. In April 2008 BPC filed a sNDS for the broader indication of treatment of moderate to moderately severe pain. Approval for the broader indication was received in July 2008. Ralivia® is produced using our proprietary Smartcoat™ technology, which provides 24-hour delivery for more constant plasma concentration and clinical effects with less peak-to-trough fluctuation. Ralivia is identical to Ultram® ER, which was launched in the U.S. and Puerto Rico in February 2006 by PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.

Nitoman® (tetrabenazine)

        Through the acquisition of Prestwick, we now have commercial responsibility for Nitoman® (tetrabenazine tablets). Nitoman® was approved by the TPD in 1995. It is indicated for the treatment of hyperkinetic movement disorders such as Huntington's chorea, Hemiballismus, Senile Chorea, Tic and Gilles de la Tourette Syndrome and Tardive Dyskinesia. In connection with our acquisition of Prestwick, we acquired three sales people and one sales manager who detail the product to physicians across Canada. Nitoman® is now marketed to Canadian physicians through the BPC sales force. Pursuant to the license agreement with Cambridge, the worldwide license holder for tetrabenazine, we pay Cambridge a supply price that ranges from 50% to 67% based on Nitoman®'s net sales.

Legacy Products

        This category includes products that we distribute in the U.S., but do not actively promote. In general, these are products that have been genericized and generate revenue streams that are relatively stable as a result of small and predictable declines in prescription volumes, offset by increases in pricing. The products in this reporting category are Cardizem® CD, Ativan®, Tiazac®, Vasotec®, Vaseretic® and Isordil®. Despite the availability of generic competitors, these products continue to generate significant cash flow.

Cardizem® CD (diltiazem)

        Cardizem® branded products have been leading medications in the CCB category of cardiovascular drugs for more than 20 years. sanofi-aventis Inc. ("sanofi-aventis") supplies Cardizem® to us.

Ativan® (lorazepam)

        Ativan® is benzodiazepine lorazepam, indicated for the management of anxiety disorders or for the short-term relief of anxiety or anxiety associated with symptoms of depression. We acquired U.S. marketing rights to Ativan® from Wyeth Pharmaceuticals Inc. ("Wyeth") in June 2003. Wyeth provided us with Ativan® until 2007. Since August 2007, Meda Manufacturing GmbH ("Meda") has supplied us with Ativan® tablets for the U.S. market. Ativan® (lorazepam) generated 25.8 million prescriptions in the U.S. during 2008.

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Tiazac® (diltiazem)

        Tiazac® belongs to the CCB class of drugs, used in the treatment of hypertension and angina. In 1995, Forest acquired the right to market Tiazac® in the U.S. The formal product launch took place in February 1996. We act as the exclusive manufacturer of the product and receive a contractually determined supply price and a royalty payment from Forest on net sales of Tiazac®. Upon the onset of generic competition for Tiazac® in the U.S. in April 2003, we launched a competing Authorized Generic version through Forest under a variable supply price arrangement, following which Forest ceased promotional support for branded Tiazac®. Forest now distributes a Tiazac® Authorized Generic manufactured by us.

Vasotec® (enalapril maleate) / Vaseretic® (enalapril maleate/hydrochlorothiazide)

        Vasotec® and Vaseretic® have been highly recognized in the treatment of hypertension, symptomatic congestive heart failure, and asymptomatic left ventricular dysfunction for nearly 20 years. Enalapril is a pro-drug; following oral administration, it is bio-activated by hydrolysis of the ethyl ester to enalaprilat, which is the active angiotensin converting enzyme ("ACE") inhibitor. Vasotec® is the maleate salt of enalapril. Vaseretic® combines Vasotec® and a diuretic, hydrochlorothiazide. The product is also indicated for the treatment of hypertension. Vasotec® (branded and generic) is one of the most widely prescribed ACE inhibitors. Vasotec® lost its market exclusivity in August 2000 and its prescription volumes have since been eroded by generic competition. Nevertheless, in 2008, there were 13.1 million prescriptions written for enalapril maleate in the U.S. Merck supplies this product to us pursuant to a supply agreement that was recently extended to December 2009.

Isordil® (isosorbide dinitrate)

        Isordil® (isosorbide dinitrate), a coronary vasodilator, is indicated for the prophylaxis of ischemic heart pain associated with coronary insufficiency (angina pectoris). Isordil® dilates the blood vessels by relaxing the muscles in their walls. Oxygen flow improves as the vessels relax, and chest pain subsides. Isordil® helps to increase the amount of exercise that may occur prior to the onset of chest pain, and can help relieve chest pain that has already started, or prevent pain expected from a strenuous activity, such as walking up a hill or climbing stairs. We acquired U.S. marketing rights to Isordil® from Wyeth in June 2003. We purchase Isordil® tablets from Meda pursuant to a supply agreement.

Generic Products

        Our generic product portfolio is currently comprised of products that are distributed in the U.S. for us by Teva and an Authorized Generic formulation of Tiazac® which is distributed in the U.S. by Forest. In 2008, the products distributed by Teva included bioequivalent formulations of Cardizem® CD, Adalat® CC, Procardia® XL, Tiazac®, Voltaren® XR and Trental®. Generic Tiazac® was introduced in Canada in January 2006 and is distributed by Novopharm, a subsidiary of Teva, in Canada.

        Our portfolio of generic formulations of branded controlled release products, such as Cardizem® CD, Adalat® CC and Procardia® XL, represents technically challenging products to formulate. These technological barriers may limit the number of generic versions of the products. This competitive landscape allows for some pricing flexibility, and may mitigate, to some extent, the price discounting that can often reach 90% in the generic pharmaceuticals industry. However, in 2007, a number of new competitor products became available, which resulted in a significant decline in our revenues relating to these products. This volatility somewhat decreased in 2008 as Teva's market share in the various product categories stabilized.

Glumetza® (U.S. Market)

        Glumetza® is a once-daily formulation of metformin indicated as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes mellitus. Glumetza® 500 mg and 1,000 mg were approved by the FDA in June 2005. Pursuant to an agreement with Depomed we manufacture and supply the 1,000 mg tablet to Depomed. In the U.S., Santarus, Inc. promotes Glumetza® to U.S. physicians for Depomed. Glumetza® competes against several other metformin products, including a number of generic formulations, in the oral diabetes market.

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        For additional information with respect to these products, see "Management's Discussion and Analysis — Results of Operations — Product Sales".

Product Development Pipeline

        We currently have development efforts ongoing for novel formulations of existing products that we believe may provide clinically meaningful benefits to patients. These include BVF-045, a combination product incorporating Aplenzin™ (bupropion hydrobromide) and an undisclosed selective serotonin reuptake inhibitor, or SSRI. By combining two different classes of anti-depressants, BVF-045 provides a single-tablet option for depression that targets all three neurotransmitters believed to play a role in the disease. We are pursuing a development partner to share the risks and costs associated with the clinical development of BVF-045.

        Another of our pipeline programs is BVF-324, an undisclosed product for the treatment of a prevalent sexual dysfunction. We currently anticipate initiating Phase III studies for BVF-324 in Europe in mid-2009 and are seeking a commercialization partner for the European market.

        In addition, in 2008 we submitted three abbreviated new drug applications to the FDA for approval. These include a generic formulation of 145 mg and 48 mg tablets of fenofibrate (marketed in the U.S. under the Tricor® brand name). We believe we are the first-to-file on the 48 mg strength, which generated revenues of approximately $73 million in the twelve months ended December 31, 2008, according to IMS; and second on the 145 mg strength, which generated revenues of approximately $1.5 billion over the same period. In addition, in December 2008 we announced the FDA's acceptance of our ANDA filing for 200 mg, 300 mg and 400 mg strengths of quetiapine fumarate extended-release tablets (sold under the brand name Seroquel® XR by AstraZeneca Pharmaceuticals LP). Seroquel® XR is an atypical antipsychotic agent indicated for the treatment of schizophrenia and bipolar disorder. The product is available in 150 mg, 200 mg, 300 mg and 400 mg strengths. According to IMS, Seroquel® XR generated U.S. revenues of approximately $200 million in the twelve-month period ended December 31, 2008.

        Our new product development efforts are subject to the process and regulatory requirements of the TPD (in Canada) and the FDA (in the U.S.). The following is a chart that describes certain of our active and disclosed pipeline projects.

Product
 
Indication

ANDA Products

   

BVF-065 (extended-release venlafaxine tablets — generic formulation of Effexor® XR)

  Depression

BVF-203 (fenofibrate tablets — generic formulation of Tricor®)

  Cardiovascular disease

BVF-058 (extended-release quetiapine tablets — generic formulation of Seroquel® XR)

  CNS disorders

Branded Products

   

BVF-045 (Bupropion Combination)

  Depression

BVF-324 (undisclosed)

  Sexual dysfunction

Drug Delivery Technology

        Although no longer the core focus of our development efforts, we have numerous proprietary drug-delivery technologies that we have used to develop controlled-release, enhanced/modified absorption and rapid-dissolve products. These technologies have enabled us to develop both branded and generic pharmaceutical products.

        Oral controlled release technologies permit the development of specialized oral delivery systems that improve the absorption and utilization of drugs by the human body. These systems offer a number of advantages, in particular allowing the patient to take only one or two doses of the drug per day. This makes controlled release drug products ideally suited for the treatment of chronic conditions.

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        Our controlled release technologies can provide a broad range of release profiles, taking into account the physical and chemical characteristics of a drug product, the therapeutic use of the particular drug and the optimal site for release of the basic drug in the gastrointestinal tract (the "GI tract"). The objective is to provide a delivery system allowing for a single dose per 12 to 24 hour period, while assuring gradual and controlled release of the subject drug at a suitable location(s) in the GI tract.

        Our rapid dissolve (FlashDose®) formulations contain the same active pharmaceutical ingredient found in the original branded products. The active product ingredient is encapsulated in microspheres utilizing our CEFORM™ technology. These microspheres can be coated to provide taste-masking, or specialty release profiles such as sustained release. Our proprietary directly compressible oral disintegrating tablet ("ODT") technologies are used to produce matrices or excipient blends that are subsequently combined with the coated CEFORM™ microspheres. This final blend can be compressed into rapid dissolve tablet formulations using conventional manufacturing technology. The benefits of rapid dissolve formulations include the ease of administration for the elderly, young children, or people with disease states who may have difficulty swallowing tablets or capsules.

        The following describes some of our proprietary technologies:

Technology
  Description
Dimatrix   Diffusion-controlled matrix technology for water soluble drugs.
Macrocap   Immediate release beads for first order or zero order release.
Consurf   Zero order drug delivery system for hydrophilic and hydrophobic drugs.
Multipart   Tablet carrier for the delivery of controlled release beads that preserves the integrity and release properties of the beads.
FlashDose™   ODTs technology for sustained release ODTs, rapid-onset ODTs, enhanced absorption ODTs, combination ODTs and taste-masking ODTs.
Shearform™   Used to produce carrier materials used to produce rapid dissolve formulations.
Smartcoat™   Allows for the manufacturing of very high potency controlled release tablets, allowing for smaller-sized tablets while controlling the release over a 24-hour period.
Smartcoat™ AQ   Aqueous-based, proprietary version of Smartcoat™.
Chronotabs   Made of Multipart or Smartcoat™ tablets particularly adapted to the science of treating diseases that follow the body's circadian rhythms.
Zero Order Release Systems ("ZORS™")   Technology used to develop zero order kinetic systems, based on a proprietary controlled release matrix coating.
CEFORM™   Technology used to produce uniformly sized and shaped microspheres of a wide range of pharmaceutical compounds. CEFORM™ can be used to formulate drugs that are generally thermally unstable and can be formulated for controlled release, enhanced absorption, delayed release, rapid absorption or taste masking.

Manufacturing

        We regard our manufacturing assets as an integral component of our success. While we currently operate three pharmaceutical manufacturing facilities, our plant in Steinbach, Manitoba is our principal manufacturing facility and we are in the process of closing our two Puerto Rico facilities (Dorado and Carolina). Certain of the Puerto Rico manufacturing activities will be transferred to our Steinbach, Manitoba facility in 2009 and 2010 (See "— Property, Plants and Equipment — Manufacturing Facilities" below).

        Through these facilities, we manufacture branded products that are commercialized by our partners, including Wellbutrin® XL, Ultram® ER and Cardizem® LA, and several other branded products that are distributed by BTA and BPC. We also manufacture generic products that are distributed by Teva and Forest in the U.S. and by Novopharm Limited ("Novopharm"), a subsidiary of Teva, in Canada.

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        We maintain on-site quality control and experienced manufacturing supervision at these three sites so that manufacturing, packaging and shipping activities are undertaken in compliance with GMP requirements. Efforts are undertaken to maintain equipment parts or replacements so that they can be readily available to avoid any interruptions in supply where possible. All of these facilities meet FDA-mandated and TPD-mandated GMP and have been audited recently.

Raw Materials

        We source raw materials for our manufacturing operations from various FDA-approved and TPD-approved companies worldwide. It is our policy, wherever reasonably possible, to have a minimum of two suppliers for all major active pharmaceutical ingredients ("API") for our manufactured products. This facilitates both the continuity of supply of raw materials and best pricing from suppliers based on volume and time period. However, the pricing of the raw materials needed for the development or manufacture of our products has fluctuated, from time to time, as a result of a number of factors, including the acts of governments outside the U.S. and Canada.

Marketing and Commercialization

        Given the vast differences between the two markets, we employ different marketing and commercialization strategies in Canada and the U.S. In Canada, we commercialize our products directly through BPC's 100-member sales force, which effectively targets a broad audience of physicians across the country. In the U.S. and other global markets, since the elimination of our U.S. specialty sales force in December 2006, our products are marketed through strategic alliances with commercial partners that have established sales and marketing infrastructures in those regions. As we progress with our New Strategic Focus, we plan to deploy appropriate commercial resources in targeted U.S. areas.

United States

        Throughout our history, we have entered into a number of supply-and-distribution arrangements for the U.S. market with several respected pharmaceutical companies, including GSK, Johnson & Johnson, Forest, Teva, Kos and, most recently, sanofi-aventis. As described further below under "— Acquisition of Businesses", on September 16, 2008 we acquired Prestwick, which held the Canadian and U.S. licensing rights to tetrabenazine tablets (known as Xenazine® in the U.S. and Nitoman® in Canada). In November 2008, Xenazine® tablets became commercially available throughout the U.S. under an exclusive supply-and-marketing agreement entered into between Prestwick and Ovation prior to our acquisition of Prestwick.

        In the U.S., our subsidiary, BTA distributes a number of branded products for which there is no longer market exclusivity. These Legacy Products include the well-known brands Cardizem® CD, Ativan®, Vaseretic®, Vasotec® and Isordil®. These products represent non-core assets that are not actively promoted by us, but remain well respected by the medical community. Due to the availability of several competing generic formulations, their prescription volumes are declining at fairly predictable rates.

Canada

        In Canada, where the market dynamics are much different than in the U.S., we have maintained a direct-selling commercial presence through BPC that successfully targets both specialist and high-prescribing primary-care physicians. Through its 12-year history, BPC has established itself as a leading, independent pharmaceutical marketing-and-sales operation in the Canadian market. In 2006, BPC expanded its sales force to 97 representatives to support a number of new product launches. In 2008, that number was increased to 100 through the integration of Prestwick's Canadian operations. BPC's therapeutic focus lies in cardiovascular disease, pain management and depression markets valued at C$2.3 billion, C$944 million, and C$838 million, respectively. BPC currently promotes a well-respected portfolio of products to approximately 11,000 physicians across Canada. Products include Tiazac® XC, Wellbutrin® XL, Glumetza®, and more recently Nitoman® and Ralivia® — our once-daily formulation of tramadol, which was launched to Canadian physicians in November 2007. During 2008, the Tiazac® franchise (Tiazac® and Tiazac® XC) was BPC's leading product line, representing approximately 40.5% of our total Canadian product revenues. We believe BPC is an important

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asset and we intend to continue to leverage our Canadian commercialization infrastructure to support our physician-targeted focus. We are also pursuing a number of product-marketing opportunities and acquisitions that have a strategic fit to further grow BPC's commercial operations.

Other Countries

        While our business focus is primarily to develop products for the U.S. and Canadian markets, we have pursued opportunities to more fully exploit the commercial potential of our products by having them launched in new geographic markets by strategic marketing partners with expertise in their local markets. For example, in 2007 and 2008, GSK launched Wellbutrin® XR (the brand name that GSK is using in a number of countries for our once-daily formulation of bupropion HCl) in several European countries for the treatment of adult patients with major depressive episodes. In addition, in January 2008, we announced an exclusive 10-year supply agreement with Janssen, a division of Johnson & Johnson, for the marketing and distribution of our once-daily, extended-release formulation of tramadol in 86 countries in Central and Eastern Europe, the Middle East and Latin America.

Patents and Proprietary Rights

        We protect the proprietary nature of our technology through a combination of patents, trade secrets, know-how and other methods. We have not routinely sought patents on our controlled-release technologies themselves because the filing of certain patents may provide competitors and potential competitors with information relating to proprietary technology, which may enable such competitors to exploit information related to such technology that is not within the confines of the protection of the patent. However, we usually do seek patent protection for novel products arising from our development efforts, to thereby provide intellectual property rights and associated market protection.

        Historically, we have relied on trade secrets, know-how and other proprietary information. Our ability to compete effectively with other companies will depend, in part, upon our ability to maintain the proprietary nature of our technology. To protect our rights in these areas, we require all licensors, licensees and significant employees to enter into confidentiality agreements. These agreements may not, however, provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information.

Significant Customers

        The following table identifies external customers that accounted for 10% or more of our total revenue during the years ended December 31, 2006, 2007 and 2008:

 
  Percentage of
Total Revenue
 
 
  2008
%
  2007
%
  2006
%
 

McKesson Corporation

    22     20     12  

GSK

    16     25     42  

Cardinal Health, Inc.

    16     10     6  

Teva

    11     11     12  

OMI (now known as PriCara, a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.)

    11     10     5  

Other Revenue

        Beyond the development, manufacture and distribution of pharmaceutical products described above, we also provide research, development and clinical contract research services to third parties, as described further below. In 2008, the provision of these services generated revenues of $24.4 million, compared with $23.8 million in 2007. We also generate revenues related to the sale of a number of our controlled-release products by third parties. We have also, in the past, generated revenue by promoting and/or co-promoting products on behalf of third parties. In 2008, these efforts resulted in revenues of $18.3 million, compared with $17.9 million in 2007.

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Contract Research Division

        Our CRD provides pharmaceutical companies with a broad range of early phase and clinical-research services. This involves conducting pharmacokinetic studies, along with bioanalytical laboratory testing to establish a drug's bioavailability or its bioequivalence to another drug moiety. Clinical studies are reviewed by an independent ethics review board that assures that all studies are conducted in an ethical and safe manner, without compromising the safety or well-being of the human subjects participating in these studies. As well, all clinical studies are designed and conducted in accordance with strict guidelines regulated under the FDA in the U.S., the TPD in Canada and the European Medicines Agency ("EMEA") in Europe, and executed under Good Laboratory Practices and Good Clinical Practices.

        Operating as an independent business unit in Toronto, Ontario, CRD is located in a 39,500-square-foot stand-alone facility owned by us, and a 13,200-square-foot leased facility. These facilities house six study clinics (including a 12-bed, Phase I first-in-man unit) with a total capacity of 186 beds, as well as a Medical Recruiting and Subject Screening Unit and Bioanalytical Laboratory.

        Our Bioanalytical Laboratory maintains the latest technology in mass spectrometry and liquid chromatography supported by a fully validated Laboratory Information Management System. The Bioanalytical Laboratory continues to add to its inventory of over 175 developed and validated methods. CRD's biopharmaceutics services group provides scientific support to our operational departments by providing pharmacokinetic, statistical, medical writing, data management and regulatory services.

        To date, CRD has designed and conducted in excess of 3,250 early phase clinical trials on more than 400 different chemical entities. The therapeutic areas in which studies have been completed include cardiovascular, anti-infectives, anti-allergy, psychiatric, neurological, urological, endocrine, gastrointestinal, dermatological, analgesic, anti-convulsant, anti-inflammatory, anti-neoplastic and bronchodialator.

        CRD maintains a database in excess of 97,500 adult male and female volunteers for potential study enrolment as well as an inventory of patient and specialty populations, including post-menopausal, renal-impaired, hepatic-impaired and elderly patients. CRD has it own independent quality assurance department to assure that the operations of CRD are subject to full compliance with the rules and regulations of the FDA, TPD and other comparable foreign regulatory bodies. The regulations applicable to the CRD activity may change as regulatory bodies identify new areas of necessary focus, or issues related to product or patient safety.

        In prior years, we were CRD's primary customer, and having preferred access to CRD's services served as a competitive advantage. However, in 2008, as we shifted our focus away from reformulation programs, our activity level dropped significantly at CRD. The division continues to aggressively pursue new external customers, as it is unlikely our requirements of CRD will revert to prior levels.

Regulation

        The R&D, manufacture and marketing of controlled release pharmaceuticals are subject to regulation by U.S., Canadian and foreign health authorities. Such national agencies and other federal, state, provincial and local entities regulate the testing, manufacturing, safety and promotion of our products.

U.S. Regulation

New Drug Application ("NDA")

        We are required by the FDA to comply with regulations governing our products prior to commencement of marketing by us or by our commercial partners. New chemical products and new formulations for existing drug compounds which cannot be filed as ANDAs are subject to NDA requirements. These requirements include: (a) preclinical laboratory and animal toxicology tests; (b) submission in certain cases of an IND, and its required acceptance by the FDA before human clinical trials can commence; (c) adequate and well-controlled replicate human clinical trials to establish the safety and efficacy of a drug for its intended indication; (d) the submission of an NDA to the FDA; and (e) FDA approval of an NDA prior to any commercial sale or shipment of the product, including pre-approval and post-approval inspections of its manufacturing and testing facilities.

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        Preclinical laboratory and animal toxicology tests must be performed to assess the safety and potential efficacy of a product. The results of these preclinical tests, together with information regarding the methods of manufacture of the products and quality control testing, are then submitted to the FDA as part of an IND requesting authorization to initiate human clinical trials. Additionally, an independent Institutional Review Board ("IRB") at each medical site proposing to conduct the clinical trials must review and approve each study protocol and oversee conduct of the trial. An IND becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. If the FDA imposes a clinical hold, the IND sponsor must resolve the FDA's concerns before clinical trials can begin. Preclinical tests and studies can take several years to complete, and there is no guarantee that an IND we submit based on such tests and studies will become effective within any specific time period, or if at all.

        Clinical trials involve the administration of a pharmaceutical product to individuals under the supervision of qualified medical investigators that are experienced in conducting studies under "Good Clinical Practice" guidelines. Clinical studies are conducted in accordance with protocols that detail the objectives of a study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA and to an IRB prior to the commencement of each clinical trial. Clinical studies are typically conducted in three sequential phases, which may overlap. In Phase I, first-in-man, the initial introduction of the product into healthy human subjects, the compound is tested for absorption, safety, tolerability, metabolic interaction, distribution and excretion. Phase II involves studies in a limited patient population with the disease to be treated to (a) determine the preliminary or potential effectiveness of the product for specific targeted indications; (b) determine optimal dosage; and (c) identify possible adverse effects and safety risks. If Phase II evaluations demonstrate that a pharmaceutical product is potentially effective, has acceptable data to show an appropriate clinical dose and has an acceptable safety profile, Phase III clinical trials are undertaken to further evaluate clinical efficacy of the product and to further test its safety within an expanded patient population at geographically dispersed clinical study sites. Periodic reports to the FDA and IRBs on the clinical investigations are required. We, as a sponsor of the study, the IRB or the FDA may suspend clinical trials at any time if any such party believes the clinical subjects are being exposed to unacceptable health risks. The results of the product development, analytical laboratory studies, toxicology studies and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing of a pharmaceutical product.

        The above-described NDA requirements are predicated on the applicant being the owner of, or having obtained a right of reference to, all of the data required to prove safety and efficacy. However, for those NDAs containing some data which the applicant neither owns nor has a right-of-reference, the FDA's ability to grant approval is limited when there are exclusivity periods or infringed patent rights that are accorded to others. These NDAs are governed by 21 U.S.C. § 355(b)(1), also known as Section 505(b)(1) of the U.S. Food, Drug and Cosmetic Act (the "FD&C Act") (referred to as "505(b)(1) NDAs").

Abbreviated New Drug Application ("ANDA")

        In certain cases, where the objective is to develop a generic (bioequivalent formulation) of an approved product already on the market, an ANDA is required. Under the ANDA procedure, the FDA waives the requirement to submit complete reports of preclinical and clinical studies of safety and efficacy, and instead, requires the submission of bioequivalence data, which is a demonstration that the generic drug produces the statistically equivalent blood levels of active ingredient in the body as its brand-name counterpart. It is mandatory that the generic products have a comparable rate and extent of absorption as measured by plasma drug levels as a function of time. In certain cases, an ANDA applicant may submit a suitability petition to the FDA requesting permission to submit an ANDA for a drug product that differs from a previously approved reference drug product (the "Listed Drug") when the change is one authorized by statute. Permitted variations from the Listed Drug may include changes in: (a) route of administration; (b) dosage form; (c) strength; and (d) one of the active ingredients of the Listed Drug when the Listed Drug is a combination product. The FDA must approve the petition before the ANDA may be submitted. An applicant is not permitted to petition for any changes from Listed Drugs which are not authorized by statute. The information in a suitability petition must demonstrate that the change may be adequately evaluated for approval without data from investigations to show the product's safety or effectiveness. The advantages of an ANDA over an NDA include reduced R&D costs

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associated with bringing a product to market, potentially shorter review and approval periods and potentially quicker time to market. The disadvantages include the lack of market exclusivity unless the ANDA is the first substantially complete file to challenge innovator patents (see "— Patent Certification and Exclusivity Issues" below).

505(b)(2) Application Process

        In certain cases, pharmaceutical companies may submit an application for marketing approval of a drug product under Section 505(b)(2) of the FD&C Act (referred to as "505(b)(2) NDAs"). This mechanism essentially relies upon the same FDA conclusions that would support the approval of an ANDA available to an applicant who develops a modification of a Listed Drug that is not supported by a suitability petition. Relative to more extensive regulatory requirements for full 505(b)(1) NDAs, the Section 505(b)(2) regulations permit applicants to forego costly and time-consuming drug development studies by relying on the FDA's finding of safety and efficacy for a previously approved drug product. Under some circumstances, the extent of the reliance on the approved drug product approaches that which is permitted under the generic drug approval provisions. This approach is intended to encourage innovation in drug development without requiring duplicative studies to demonstrate what is already known about a drug while protecting the patent and exclusivity rights for the approved drug. If clinical efficacy trials are required for approval, the 505(b)(2) NDAs product is generally entitled to three years of market exclusivity following approval.

Patent Certification and Exclusivity Issues

        When submitting ANDAs and 505(b)(2) NDAs, a company must include certifications with respect to any patents that claim the Listed Drug or that claim a use for the Listed Drug for which the applicant is seeking approval. If applicable patents are in effect and the patent information has been submitted to the FDA and listed in the FDA's "Orange Book", the FDA may be required to delay approval of the ANDAs or 505(b)(2) NDAs until the patents expire. If the applicant believes it will not infringe the patents or that the patents are invalid, it can make a patent certification to the owners of the patents and the holder of the original NDA approval for the drug product for which a generic drug approval is being sought. This may result in patent infringement litigation which could delay the FDA approval of the ANDA or 505(b)(2) NDA for up to 30 months. If the drug product covered by an ANDA or 505(b)(2) NDA were to be found by a court to infringe another company's patents, approval of the ANDA or 505(b)(2) NDAs could be delayed until the infringed patents expire.

        Under the FD&C Act, the first filer of an ANDA with a certification of patent non-infringement or invalidity is generally entitled to receive 180 days of market exclusivity. Subsequent filers of generic products would be entitled to market their approved product after the 180-day exclusivity period expires. However, the first filer may be deemed to have forfeited its 180-day exclusivity period if, for example, it has not started marketing its generic product within certain time frames.

        Patent expiration refers to expiry of U.S. patents (inclusive of any extensions) on drug compounds, formulations and uses. Patents outside the U.S. may differ from those in the U.S. Under U.S. law, the expiration of a patent on a drug compound does not create a right to make, use or sell that compound. There may be additional patents relating to a person's proposed manufacture, use or sale of a product that could potentially prohibit such person's proposed commercialization of a drug formulation.

        The FD&C Act contains non-patent market exclusivity provisions that offer additional protection to pioneer drug products and are independent of any patent coverage that might also apply. In the case of pioneer drugs, exclusivity refers to the fact that the effective date of approval of a potential competitor's ANDA or 505(b)(2) NDAs may be delayed or, in certain cases, an ANDA or 505(b)(2) NDA may not be submitted until the exclusivity period expires. Five-year exclusivity periods are granted to the first approval of a new chemical entity. Three-year exclusivity periods may apply to products which are not new chemical entities, but for which new clinical investigations are essential to the approval. For example, a new indication for use, or a new dosage strength of a previously approved product, may be entitled to an exclusivity period, but only with respect to that indication or dosage strength. In the case of pioneer drugs, exclusivity periods only offer protection against a

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competitor entering the market via the ANDA and 505(b)(2) NDA routes, and does not operate against a competitor that generates all of its own data and submits a full NDA under Section 505(b)(1) of the FD&C Act.

Other Issues That May Arise Prior to Approval

        Satisfaction of FDA requirements typically takes several years. The actual time required varies substantially, based upon the type, complexity, and novelty of the pharmaceutical product, among other things. Government regulation imposes costly and time-consuming requirements and restrictions throughout the product life cycle and may delay product marketing for a considerable period of time, limit product marketing, or prevent marketing altogether. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are not always conclusive and may be susceptible to varying interpretations that could delay, limit, or prevent marketing approval. Even if a product receives marketing approval, the approval is limited to specific clinical indications. Further, even after marketing approval is obtained, the discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.

        If applicable regulatory criteria are not satisfied, the FDA may deny approval of an 505(b)(2) NDA, full NDA or an ANDA or may require additional testing. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA may require further testing and surveillance programs to monitor the pharmaceutical product that has been commercialized. Non-compliance with applicable requirements can result in additional penalties, including product seizures, injunction actions and criminal prosecutions.

Issues Pertaining to Post-marketing Compliance

        After product approval, there are continuing significant regulatory requirements imposed by the FDA, including record-keeping requirements, obligations to report adverse experiences, and restrictions on advertising and promotional activities. Quality control and manufacturing procedures must continue to conform to cGMPs, and the FDA periodically inspects facilities to assess cGMP compliance. Additionally, post-approval changes in manufacturing processes or facilities, product labeling, or other areas require FDA review and approval. Failure to comply with FDA regulatory requirements may result in enforcement action by the FDA, including product recalls, suspension or revocation of product approval, seizure of product to prevent distribution, impositions of injunctions prohibiting product manufacture or distribution, and civil and criminal penalties. Maintaining compliance is costly and time-consuming. Nonetheless, we cannot be certain that we, or our present or future suppliers or third-party manufacturers, will be able to comply with all FDA regulatory requirements, and potential consequences of noncompliance could have a material adverse impact on our business.

        The FDA's policies may change, and additional government regulations may be enacted that could delay, limit, or prevent marketing approval of our products or affect our ability to manufacture, market, or distribute our products after approval. Moreover, increased attention to the containment of healthcare costs in the U.S. and in foreign markets could result in new government regulations that could have a material adverse effect on our business. Our failure to obtain coverage, an adequate level of reimbursement, or acceptable prices for our future products could diminish any revenues we may be able to generate. Our ability to commercialize future products will depend in part on the extent to which coverage and reimbursement for the products will be available from government and health administration authorities, private health insurers, and other third-party payors. U.S. government and other third-party payors increasingly are attempting to contain healthcare costs by consideration of new laws and regulations limiting both coverage and the level of reimbursement for new drugs. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.

        Our activities also may be subject to state laws and regulations that affect our ability to develop and sell our products. We are also subject to numerous federal, state, and local laws relating to such matters as safe working conditions, clinical, laboratory, and manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future, and the failure to comply may have a material adverse impact on our business.

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        The labeling, advertising, promotion, marketing and distribution of a drug or biologic product also must be in compliance with FDA requirements, which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the internet. The FDA has very broad enforcement authority, and failure to abide by these regulations can result in penalties, including the issuance of a Warning Letter directing a company to correct deviations from regulatory standards and enforcement actions that can include seizures, injunctions and criminal prosecutions. Each NDA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug User Fee Act, or PDUFA, and its amendments. According to the FDA's fee schedule, effective on October 1, 2008 for the fiscal year 2009, the user fee for an application requiring clinical data, such as a NDA, is $1,247,200, and $623,600 for an application not requiring clinical data or a supplement requiring clinical data. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual product fee for prescription drugs and biologics ($71,520), and an annual establishment fee ($425,600) on facilities used to manufacture prescription drugs and biologics. We are not at the stage of development with our products where we are subject to these fees, but they are significant expenditures that we expect to incur in the future and will need to be paid at the time of application submission to FDA.

Canadian Regulation

        The requirements to sell pharmaceutical drugs in Canada are substantially similar to those in the U.S., which are described above, with the exception of the 505(b)(2) NDAs and 180-day marketing exclusivity period for a first filer of an ANDA under the FD&C Act in the U.S.

Clinical Trial Application

        Before conducting clinical trials of a new drug in Canada, a Clinical Trial Application ("CTA") must be submitted to the TPD. Applications for Phase I trials include information about the proposed trial and the new drug as well as information on any previously executed clinical trials with the new drug. Phase II and III applications also include information on the methods of manufacture of the drug and controls, and preclinical laboratory and animal toxicology tests on the safety and potential efficacy of the drug. If, within 30 days of receiving the application, the TPD does not notify the applicant that its application is unsatisfactory, the applicant may proceed with clinical trials of the drug (although the TPD targets to review applications to conduct Phase I trials within 7 days). The phases of clinical trials are the same as those described above under "U.S. Regulation — New Drug Application".

New Drug Submission ("NDS")

        Before selling or advertising a new drug in Canada, the applicant must submit an NDS or sNDS to the TPD and receive a Notice of Compliance ("NOC") from the TPD to sell the drug. The submission includes information describing the new drug, including its proper name, the proposed name under which the new drug will be sold, a quantitative list of ingredients in the new drug and the specifications for each of those ingredients, the plant and equipment to be used in manufacturing, preparation and packaging the new drug, the methods of manufacturing, preparation and packaging the new drug, the controls applicable to these operations, the tests to be applied to control the potency, purity, stability and safety of the new drug, pharmacology data and the results of non-clinical, biopharmaceutics, clinical trials, as appropriate, the intended indications for which the new drug may be prescribed, all representations to be made for the promotion of the new drug including route of administration, proposed dosage, claims, contra-indications and side effects, the effectiveness and safety of the new drug when used as intended and draft labels to be used. The TPD reviews the NDS or sNDS. If the submission meets the requirements of Canada's Food and Drugs Act (the "F&D Act") and regulations, the TPD will issue an NOC for the new drug.

        The TPD may deny approval or may require additional information or testing of a proposed new drug if applicable regulatory criteria are not met. Product approvals may be suspended if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Contravention of the F&D Act and regulations can result in fines and other sanctions, including product seizures and criminal prosecutions.

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        Where the TPD has already approved a drug for sale in controlled release dosages, the applicant may seek approval from the TPD to sell an equivalent generic drug through an Abbreviated New Drug Submission ("ANDS"). The TPD does not require additional clinical trials to be conducted by the manufacturer of a proposed drug that is claimed to be equivalent to a drug that has already been approved for sale and marketed. Instead, the manufacturer must satisfy the TPD that the drug is bioequivalent to the drug that has already been approved and marketed.

        The Canadian government has regulations which can prohibit the issuance of an NOC for a patented medicine to a generic competitor, provided that the patentee, exclusive licensee or a person who has obtained the consent of the owner of the patent (the "First Person") has filed a list of its Canadian patents covering that medicine with the Minister of Health. Generic competitors that are interested in marketing generic versions of medicines against which certain patents have been listed must first provide proof that their product will not infringe the listed patents in question. In order to do this, the generic competitor must serve a notice of allegation pursuant to the regulations ("Notice of Allegation") in which it outlines the reasons that its product will not infringe the listed patents, or assert that the listed patents are invalid. At that point, the First Person can commence a legal proceeding to obtain an order of prohibition directed to the Minister of Health prohibiting him or her from issuing an NOC to the generic competitor that has served a Notice of Allegation. The Minister of Health may be prohibited from issuing an NOC permitting the importation or sale of a patented medicine to a generic competitor until patents on the medicine expire or the allegation of non-infringement and/or invalidity of the patent(s) in question is resolved by litigation in the manner set out in such regulations. There may be additional patents relating to a company's proposed manufacture, use or sale of a product that could potentially prohibit a generic competitor's proposed commercialization of a drug compound.

        The regulations under the F&D Act also contain non-patent exclusivity provisions that offer additional protection to innovative drug products. The current regulations prohibit the Minister of Health from issuing an NOC to a manufacturer that makes a direct or indirect comparison to an "innovative drug" until at least eight years have passed from issuance of the innovator's NOC for the innovative drug. This eight-year Canadian period is extended by a further six months in the case of drugs that have been the subject of clinical trials designed and conducted for the purpose of increasing the knowledge of the behaviour of the drug in pediatric populations. "Innovative drug" is defined as "a drug that contains a medicinal ingredient not previously approved in a drug by the Minister of Health and that is not a variation of a previously approved medicinal ingredient such as a salt, ester, enantiomer, solvate or polymorph". Additionally, the regulations have introduced, with a limited exception for the export of certain drugs to Africa, a six-year "no filing" period with respect to an NDS, sNDS, ANDS or sANDS within the eight-year term of data protection. The six-year and eight-year prohibitions do not apply where the innovator consents to the earlier filing by the second manufacturer of an application for an NOC or to the issuance of an NOC to the second manufacturer, as the case may be. This data protection will only apply where the innovative drug has received an NOC and is marketed in Canada. A register of innovative drugs has been created, listing for each such drug the dates on which the six-year, eight-year and, where applicable, the pediatric extension periods will expire.

        Certain provincial regulatory authorities in Canada have the ability to determine whether and which consumers of a drug sold within such province will be reimbursed by a provincial government health plan. A determination that a drug is reimbursable in a particular province results in the listing of that drug on the relevant provincial formulary. The listing or non-listing of a drug on a provincial formulary may affect the price of the drug within that province and the volume of the drug sold within that province.

Additional Regulatory Considerations

        Sales of our products by our commercial partners outside the U.S. and Canada are subject to local regulatory requirements governing the testing, registration and marketing of pharmaceutical products, which vary widely from country to country.

        Our manufacturing facilities located in Steinbach, Manitoba, Dorado, Puerto Rico and Carolina, Puerto Rico, operate according to FDA-mandated and TPD-mandated GMP. These manufacturing facilities are inspected on a regular basis by the FDA, the TPD and other regulatory authorities. Our internal quality auditing team monitors compliance on an ongoing basis with FDA-mandated and TPD-mandated GMP. From time to

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time, the FDA, the TPD or other regulatory agencies may adopt regulations that may significantly affect the manufacture and marketing of our products.

        In addition to the regulatory approval process, pharmaceutical companies are subject to regulations under provincial, state and federal laws, including requirements regarding occupational safety, controlled substances, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future regulations governing the pharmaceutical industry. We believe that we are in compliance in all material respects with such regulations as are currently in effect.

Taxation

        We have operations in various countries that have differing tax laws and rates. A significant portion of our revenue and income is earned in Barbados, a country with low domestic tax rates. Dividends from such after-tax business income are received tax-free in Canada. Our tax structure 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 effective tax rate may change from year to year based on changes in the mix of activities and income allocated or 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 an increase in the effective tax rate on all or a portion of our income to a rate possibly exceeding the statutory income tax rate of Canada or the U.S. We conduct transfer pricing studies to support the pricing of transactions between the various entities in our structure. Our income tax reporting is subject to audit by domestic and foreign tax authorities.

Acquisitions of Businesses

        On September 16, 2008, in connection with our New Strategic Focus, we acquired 100% of Prestwick, a privately held U.S.-based pharmaceutical company, for a total net cash purchase price of approximately $101.9 million. Prestwick holds the U.S. and Canadian licensing rights to tetrabenazine tablets (known as Xenazine® in the U.S. and Nitoman® in Canada). Prestwick acquired those licensing rights from Cambridge, the worldwide license holder of tetrabenazine. The acquisition of Prestwick also provided us with other early-stage products, including Lisuride Sub Q (advanced Parkinson's disease), Lisuride Patch (Parkinson's disease) and D-Serine (Schizophrenia). We currently do not anticipate continuing the development of these products.

        On August 15, 2008, an NDA for Xenazine® received FDA approval for the treatment of chorea associated with Huntington's disease. Xenazine® has been granted Orphan Drug designation by the FDA, which provides this product with seven years of market exclusivity in the U.S. from the date of approval. Xenazine® is the first and only FDA-approved treatment for any Huntington's disease-related symptom and is the first commercial product stemming from our New Strategic Focus — one that targets unmet medical needs in specialty CNS markets. Upon approval of Xenazine® the FDA determined that a Risk Evaluation and Mitigation Strategy ("REMS") was necessary to ensure that the benefits of the drug outweigh the risks of depression and suicide, to promote the informed prescribing and proper titration and dosing of Xenazine®, and to minimize the risk of drug-drug interactions. Also as part of the program associated with the REMS, our marketing partner Ovation has begun the process of educating physicians, pharmacists, patients and their caregivers about the safe and effective use of the drug.

        In November 2008, Xenazine® tablets became commercially available throughout the U.S. under an exclusive supply-and-marketing agreement entered into between Prestwick and Ovation prior to our acquisition of Prestwick. Ovation paid Prestwick $50 million for the exclusive rights to market and distribute Xenazine® in the U.S. for an initial term of 15 years. We will supply Xenazine® product to Ovation for a price based on a variable percentage of Ovation's annual net sales of the product. For annual net sales up to $125 million, our supply price will be equal to 72% of net sales. Beyond $125 million, our supply price will be equal to 65% of net sales. At both tiers, we will acquire Xenazine® product from Cambridge for an amount equal to 50% of Ovation's net sales. In addition, Prestwick held options to develop future related products with Ovation for the U.S. market in conjunction with Cambridge. Xenazine® is distributed throughout the U.S. via a specialty

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pharmacy network. Distribution of Xenazine® by Ovation is designed to both help streamline prescription fulfillment, as well as to provide specialized assistance to healthcare professionals, patients and caregivers, including addressing questions about the appropriate use of Xenazine®.

Competition

        We compete with companies in North America and internationally, including major pharmaceutical and chemical companies, specialized contract research organizations, research-and-development firms, universities and other research institutions.

Seasonality of Business

        Our results of operations have not been materially impacted by seasonality.

Employees

        As of December 31, 2008, we employ 1,368 employees and 21 temporary employees who are hired on a contract basis. None of these employees is represented by a collective bargaining agreement.

Geographic Areas

        See Note 31 of the Consolidated Financial Statements, "Segment Information", in Item 18, "Financial Statements".

        A significant portion of our revenue and income is earned in Barbados, which has low domestic tax rates. See Item 3D, "Risk Factors — Income Tax — Our effective tax rates may increase".

Availability of Information

        The Company's Internet address is www.biovail.com. Our annual report on Form 20-F is available, without charge, on our website, as soon as reasonably practicable after it is filed electronically with the SEC. Copies are also available, without charge, and requests for such copies should be directed to us at the following address: Biovail Corporation, 7150 Mississauga Road, Mississauga, Ontario, Canada, L5N 8M5, Attention: Investor Relations; by telephone (905) 286-3000; by facsimile (905) 286-3050; or by email to ir@biovail.com. References to our website addressed in this report are provided as a convenience and do not constitute, nor should be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered a part of this report.

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C.    Organizational Structure

        At December 31, 2008, each of the subsidiaries listed below either represents at least 10% of our total assets, or sales and operating revenues on a consolidated basis, or are entities through which we conduct our business.

Company
  Jurisdiction of
Incorporation
  Nature of Business   Group Share
%
  Address

Biovail Laboratories International SRL

  Barbados   Strategic planning and management of intellectual property, manufacture, sale, development, licensing of pharmaceutical products     100   Welches,
Christ Church, Barbados

Biovail Americas Corp.

  Delaware   Holding company     100   700 Route 202/206 North
Bridgewater, New Jersey

Biovail Insurance Incorporated

  Barbados   Captive insurance company     100   Welches,
Christ Church, Barbados

Biovail Distribution Corporation

  Delaware   Distribution of pharmaceutical products     100   700 Route 202/206 North
Bridgewater, New Jersey

BTA Pharmaceuticals, Inc.

  Delaware   Distribution of pharmaceutical products     100   700 Route 202/206 North
Bridgewater, New Jersey

Biovail Technologies Ltd.

  Delaware   Contract development of pharmaceutical products     100   3701 Concorde Parkway,
Chantilly, Virginia 20151

D.    Property, Plants and Equipment

Manufacturing Facilities

        We own and lease space for manufacturing, warehousing, research, development, sales, marketing, and administrative purposes. We currently operate three modern, fully integrated pharmaceutical manufacturing facilities located in Steinbach, Manitoba, Dorado, Puerto Rico and Carolina, Puerto Rico. All of these facilities meet FDA-mandated and TPD-mandated GMP. These facilities are inspected on a regular basis by regulatory authorities, and our own internal auditing team ensures compliance on an ongoing basis with such standards.

        We have owned our Steinbach, Manitoba facility since 1992. In 2006, we completed a $31 million expansion at that facility which increased total capacity to 250,000 square feet, providing additional manufacturing capacity and capability. Among the products manufactured in Steinbach in 2008 were Wellbutrin® XL, Ultram® ER, Cardizem® LA, and Tiazac® XC.

        The Dorado, Puerto Rico facility totals 145,000 square feet. This facility is set up to support the manufacture of controlled release and FlashDose® products and houses the packaging operations for Tiazac®, Wellbutrin® XL, Ultram® ER, Vasotec®, Vaseretic®, Cardizem®, Ativan® and Isordil® products for the U.S. market. We have owned the Dorado manufacturing facility since January 2001, and subsequently upgraded it to accommodate our process and packaging requirements. Packaging operations at this facility commenced in January 2003.

        The Carolina, Puerto Rico facilities total 35,000 square feet, including a 25,000 square-foot owned manufacturing facility and a 10,000 square-foot leased warehouse space. This plant is specially constructed for the high volume production of controlled release beads.

        In May 2008, in connection with our New Strategic Focus, we announced our intention to close our Puerto Rico manufacturing facilities, and transfer certain manufacturing processes to our Steinbach, Manitoba facility, over a period of 18 to 24 months. We believe the closure of the Puerto Rico facilities will reduce our cost infrastructure and improve the capacity utilization of our manufacturing operations. The ongoing process to wind down operations at our two Puerto Rico manufacturing facilities remains on schedule, and we anticipate that the facilities will be closed in 2010. We have begun the sale process relating to both of these facilities. We do not anticipate any impact to our existing revenue base due to the closure of the two Puerto Rico manufacturing facilities.

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Other Facilities

        Our corporate headquarters is located in Mississauga, Ontario. In December 2006, we commenced a $12.5 million 30,000 square-foot addition to the corporate headquarters facility. The expansion was completed in January 2008. In connection with our New Strategic Focus, we are in the process of monetizing our non-core assets. Under this program we are intending to complete a sale/lease-back transaction in respect of the corporate headquarters. Based on a preliminary value estimate for this facility, we expect to recognize a loss on disposal of approximately $7 million. Although that value estimate was an indicator of impairment at December 31, 2008, the expected loss has not been recorded in 2008.

        We also perform certain R&D services at a GMP-compliant leased facility in Mississauga, Ontario. The technology transfer group is based at this facility and also utilizes the facility for activities related to product and process transfers.

        CRD operates from an owned facility in Toronto, Ontario which includes various clinic areas used during clinical trials, a laboratory and administrative offices. In addition, CRD conducts its recruitment and screening activities at a leased facility, which also contains clinic facilities.

        Our principal operating subsidiary, Biovail Laboratories International SRL ("BLS") is based in Barbados, West Indies. In 2008 we relocated from our previous facility, which we had been leasing since 1992, to a newly constructed, facility in Christ Church. This new facility is used for strategic planning, and the oversight and management of product sales and related operations, product development, supply chain and logistics, contract management, licensing, intellectual property management and administration.

        The Bridgewater, New Jersey facility, which we began leasing in 2003, is used for our U.S. operations including certain clinical and R&D administration. In connection with the May 2005 restructuring of our U.S. commercial operations, we vacated a portion of our New Jersey facility.

        The Chantilly, Virginia facility continues to perform primarily R&D services and to be a technology transfer site.

        The Dublin, Ireland facility, which we purchased in 2002, was used to perform R&D services. In May 2008, we announced our intention to rationalize our pharmaceutical sciences operations in connection with our New Strategic Focus, and began exploring the option of closing the Ireland R&D facility. In August 2008, we concluded a 30-day consultation process with an employee representative group to discuss matters associated with the closure of the Ireland facility, including support for the approximately 50 employees who would be affected by this closure. The closure of the Ireland facility is now complete and all employees have been terminated. We have begun the sale process and currently expect to finalize a sale transaction for the Ireland facility by 2010. We do not anticipate any impact to our existing revenue base due to the closure of the Ireland facility. R&D activities conducted in Ireland will be consolidated at our Chantilly, Virginia facility.

        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. A portion of our pharmaceutical manufacturing capacity, as well as other critical business functions, are located in areas subject to hurricane and earthquake casualty risks. Although we have certain limited protection afforded by insurance, our business and our earnings could be materially adversely affected in the event of a major windstorm, earthquake or other natural disaster.

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        We believe that we have sufficient facilities to conduct our operations during 2009. The following table lists the location, use, size and ownership interest of our principal properties:

Location
  Use   Size   Ownership  

Mississauga, Ontario, Canada

  Corporate office, sales, marketing and administration
Research and development services
    85,000 Sq. Ft.
24,300 Sq. Ft.
    Owned
Leased
(2)

Christ Church, Barbados

 

Strategic planning; oversight and management of product sales, product development, supply chain and logistics, contract management, licensing, intellectual property management and administration

   
17,780 Sq. Ft.
   

Owned

 

Toronto, Ontario, Canada

 

Contract research and development and administration
Contract research and development

   
40,000 Sq. Ft.
11,000 Sq. Ft.
   

Owned
Leased

 

Steinbach, Manitoba, Canada

 

Manufacturing and warehousing

   
250,000 Sq. Ft.
   

Owned

 

Chantilly, VA, USA

 

Research and development services
Warehousing
Vacated and sublet

   
80,000 Sq. Ft.
10,000 Sq. Ft.
50,000 Sq. Ft.
   

Leased
Leased
Leased

 

Bridgewater, NJ, USA

 

U.S. Corporate office and administration

   
110,000 Sq. Ft.
   

Leased

 

Dorado, Puerto Rico

 

Manufacturing and warehousing

   
145,000 Sq. Ft.
   

Owned

(1)(2)

Carolina, Puerto Rico

 

Manufacturing
Warehousing

   
25,000 Sq. Ft.
10,000 Sq. Ft.
   

Owned
Leased

(1)(2)

Dublin, Ireland

 

Vacant

   
27,000 Sq. Ft.
   

Owned

(2)

(1)
To be closed in 2010, with certain manufacturing processes to be transferred to Steinbach, Manitoba facility in 2009 and 2010.

(2)
Non-core assets intended for sale/lease-back.

Legal Proceedings

        From time to time, we become involved in various legal and administrative proceedings, which include product liability, intellectual property, antitrust, governmental and regulatory investigations, and related private litigation. There are also ordinary course employment-related issues and other types of claims in which we routinely become involved, but which individually and collectively are not material.

        Unless otherwise indicated, we cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An adverse outcome in certain of these proceedings could have a material adverse effect on our business, financial condition and results of operations, and could cause the market value of our Common Shares to decline.

        From time to time, we also initiate actions or file counterclaims. We could be subject to counterclaims or other suits in response to actions we may initiate. We cannot reasonably predict the outcome of these proceedings, some of which may involve significant legal fees. We believe that the prosecution of these actions and counterclaims is important to preserve and protect our Company, our reputation and our assets.

Governmental and Regulatory Inquiries

        In July 2003, we received a subpoena from the U.S. Attorney's Office for the District of Massachusetts ("USAO") requesting information related to the promotional and marketing activities surrounding the commercial launch of Cardizem® LA. In particular, the subpoena sought information relating to the Cardizem® LA Clinical Experience Program, titled P.L.A.C.E. (Proving L.A. Through Clinical Experience). In October 2007, we received an additional related subpoena.

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        On May 16, 2008, Biovail Pharmaceuticals, Inc. (now Biovail Pharmaceuticals LLC), our subsidiary, entered into a written plea agreement with the USAO whereby it agreed to plead guilty to violating the U.S. Anti-Kickback Statute and pay a fine of $22,243,590. A hearing before the U.S. District Court in Boston, where the plea agreement must be approved, is expected to take place on April 2, 2009. On May 16, 2008, Biovail Corporation entered into a non-prosecution agreement with the USAO whereby the USAO agreed to decline prosecution of Biovail Corporation in exchange for Biovail Corporation's continuing cooperation and in exchange for our agreement to finalize a civil settlement agreement and pay a civil penalty of $2,404,286. The civil settlement agreement has not yet been finalized.

        On November 20, 2003, we received notification from the SEC indicating that the SEC would be conducting an informal inquiry relating to our accounting and disclosure practices for the fiscal year 2003. These issues included whether or not we improperly recognized revenue and expenses for accounting purposes in relation to our financial statements in certain periods, disclosure related to those statements, and whether we provided misleading disclosure concerning the reasons for our forecast of a revenue shortfall in respect of the three-month period ended September 30, 2003, and certain transactions associated with a corporate entity that we acquired in 2002. On March 3, 2005, we received a subpoena from the SEC reflecting the fact that the SEC had entered a formal order of investigation. The subpoena sought information about our financial reporting for the fiscal year 2003. Also, the scope of the investigation became broader than initially, and the period under review was extended to encompass the period January 1, 2001 to May 2004.

        On March 24, 2008, the SEC filed a civil complaint against us, Eugene Melnyk, the Company's former Chairman and CEO, Brian Crombie, the Company's former CFO, and two former officers, Kenneth Howling and John Miszuk, related to the matters investigated by the SEC. We have entered into a Consent Decree with the SEC in which we have not admitted to the civil charges contained in the complaint but have paid $10,000,001 to the SEC to fully settle the matter. As part of the settlement, the Company has also agreed to an examination of its accounting and related functions by an independent consultant. The settlement does not include the four individuals. The Company is indemnifying these individuals for their legal costs.

        In the Spring of 2007 we were contacted by the U.S. Attorney's Office for the EDNY, who informed us that the office is conducting an investigation into the same matters that the SEC is investigating. The EDNY conducted interviews of several of our current or former employees and has requested documents related to fiscal years 2002 and 2003. We intend to cooperate with the investigation. We cannot predict the outcome or timing of when this matter may be resolved.

        Over the last few years, we have received a number of communications from the OSC relating to our disclosure, and/or seeking information pertaining to certain financial periods. Similar to the SEC, the OSC has advised us that it has investigated whether we improperly recognized revenue for accounting purposes in relation to the interim financial statements filed by us for each of the four quarters in 2001, 2002 and 2003, and the first quarter of 2004, and related disclosure issues. The OSC also investigated whether we provided misleading disclosure concerning the reasons for our forecast of a revenue shortfall in respect of the three-month period ending September 30, 2003, and certain transactions associated with a corporate entity that we acquired in 2002, as well as issues relating to trading in our Common Shares. These issues include whether our insiders complied with insider reporting requirements, whether persons in a special relationship with us may have traded in our shares with knowledge of undisclosed material information, whether certain transactions may have resulted in, or contributed to, a misleading appearance of trading activity in our securities during 2003 and 2004 and whether certain registrants (who are our former directors) may have had conflicts of interest in relation to the trading of our shares.

        Pursuant to a Notice of Hearing dated July 28, 2006, the staff of the OSC gave notice that an administrative hearing pursuant to sections 127 and 127.1 of the Ontario Securities Act would be held related to the issues surrounding the trading in our Common Shares. The respondents in the hearing included former Chairman and CEO Eugene Melnyk, one of our former directors, among others. We were not a party to this proceeding. The proceeding as against Eugene Melnyk has been settled. In a decision released June 20, 2008, a panel of the OSC found that the former director acted contrary to the public interest and breached section 107 of the Ontario Securities Act when he: (a) failed to provide us with accurate information concerning shares over which he shared control and direction; (b) failed to file insider reports in respect of certain trades in our securities; and

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(c) engaged in a high volume of discretionary trading in our securities during blackout periods imposed by us. A sanctions hearing has not yet taken place.

        Pursuant to a Notice of Hearing dated March 24, 2008, the staff of the OSC gave notice that an administrative hearing would be held related to the other matters investigated. The notice named the Company, former Chairman and CEO Eugene Melnyk, former CFO Brian Crombie, and Kenneth Howling and John Miszuk, two former officers. On January 9, 2009, the OSC approved a settlement reached with the Company. Pursuant to the terms of this settlement, the Company paid C$6.5 million in costs and sanctions and agreed to the appointment of an independent consultant to examine and report on the Company's training of its personnel concerning compliance with financial and other reporting requirements under applicable securities laws in Ontario. On January 27, 2009, the OSC approved a settlement with Messrs. Howling and Miszuk and, on February 10, 2009, the OSC approved a settlement with Mr. Crombie. The matter is proceeding against Mr. Melnyk.

Securities Class Actions

        In late 2003 and early 2004, a number of securities class action complaints were filed in the U.S. District Court for the Southern District of New York naming us and certain of our former officers and a former director as defendants. On or about June 18, 2004, the plaintiffs filed a Consolidated Amended Complaint (the "Complaint"), alleging, among other matters, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. We responded to the Complaint by filing a motion to dismiss, which the Court denied. Thereafter, we filed our Answer denying the allegations in the Complaint.

        On August 25, 2006, the plaintiffs filed a Consolidated Second Amended Class Action Complaint ("Second Amended Complaint"). The Second Amended Complaint alleged, among other matters, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. More specifically, the Second Amended Complaint alleged that the defendants made materially false and misleading statements that inflated the price of our stock between February 7, 2003 and March 2, 2004.

        In December 2007, we and the named individual defendants entered into an agreement in principle to settle this matter. The settlement class included, with certain exceptions, all persons or entities that purchased our common stock during the period from February 7, 2003 to March 2, 2004.

        Under the terms of the agreement, the total settlement amount was $138,000,000, out of which the Court-approved legal fees to the plaintiffs' counsel were paid. On May 9, 2008, we paid $83,048,000 in escrow to fund the settlement amount (pending final Court approval of the settlement) and our insurance carriers funded the remaining $54,952,000. The agreement contained no admission of wrongdoing by us or any of the named individual defendants, nor did we nor any of the named defendants acknowledge any liability or wrongdoing by entering into the agreement.

        The settlement received final Court approval on August 8, 2008.

        On September 21, 2005, the Canadian Commercial Workers Industry Pension Plan commenced a securities class action in Canada in the Ontario Superior Court against us and several of our officers. The action is purportedly prosecuted on behalf of all individuals other than the defendants who purchased our common stock between February 7, 2003 and March 2, 2004. The claim sought damages in excess of $100,000,000 for misrepresentation and breaches of s. 134 of the Ontario Securities Act and ss. 36 and 52 of the Competition Act, R.S. 1985, c. C-34, as well as class-wide punitive and exemplary damages. The claim essentially relied on the same facts and allegations as those cited in the Second Amended Complaint. The claim was served on us and the named officers on September 29, 2005. The plaintiffs had not taken any steps to certify the action as a class proceeding or otherwise to move it forward.

        On April 22, 2008, we and the individuals entered into an agreement to settle this matter. Under the terms of the agreement, the parties agreed that the sole source of compensation for the plaintiffs would be the U.S. settlement funds referenced above. The agreement has received final Court approval. Canadian class counsel's entitlement to legal fees was assessed at C$741,000.

        On October 8, 2008, a proposed securities class action lawsuit was filed in the U.S. District Court Southern District of New York against us, our current Chairman, one current officer and two former officers. The

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complaint has been filed on behalf of all persons and entities that purchased our securities from December 14, 2006 through July 19, 2007. The complaint relates to public statements alleged to have been made in respect of Aplenzin™ (bupropion hydrobromide tablets) during the product's U.S. regulatory approval process. We believe the claim is without merit and will defend vigorously. Accordingly, we have filed a motion to dismiss this action in its entirety. A decision is currently pending.

Antitrust

        Several class action or representative action complaints in multiple U.S. jurisdictions have been filed against us in which the plaintiffs seek damages and allege that we improperly impeded the approval of a generic form of Tiazac®. Those actions filed in U.S. federal courts were filed in, or transferred to, and in some cases consolidated or coordinated in, the U.S. District Court for the District of Columbia. We believe that the complaints are without merit and that our actions were in accordance with our rights under the Hatch-Waxman Act and applicable law.

        The Court granted our motion for summary judgment seeking to dismiss all of the federal actions, which the federal plaintiffs appealed. These appeals were consolidated by the Court of Appeals and, on July 25, 2008, the Court of Appeals affirmed the dismissal of those actions.

        We have brought the Court's decision on our motions for summary judgment to the attention of the Superior Court of the State of California for Los Angeles County, the Superior Court of the State of California for the County of San Diego and the Superior Court of the State of California for the County of Alameda, where several related State Court actions were pending. The Superior Court for the County of San Diego directed that certain discovery concerning the regulatory problems of Andrx Corporation and Andrx Pharmaceuticals Inc. (collectively, the "Andrx Group") that was already produced to the federal plaintiffs be made available to the plaintiffs in that case. We complied with the Court's direction and then moved to dismiss the amended complaint in the case. The Court granted our motion and dismissed the complaint with leave for the plaintiffs to file an amended complaint, which they filed. We then moved to dismiss the amended complaint. The Court also granted that motion and dismissed the amended complaint with prejudice. The plaintiffs moved to have the Court reconsider its decision, which the Court denied. The plaintiffs appealed, but their appeal was dismissed after they failed to file an appellate brief. The actions in the other California courts were stayed pending the final disposition of the cases pending in the District of Columbia. As a result of the Court of Appeals affirming the dismissal of the federal claims, two of the California State actions have been dismissed. The California plaintiffs, in the remaining two actions, must decide whether or not they will pursue their state court actions. Since the Court of Appeals' decision upholding summary judgment they have not taken any steps to pursue these actions.

        Several class action and individual action complaints in multiple jurisdictions have been commenced jointly against us, Elan Corporation plc ("Elan") and Teva relating to two agreements: one between us and Elan for the licensing of Adalat® CC products from Elan, and the other between us and Teva for the distribution of those products in the U.S. These actions were transferred to the U.S. District Court for the District of Columbia. The agreements in question have since been resolved as a result of a consent decree between Elan and Biovail and the U.S. Federal Trade Commission.

        We believe these suits are without merit because, among other reasons, we believe that any delay in the marketing or out-licensing of our Adalat® CC product was due to manufacturing difficulties we encountered and not because of any improper activity on our part.

        We and the other defendants filed a motion to dismiss, and the Court denied our motion to dismiss the damage claims brought on behalf of both a purported class of so-called "direct purchasers" and individual direct purchasers who have sued directly, generally consisting of distributors and large chain drug stores, but dismissed the claims of a class of consumers and so-called "indirect purchasers". The remainder of the federal action is proceeding on the merits through the normal legal process. The Court granted plaintiffs' motion for class certification on November 21, 2007 and certified a class of alleged "direct purchasers".

        In December 2007, we and the other defendants moved for the Court to reconsider that decision and the Court denied that motion on November 3, 2008. On November 18, 2008, we and the other defendants filed a petition in the D.C. Circuit pursuant to Fed. R. Civ. Pro. 23(f), requesting leave to appeal from the district

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court's grant of class certification. The D.C. Circuit denied the defendants' leave to appeal on February 23, 2009. On December 23, 2008, we and the other defendants moved for summary judgment as to the entirety of the case.

        On March 21, 2006, we were advised that an additional claim in respect of this fact situation was filed by Maxi Drug Inc. d/b/a Brooks Pharmacy in the U.S. District Court, District of Columbia. We have accepted service of this complaint, and the case will proceed on the merits according to the schedule set by the Court in the related federal cases pending in the District of Columbia.

        On April 4, 2008, a direct purchaser plaintiff filed a class action antitrust complaint in the U.S. District Court for the District of Massachusetts against us and SmithKline Beecham Inc. ("SmithKline") seeking damages and alleging that we and SmithKline took actions to improperly delay FDA approval for generic forms of Wellbutrin® XL. The direct purchaser plaintiff in the Massachusetts federal court lawsuit voluntarily dismissed its complaint on May 27, 2008, and shortly thereafter refiled a virtually identical complaint in the U.S. District Court for the Eastern District of Pennsylvania. In late May and early June 2008, a total of seven additional direct and indirect purchaser class actions were also filed against us and SmithKline in the Eastern District of Pennsylvania, all making similar allegations. These complaints have now been consolidated resulting in a lead direct purchaser and a lead indirect purchaser action.

        We believe that each of these complaints lacks merit and that our challenged actions complied with all applicable laws and regulations, including federal and state antitrust laws, FDA regulations, U.S. patent law, and the Hatch-Waxman Act. We have not yet answered the complaints but have moved to dismiss all complaints. No decision has yet been rendered.

Intellectual Property

        On February 3, 2006, we and Laboratoires Des Produits Éthiques Ethypharm instituted an action against Sandoz Canada Inc. ("Sandoz") and Andrx Group stating that certain patents applicable to Tiazac® have been infringed contrary to the Patent Act (Canada) by the defendants. In addition, we are seeking injunctive relief restraining the defendants from offering for sale and/or manufacturing in Canada any product covered by our patents and/or procuring the infringement of our patents.

        The defendants served us with a Statement of Defence and Counterclaim on May 15, 2006. We delivered our reply on May 30, 2006, and pleadings closed in June 2006. The matter is proceeding in the ordinary course.

        In August 2006, Sandoz brought an action against us under section 8 of the Patented Medicine (NOC) Regulations demanding damages for having been kept off the market with its generic version of Tiazac® due to prohibition proceedings taken against Sandoz's predecessor RhoxalPharma Inc. by us under the Patented Medicine (NOC) Regulations. The prohibition proceedings were subsequently dismissed in November of 2005. This action is proceeding in the ordinary course and we cannot assess the merits, if any, of the claim at this stage.

        On November 7, 2008, Novopharm brought an action against us under section 8 of the Patented Medicine (NOC) Regulations demanding damages for having been kept off the market with its generic version of Wellbutrin® SR due to prohibition proceedings taken against them by us under the Patented Medicine (NOC) Regulations. The prohibition proceedings were subsequently dismissed in January 2005. This action is proceeding in the ordinary course.

        Apotex Inc. ("Apotex") has filed a submission with the Minister of Health in Canada, which seeks approval of APO-Metformin ER 500 mg, a generic form of Glumetza®. In connection with that submission, Apotex has served us with a Notice of Allegation in respect of two patents listed in the Patent Register. Apotex alleges that APO-Metformin ER will not infringe the patents and, alternately, that the patents are invalid. On January 23, 2008, we instituted legal proceedings in the Federal Court of Canada that prevented the issuance of a Notice of Compliance to Apotex until these proceedings are concluded, or until the expiry of 24 months from the date that our application in the Federal Court of Canada was issued, whichever is earlier. While a date for the hearing of our application has not yet been established, it is anticipated that the matter will come to a hearing before a judge of the Federal Court of Canada in early 2010.

        Par Pharmaceutical Companies, Inc. ("Par") filed an ANDA with the FDA seeking approval to market Tramadol Hydrochloride Extended Release Tablets, 200 mg. On May 9, 2007, BLS, along with Purdue Pharma Products L.P. ("Purdue"), Napp Pharmaceutical Group Ltd. ("Napp") and OMI filed a complaint in the

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U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,254,887 by the filing of that ANDA, thereby triggering a 30-month stay of FDA's approval of that application. Par has answered the complaint and asserted counterclaims of non-infringement and patent invalidity. The plaintiffs have denied the counterclaims. On May 22, 2007, Par informed us that it had filed a supplemental ANDA seeking approval to market Tramadol Hydrochloride Extended Release Tablets, 100 mg. On June 28, 2007, the same plaintiffs filed another complaint in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,254,887 by the filing of that ANDA, thereby triggering a 30-month stay of FDA's approval of the 100 mg strength formulation.

        On July 23, 2007, Par answered the second complaint and asserted counterclaims of non-infringement and patent invalidity. On September 24, 2007, Par informed us that it had filed another supplemental ANDA seeking approval to market Tramadol Hydrochloride Extended Release Tablets, 300 mg. On October 24, 2007, the same plaintiffs filed another complaint in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,254,887 by the filing of that ANDA, thereby triggering a 30-month stay of FDA's approval of the 300 mg strength formulation. A Markman hearing claims construction ruling was released on November 4, 2008.

        BLS filed, and was granted, a motion for dismissal of BLS from the case. Subsequently, OMI has also been dismissed from the case. The case will continue between the plaintiff and Par. BLS's and OMI's dismissals from the case are not expected to substantively impact the proceedings. The hearing in this matter is expected to commence on April 17, 2009.

        On July 2, 2008, we received a Notice of Paragraph IV Certification for Tramadol Hydrochloride Extended-release Tablets, 100 mg, a generic version of Ultram® ER, from Impax. BLS filed suit along with Purdue, Napp and OMI in the U.S. District Court for the District of Delaware pursuant to the provisions of the Hatch-Waxman Act. As a result, FDA approval of Impax's generic product has been automatically stayed for 30 months until January 2, 2011. BLS filed, and was granted, a motion for dismissal from the case. This matter will continue between Par, OMI and Purdue.

        On September 23, 2008, we received a Notice of Paragraph IV Certification for Tramadol Hydrochloride Extended-release Tablets, 200 mg and 300 mg, generic versions of Ultram® ER, from Impax. Purdue, Napp and OMI filed a complaint in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,254,887 by the filing of that ANDA, thereby triggering a 30-month stay of the FDA's approval of that application. The matter is proceeding in the ordinary course.

        BLS filed an ANDA with the FDA seeking approval to market Venlafaxine Hydrochloride Extended-Release capsules equivalent to the 37.5, 75 and 150 mg doses of Effexor® XR. On June 26, 2008, Wyeth filed a complaint against Biovail Corporation, BTL and BLS in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,274,171 B1, 6,403,120 and 6,419,958 B2 by the filing of that ANDA, thereby triggering a 30-month stay of the FDA's approval of that application. On September 25, 2008 the Company filed its Answer and Affirmative Defenses along with counterclaims of non-infringement and invalidity. The case is in its preliminary stages and will proceed in the ordinary course. No trial date has yet been set.

        On or about June 26, 2008, BLS received Notices of Paragraph IV Certification from Sun Pharmaceutical Industries, Ltd., India ("Sun India") for diltiazem hydrochloride extended-release capsules, 120, 180, 240, 300, and 360 mg strengths, a generic version of Cardizem® CD. On August 8, 2008, BLS filed suit against Sun India in the U.S. District Court of New Jersey alleging patent infringement of U.S. Patent Nos. 5,470,584, 5,286,497 and 5,439,689 pursuant to the provisions of the Hatch-Waxman Act. BLS has also sought declaratory judgment of infringement for all three patents. These suits are expected to result in a 30-month stay of the FDA approval of the 120, 180, 240 and 300 mg strengths, and may, subject to an appropriate finding by the trial court, result in a 30-month stay of approval on the 360 mg strength. There are currently no unexpired patents listed against BLS's 360 mg strength product listed in the FDA's Orange Book database. On September 30, 2008 Sun delivered its Answer and Counterclaim, which include declarations of non-infringement, invalidity and unenforceability as well as certain antitrust allegations. The unenforceability and antitrust claims have been stayed pending a determination of the Company's infringement claims.

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        BLS filed an ANDA with the FDA seeking approval to market Fenofibrate Tablets in 48 mg and 145 mg dosage sizes. On November 3, 2008, Abbott and Laboratoires Fournier S.A. filed a complaint against Biovail Corporation and BLS in the U.S. District Court for the Northern District of Illinois alleging infringement of U.S. Patent Nos. 6,277,405, 7,037,529, and 7,041,319 by the filing of the ANDA, thereby triggering a 30-month stay of FDA's approval of that application. This matter has now been transferred to the District of New Jersey. On November 3, 2008, Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. also filed a complaint against Biovail Corporation and BLS in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 5,145,684, 7,276,249, and 7,320,802 by the filing of the ANDA. The Answers and Counterclaims of Biovail Corporation and BLS have been filed. These cases are in their preliminary stages and will proceed in the ordinary course. Case schedules have not yet been set.

        On or about December 1, 2008, the FDA accepted an ANDA filed by BLS seeking approval to market generic formulations of the 200 mg, 300 mg and 400 mg strengths of quetiapine fumarate extended-release tablets (sold under the brand name Seroquel® XR by AstraZeneca Pharmaceuticals LP ("AstraZeneca"). On January 9, 2009, AstraZenca and AstraZeneca UK Limited filed a complaint against Biovail Corporation, BLS, and BTA Pharmaceuticals, Inc. in the U.S. District Court for the District New Jersey alleging infringement of U.S. Patent Nos. 4,879,288 and 5,948,437 by the filing of that ANDA, thereby triggering a 30-month stay of the FDA's approval of that application. Answers and Counterclaims have not been filed. The case is in its preliminary stages and will proceed in the ordinary course. No trial date has yet been set.

Defamation and Tort

        On April 29, 2003, Jerry I. Treppel, a former analyst at BAC, commenced an action in the U.S. District Court for the Southern District of New York naming as defendants us and certain of our officers, and against Michael Sitrick and Sitrick & Company, Inc., in their capacity as our consultants, in which he has alleged that he was defamed by the defendants and that our actions resulted in damages to him by way of lost employment and employment opportunities and saught monetary damages as a result thereof.

        We filed a motion to dismiss this action, which, after rehearing, the Court granted in part and denied in part. In response, the plaintiff filed a second amended complaint on March 24, 2005, which generally repeated the allegations and asserted that all defendants acted in concert and participated in the defamatory and other alleged misconduct.

        On May 27, 2005, Eugene Melnyk, our former Chairman and CEO, filed an answer to the second amended complaint and a counterclaim against Mr. Treppel. This counterclaim alleges defamation, defamation per se and civil conspiracy. Mr. Melnyk's claims relate to, among other things, written and oral communications made by Mr. Treppel that caused damage to Mr. Melnyk's professional and business reputation.

        We and the named defendants, including Mr. Melnyk, filed a motion to dismiss the second amended complaint. Mr. Treppel also moved to dismiss the counterclaim brought by Mr. Melnyk.

        On August 30, 2005, the Court granted in part and denied in part the motion to dismiss Mr. Treppel's claims, and dismissed the case with prejudice against three of the five defendants. In the Order the Court further noted that the remaining claims against us and the only remaining individual defendant, Mr. Melnyk, were limited to the defamation, tortious interference and civil conspiracy claims arising out of three statements he found to be susceptible of a defamatory meaning.

        The Court also denied in part and granted in part Mr. Treppel's motion to dismiss Mr. Melnyk's counterclaims against Mr. Treppel. This counterclaim is therefore proceeding on certain of the claims of defamation and defamation per se made by Mr. Melnyk.

        Following mediation this matter was settled in January 2009. The terms of the settlement are confidential; however, such terms are not material to Biovail's cash flow or operations.

Biovail Action Against S.A.C. and Others

        On February 22, 2006, we filed a lawsuit in Superior Court, Essex County, New Jersey, seeking $4.6 billion in damages from 22 defendants (the "S.A.C. Complaint"). The S.A.C. Complaint alleges that the defendants participated in a stock market manipulation scheme that negatively affected the market price of our shares and

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alleges violations of various state laws, including the New Jersey Racketeer Influenced and Corrupt Organizations Act, pursuant to which treble damages may be available.

        The original defendants included: S.A.C. Capital Management, LLC, S.A.C. Capital Advisors, LLC, S.A.C. Capital Associates, LLC, S.A.C. Healthco Funds, LLC, Sigma Capital Management, LLC, Steven A. Cohen, Arthur Cohen, Joseph Healey, Timothy McCarthy, David Maris, Gradient Analytics, Inc., Camelback Research Alliance, Inc., James Carr Bettis, Donn Vickrey, Pinnacle Investment Advisors, LLC, Helios Equity Fund, LLC, Hallmark Funds, Gerson Lehrman Group, Gerson Lehrman Group Brokerage Services, LLC, Thomas Lehrman, Patrick Duff, and James Lyle. The defendants Hallmark Funds and David Maris have been voluntarily dismissed from the action by the Company.

        The lawsuit is in its early stages. No discovery has been conducted. All defendants have moved to dismiss the complaint. These motions have yet to be heard by the Court.

        On January 26, 2007, U.S. District Judge Richard Owen issued an Order in a securities class action proceeding against us in the U.S. District Court for the Southern District of New York (described more fully above) that sanctioned us for our use in the S.A.C. Complaint of certain documents obtained in lawful discovery in the securities class action. Judge Owen ordered the return of the documents and the redaction of the S.A.C. Complaint. On February 22, 2007, we filed an Amended Complaint.

        Pursuant to a March 16, 2007 Order, this case has been stayed pending the resolution of motions to dismiss in a factually similar shareholder class action that does not involve us. This stay currently remains in force. On February 19, 2009 the factually similar shareholder class action was dismissed without prejudice.

General Civil Actions

        Complaints have been filed by the City of New York, the State of Alabama, the State of Mississippi and a number of counties within the State of New York, claiming that we, and numerous other pharmaceutical companies, made fraudulent misstatements concerning the "average wholesale price" of their prescription drugs, resulting in alleged overpayments by the plaintiffs for pharmaceutical products sold by the companies.

        The City of New York and plaintiffs for all the counties in New York (other than Erie, Oswego and Schenectady) have voluntarily dismissed us and certain others of the named defendants on a without prejudice basis. Similarly, the State of Mississippi has voluntarily dismissed its claim against us and a number of defendants on a without prejudice basis.

        In the case brought by the State of Alabama, we have answered the State's Amended Complaint and discovery is ongoing. The cases brought by the New York State counties of Oswego, Schenectady and Erie, each of which was originally brought in New York State court, were removed by defendants to federal court on October 11, 2006. We answered the complaint in each case after the removal to federal court. The cases were subsequently remanded and, following the remand, the defendants made an application to the New York State Litigation Coordinating Panel for pretrial coordination of the three actions. That application is pending.

        Based on the information currently available, and given the small number of our products at issue and the limited time frame in respect of such sales, we anticipate that even if these actions are successful, any recovery against us would likely not be significant.

        On May 6, 2008, BLS commenced an arbitration under FINRA rules against Credit Suisse seeking $26,775,000 in compensatory damages and $53,550,000 in punitive damages. The Statement of Claim alleges that Credit Suisse, as non-discretionary manager of BLS's cash management account, fraudulently or negligently, and in breach of the parties' customer agreement, invested BLS's assets in auction rate securities, which were not among BLS's approved investments. Credit Suisse has now delivered its Answer and Response. The matter is in its preliminary stages, and the Company anticipates it will proceed in the ordinary course. A hearing is expected to commence this summer.

Item 4A. Unresolved Staff Comments

        Not Applicable.

Item 5.    Operating and Financial Review and Prospects

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MANAGEMENT'S DISCUSSION AND ANALYSIS

(All dollar amounts expressed in U.S. dollars)

        The following Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") should be read in conjunction with our audited consolidated financial statements and related notes thereto prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for the fiscal year ended December 31, 2008 (our "Consolidated Financial Statements").

        Additional information relating to Biovail Corporation, including our Annual Report on Form 20-F for the fiscal year ended December 31, 2008 (our "2008 Form 20-F"), is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission ("SEC") website at www.sec.gov.

        The discussion and analysis contained in this MD&A are as of February 27, 2009.

FORWARD-LOOKING STATEMENTS

        Caution regarding forward-looking statements and "Safe-Harbor" statements under the U.S. Private Securities Litigation Reform Act of 1995:

        To the extent any statements made in this MD&A 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, our objectives, goals, strategies, beliefs, intentions, plans, estimates, and outlook, including, without limitation, statements concerning the following:

    intent and ability to implement and effectively execute plans and initiatives associated with our New Strategic Focus (as defined below) and the anticipated impact of such New Strategic Focus;

    beliefs related to pricing, reimbursement, and exclusivity periods for products in the specialty Central Nervous System ("CNS") markets;

    expected impact of the acquisition of Prestwick Pharmaceuticals, Inc. ("Prestwick") on earnings per share ("EPS") and cash flows;

    timing of the commercial launch of Aplenzin™ by our strategic marketing partner, sanofi-aventis U.S. LLC ("sanofi-aventis");

    expected future taxable income in determining any required deferred tax asset valuation allowance;

    anticipated effect of the utilization of U.S. tax loss carryforwards on future effective tax rates;

    expectations regarding the development of products outside the therapeutic area of specialty CNS disorders;

    timing regarding the planned closure of our two Puerto Rico manufacturing facilities and the associated costs, the anticipated impact of such closure, our ability to sell or divest these facilities, as well as the possible impact on our manufacturing processes;

    intent and timing of the sale of our recently closed Dublin, Ireland research and development facility;

    beliefs and positions related to, results of, and costs associated with, certain legacy litigation and regulatory proceedings, including, but not limited to, the outcome of the court hearing to approve an agreement reached between a subsidiary of our Company and the U.S. Attorney's Office ("USAO") for the District of Massachusetts related to activities surrounding the 2003 commercial launch of Cardizem® LA;

    intent regarding and timing of the planned disposals of non-core assets, and the anticipated proceeds of such dispositions;

    amount of expected loss on disposal of our corporate headquarters;

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

    intent and ability to continue the repurchase of our common shares under the share repurchase program;

    views and beliefs related to the outcome of patent infringement trial proceedings regarding, and the timing of the introduction of generic competition related to, Ultram® ER;

    expected timing of the introduction of a generic version of Cardizem® LA;

    impact that generic competition to the 360mg dosage strength of Cardizem® CD may have on our product sales and the carrying value of the associated intangible asset;

    intent regarding the defence of our intellectual property against infringement;

    amount and timing of expected contribution from our product-development pipeline;

    amount and timing of investment in research and development efforts, and expected tracking of research and development expenses;

    additional expected charges and anticipated annual savings related to ongoing or planned efficiency initiatives;

    outcome of business development efforts, including acquisitions or in-licensing opportunities;

    anticipated supply price for Wellbutrin XL® in 2009 and beyond;

    expected timing to address any shortfall in our supply of Ultram® ER 100mg tablets;

    timing, results, and progress of research and development efforts, including efforts to locate a development partner for BVF-045 and to initiate Phase III studies for BVF-324;

    expected impact of the resolution of certain legacy litigation and regulatory proceedings and the impact associated with a recently announced litigation proceeding;

    sufficiency of cash resources, including those available under the accordion feature of our credit facility, or through the refinancing of our credit facility, to support future spending requirements;

    intent and ability to make future dividend payments;

    expected capital expenditures and business development activities;

    impact of market conditions on our ability to access additional funding at reasonable rates;

    investment recovery, liquidity, valuation, and impairment conclusions associated with our investment in auction rate securities;

    intent and ability to hold auction rate securities until a recovery in market value occurs (or until maturity if necessary);

    expected potential milestone payments in connection with research and development arrangements;

    ability to manage exposure to foreign currency exchange rate changes and interest rates;

    impact of short-term fluctuations in our share price on the fair value of our Company's reporting unit for purposes of testing goodwill for impairment;

    availability of benefits under tax treaties;

    continued availability of low effective tax rates for our operations;

    expected stock-based compensation expense;

    expected impact of adoption of new accounting standards; and

    intent to continue to follow U.S. GAAP and resulting comparability with our U.S.-based industry peers.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

        These forward-looking statements may not be appropriate for other purposes.

        Forward-looking statements can generally be identified by the use of words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may", "target", 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. Although we have indicated above certain of these statements set out herein, all of the statements in this MD&A 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 prescription trends, pricing and the formulary and/or Medicare/Medicaid positioning for our products; the competitive landscape in the markets in which we compete, including, but not limited to, the availability or introduction of generic formulations of our products; timelines associated with the development of, and receipt of regulatory approval for, our new products; the opportunities present in the market for therapies for CNS disorders; and the resolution of insurance claims relating to certain litigation and regulatory proceedings. 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 difficulty of predicting U.S. Food and Drug Administration ("FDA"), Canadian Therapeutic Products Directorate and European regulatory approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the results of continuing safety and efficacy studies by industry and government agencies, uncertainties associated with the development, acquisition and launch of new products, contractual disagreements with third parties, availability of capital and ability to generate operating cash flows and satisfy applicable laws for dividend payments, the continuation of the recent market turmoil, market liquidity for our common shares, our ability to secure third-party manufacturing arrangements, our satisfaction of applicable laws for the repurchase of our common shares, our ability to retain the limited number of customers from which a significant portion of our revenue is derived, the impact of a decline in our market capitalization on the carrying value of goodwill, reliance on key strategic alliances, delay in or transition issues arising from the closure of our Puerto Rico and Ireland facilities, the successful implementation of our New Strategic Focus, our eligibility for benefits under tax treaties, the availability of raw materials and finished products, the regulatory environment, the unpredictability of protection afforded by our patents and other intellectual proprietary property, the mix of activities and income in the various jurisdictions in which we operate, successful challenges to our generic products, infringement or alleged infringement of the intellectual property rights of others, the ability to manufacture and commercialize pipeline products, unanticipated interruptions in our manufacturing operations or transportation services, the expense, timing and uncertain outcome of legal and regulatory proceedings and settlements thereof, payment by insurers of insurance claims, currency and interest rate fluctuations, consolidated tax rate assumptions, fluctuations in operating results, the market liquidity and amounts realized for auction rate securities held as investments, and other risks detailed from time to time in our filings with the SEC and the Canadian Securities Administrators ("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 in the body of this MD&A, as well as under the heading "Key Information — Risk Factors" under Item 3.D of our 2008 Form 20-F. 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 our Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We undertake no obligation to update or revise any forward-looking statement.

COMPANY PROFILE

        We are a specialty pharmaceutical company, engaged in the formulation, clinical testing, registration, manufacture, and commercialization of pharmaceutical products. We have various research and development,

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


clinical research, manufacturing and commercial operations located in Barbados, Canada, the U.S., and Puerto Rico.

        Prior to 2008, we focused our growth on the development and large-sale manufacture of pharmaceutical products incorporating oral drug-delivery technologies. Our main therapeutic areas of focus were non-specialty CNS disorders, pain management and cardiovascular disease. Our successes in this regard include our Wellbutrin XL®, Ultram® ER and Cardizem® LA products.

        In 2008, as a result of significant changes in the environment for oral controlled-release products over the past several years — including increased sophistication and enhanced competition from manufacturers of generic drugs that compete with our products, an industry-wide slowdown in new drug approvals, and increasing financial pressure on third-party reimbursement policies — we developed a new business model focused on the development and commercialization of medicines that address unmet medical needs in niche specialty CNS markets (see "New Strategic Focus" below).

NEW STRATEGIC FOCUS

        In May 2008, we announced a new strategic focus (our "New Strategic Focus") based on leveraging our core capabilities in drug delivery and formulation for the development and commercialization of products targeted towards unmet medical needs in the area of specialty CNS disorders, with a core focus on neurological disorders. The implementation of this strategic shift to focus on specialty CNS markets was necessitated by the increasingly rapid genericization of our portfolio of oral controlled- release branded products. It had become increasingly difficult to establish and defend our intellectual property against generic drug manufacturers, which significantly reduced the expected market exclusivity period for our products.

        Our prior business model was focused on the application of our oral drug-delivery technologies to create controlled-release formulations of existing drugs within multiple therapeutic areas. Notwithstanding the benefits of our products, government and other payer groups have increasingly demanded that new drugs demonstrate clinically meaningful enhancements over existing therapies to secure favourable pricing and reimbursement. Incremental advances in convenience and patient compliance (e.g., Wellbutrin XL®) no longer command price premiums and pharmacies have strong financial incentives to substitute generics, when available, for branded products and once-daily formulations (e.g., Ultram® ER).

        We believe that the specialty CNS market provides enhanced regulatory exclusivity periods, and an attractive pricing and reimbursement environment for differentiated products with clear clinical benefits. In addition, as many specialty CNS products target smaller patient populations, this market may be less attractive to large pharmaceutical companies and generic drug manufacturers, allowing for longer effective market exclusivity periods.

Key Initiatives

        Key initiatives of our New Strategic Focus include efforts to:

    in-license or acquire specialty CNS compounds in late-stage development, with particular interest in orphan drug categories, and other specialty therapies targeting smaller patient and physician populations;

    invest approximately $600 million on research and development in the 2008 to 2012 timeframe, including upfront and milestone payments related to in-licensing activities; and

    apply existing drug-delivery technologies and acquired technologies to enhance existing specialty CNS products.

        In support of the implementation of our New Strategic focus, we have also undertaken other activities that are intended to promote efficiency in our operations, significantly reduce our cost structure to better align

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

expenses with current projected revenues, and ensure capital is available to be deployed in support of our new business model. Key initiatives in this regard include efforts to:

    rationalize manufacturing operations, pharmaceutical sciences operations, and general and administrative expenses;

    drive cost savings through other operational efficiencies, and the resolution of legacy litigation and regulatory matters; and

    explore the divestiture and/or monetization of certain non-core assets.

        As outlined below under "Recent Developments", we have made significant progress in addressing each of the foregoing initiatives.

RECENT DEVELOPMENTS

Business Development

Acquisition of Prestwick

        On September 16, 2008, we acquired 100% of Prestwick for a total net purchase price of $101.9 million. The acquisition of Prestwick was accounted for as a business combination under the purchase method of accounting. Accordingly, the results of Prestwick's operations have been included in our Consolidated Financial Statements since September 16, 2008. The purchase price paid was primarily allocated to identifiable intangible assets of $157.9 million and deferred revenue of $50.0 million. The identifiable intangible assets relate to the acquired Xenazine® and Nitoman® product rights described below, which are being amortized over an estimated useful life of 10 years.

        Prestwick holds the U.S. and Canadian licensing rights to tetrabenazine tablets (known as Xenazine® in the U.S. and Nitoman® in Canada), which it had previously acquired from Cambridge Laboratories (Ireland) Ltd. ("Cambridge"), the worldwide license holder of tetrabenazine. On August 15, 2008, a New Drug Application ("NDA") for Xenazine® received FDA approval for the treatment of chorea associated with Huntington's disease. Xenazine® was granted Orphan Drug designation by the FDA, which provides this product with seven years of market exclusivity in the U.S. from the date of FDA approval. Nitoman® has been available in Canada since 1996, where it is approved for the treatment of hyperkinetic movement disorders, including Huntington's chorea.

        Xenazine® is being commercialized in the U.S. by Ovation Pharmaceuticals, Inc. ("Ovation") under an exclusive supply and marketing agreement entered into between Prestwick and Ovation prior to our acquisition of Prestwick. Ovation paid Prestwick $50.0 million for the exclusive rights to market and distribute Xenazine® for an initial term of 15 years. We will supply Xenazine® product to Ovation for a variable percentage of Ovation's annual net sales of the product. For annual net sales up to $125 million, our supply price will be 72% of net sales. Beyond $125 million, our supply price will be 65% of net sales. At both tiers, we will acquire Xenazine® product from Cambridge at a supply price of 50% of Ovation's net sales. In addition, Prestwick holds options to develop future related products with Ovation for the U.S. market in conjunction with Cambridge.

        We expect the acquisition of Prestwick to be accretive to both EPS and cash flows in 2009.

Aplenzin™

        On April 23, 2008, the FDA approved our NDA for Aplenzin™ for the treatment of major depressive disorder. Aplenzin™ is a once-daily formulation of bupropion hydrobromide and has been approved in 174mg, 348mg, and 522mg extended-release tablets. In December 2008, we entered into a supply agreement with sanofi-aventis for the marketing and distribution of Aplenzin™ in the U.S. and Puerto Rico. We anticipate that sanofi-aventis will launch the 348mg and 522mg dosage strengths of Aplenzin™ early in the second quarter of 2009. We will manufacture and supply Aplenzin™ to sanofi-aventis at contractually determined supply prices ranging from

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


25% to 35% of sanofi-aventis's net selling price, depending on the level of net sales of Aplenzin™ in each calendar year.

Reduction of Valuation Allowance on Deferred Tax Assets

        In the fourth quarter of 2008, we recorded a deferred income tax benefit of $90.0 million related to a change in our assessment of the realizability of a portion of our deferred tax assets related to approximately $350 million of operating loss carryforwards in the U.S. We recorded a valuation allowance to reduce these loss carryforwards to an amount that we considered more likely than not to be realized. As of December 31, 2008, our U.S. operations had earned cumulative pre-tax income for the latest three years, reflecting the positive impact of restructuring programs implemented in December 2006 (as described below under "Results of Operations — Restructuring Costs") and May 2005 to reduce the overall cost structure of these operations. In determining the amount of the valuation allowance that was necessary, we considered the taxable income expected to be generated in the U.S. in future years. On that basis, we considered it more likely than not that we will be able to utilize approximately $230 million of U.S. operating loss carryforwards. As a result, we reduced the valuation allowance recorded against these loss carryforwards, with a corresponding increase to net income in the fourth quarter of 2008. We anticipate that the utilization of these loss carryforwards to reduce taxable income in the U.S. will result in an increase in our overall effective tax rate commencing in fiscal 2009.

Research and Development

        While pursuing efforts to identify and add specialty CNS opportunities to our product pipeline, we continue to work on the development of a number of pipeline products that originated from our prior business model. These products include BVF-045, a combination of Aplenzin™ and an undisclosed selective serotonin reuptake inhibitor, and BVF-324, an undisclosed product for the treatment of a prevalent sexual dysfunction. In addition, during 2008, we filed three Abbreviated New Drug Applications ("ANDA") with the FDA related to the following programs:

    BVF-065 — venlafaxine capsules equivalent to 37.5mg, 75mg and 150mg dosage strengths for the treatment of depression;

    BVF-203 — fenofibrate capsules in 48mg and 145mg dosage strengths for the treatment of high cholesterol; and

    BVF-058 — quetiapine capsules in 200mg, 300mg and 400mg dosage strengths for the treatment of schizophrenia and bipolar disorder.

        We are subject to infringement claims by the innovator companies related to each of these ANDA filings, thereby triggering a 30-month stay of the FDA's approval pursuant to the provisions of the Hatch-Waxman Act.

        We expect to continue to apply our core drug-delivery and formulation technologies to select opportunities outside the therapeutic area of specialty CNS disorders if stringent financial and commercialization criteria are met.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Restructuring

        In 2008, we incurred a restructuring charge of $70.2 million, primarily related to the rationalization of our manufacturing and pharmaceutical sciences operations. The following table summarizes the major components of the restructuring costs recognized in 2008:

 
  Asset Impairments   Employee Termination Benefits    
   
 
 
  Contract
Termination
and Other
Costs
   
 
($ in 000s)
  Manufacturing   Pharmaceutical
Sciences
  Manufacturing   Pharmaceutical
Sciences
  Total  

Balance, January 1, 2008

  $   $   $   $   $   $  

Costs incurred and charged to expense

    42,602     16,702     3,309     2,724     4,865     70,202  

Cash payments

                (2,724 )   (333 )   (3,057 )

Non-cash adjustments

    (42,602 )   (16,702 )           (1,186 )   (60,490 )
                           

Balance, December 31, 2008

  $   $   $ 3,309   $   $ 3,346   $ 6,655  
                           

Manufacturing Operations

        In May 2008, we announced our intention to close our two Puerto Rico manufacturing facilities and transfer certain manufacturing and packaging processes to our Steinbach, Manitoba facility, over a period of 18 to 24 months (the "shutdown period"). We believe the closure of these facilities will significantly reduce our cost infrastructure and improve the capacity utilization of our manufacturing operations.

        We conducted an impairment review of the property, plant and equipment located in Puerto Rico to determine if the carrying value of these assets was recoverable based on the expected cash flows from their remaining use during the shutdown period and their eventual disposition. That review indicated that the cash flows were not sufficient to recover the carrying value of the property, plant and equipment, and, as a result, an impairment charge of $42.6 million was recorded in 2008 to write down the carrying value of these assets to their estimated fair value. Fair value was determined based on market values for comparable assets. We anticipate that these facilities will be fully closed in 2010 and have initiated a program to locate potential buyers.

        We also expect to incur employee termination costs of approximately $9.4 million for severance and related benefits payable to the approximately 245 employees who will be terminated as a result of the planned closure of the Puerto Rico facilities. These employees will be required to provide service during the shutdown period in order to be eligible for termination benefits. Accordingly, we are recognizing the cost of those termination benefits ratably over the required future service period, including $3.3 million recognized in 2008.

Pharmaceutical Sciences Operations

        As part of our plans to rationalize our pharmaceutical sciences operations, we have closed our research and development facility in Dublin, Ireland. As a result, we recorded an impairment charge of $9.2 million in 2008 to write down the carrying value of the building and equipment located in Ireland to their estimated fair value. Fair value was determined based on market values for comparable assets. We expect to complete a sale of this facility by 2010, subject to market conditions.

        In August 2008, we concluded a 30-day consultation process with an employee representative group to discuss matters associated with the closure of the Ireland facility, including support for the approximately 50 employees who were affected by this closure. Based on the outcome of that consultation process, we recognized costs related to employee terminations of $2.7 million in 2008. Those terminations and related severance payouts were completed prior to the end of 2008.

        In the fourth quarter of 2008, we identified certain of our proprietary drug-delivery technologies that are not expected to be utilized in the development of specialty CNS products consistent with our New Strategic Focus. As a result, we recorded an impairment charge of $7.5 million to write off the carrying value of the related technology intangible assets.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Contract Termination Costs

        In connection with a restructuring of our U.S. commercial operations in May 2005, we vacated a portion of our Bridgewater, New Jersey facility. We recognized a restructuring charge at that time for a gross operating lease obligation related to the vacant space offset by estimated sublease rentals that could be reasonably obtained. Our evaluation of general economic and commercial real estate market conditions indicated that an additional charge of $4.2 million was required in 2008 to reflect lower estimated future sublease rentals, based on the expected time required to locate and contract a suitable sublease and the expected market rates for such a sublease.

Resolution of Legacy Litigation and Regulatory Matters

        During the course of 2008, we resolved six litigation and regulatory proceedings arising from allegations of conduct in the period from 2001 to March 2004, as follows:

USAO Agreement

        On May 16, 2008, we announced that a subsidiary of our Company had reached an agreement with the USAO in respect of criminal allegations related to activities surrounding the 2003 commercial launch of Cardizem® LA. In particular, the allegations relate to prior management's actions in 2002 and 2003 in respect of the Cardizem® LA clinical experience program. Pursuant to the terms of this agreement, Biovail Pharmaceuticals, Inc. (now Biovail Pharmaceuticals LLC) is expected to plead guilty to charges relating to making payments to induce purchasing or ordering of Cardizem® LA in 2003 and is expected to pay an amount of $24.6 million to fully settle this matter, which we accrued in the second quarter of 2008. As part of this agreement, Biovail Corporation and its subsidiaries, other than Biovail Pharmaceuticals LLC, expect to receive full releases for all matters related to the USAO's investigation. This agreement is subject to approval at a Court hearing that is expected to take place in April 2009.

SEC Consent Decree

        On March 24, 2008, we announced that we had reached a settlement with the SEC in respect of an investigation of our Company. The investigation related to specific accounting and financial disclosure practices, as previously disclosed, that occurred between 2001 and 2003 and resulted in a civil complaint filed by the SEC against our Company and certain former officers. On March 24, 2008, we entered into a Consent Decree with the SEC in which we did not admit to the civil charges contained in the complaint and pursuant to which we paid $10.0 million to the SEC to fully settle this matter. As part of this settlement, we also agreed to an examination of our accounting and related functions by an independent consultant.

        This settlement does not include four former officers who were also named in the complaint: Eugene Melnyk (then Chairman and Chief Executive Officer ("CEO")); Brian Crombie (then Chief Financial Officer ("CFO")); Kenneth Howling (then responsible for Corporate Communications, and later CFO until March 24, 2008); and John Miszuk (Vice-President, Controller and Assistant Corporate Secretary until March 24, 2008). To our knowledge, the allegations against these individuals have not yet been resolved. Effective March 24, 2008, Mr. Howling and Mr. Miszuk were reassigned to non-officer positions. As of December 31, 2008, none of the four former officers named in the complaint were employed by our Company.

Ontario Securities Commission Settlement

        On March 24, 2008, the Ontario Securities Commission ("OSC") issued a Notice of Hearing against our Company and each of the four former officers referred to above under "SEC Consent Decree" in respect of substantially the same matters as are described in the SEC complaint. The Notice of Hearing was accompanied by a Statement of Allegations setting out the OSC staff's allegations concerning certain accounting and financial disclosure items dating from 2001 to 2004. On January 9, 2009, we announced that the OSC approved a settlement agreement in respect of its investigation of our Company. Pursuant to the terms of this agreement, we

65



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


paid the OSC $5.3 million, including costs, to fully settle this matter. This settlement did not include the four former officers who were also named in the Statement of Allegations. Subsequently, however, Messrs. Crombie, Howling and Miszuk each separately entered into settlement agreements with the OSC.

Settlement of U.S. and Canadian Securities Class Actions

        In late 2003 and early 2004, our Company and certain former officers and directors were named as defendants in a number of securities class actions in the U.S. alleging that the defendants made materially false and misleading statements that inflated the price of our stock between February 7, 2003 and March 2, 2004. On December 11, 2007, we announced that our Company and the named individual defendants had entered into an agreement in principle to settle this matter. Pursuant to the terms of the settlement agreement, the total settlement amount payable was $138.0 million, including Court-approved legal fees payable to the plaintiffs' counsel. Upon Court approval of this agreement on August 8, 2008, we paid $83.0 million to fund the settlement amount and our insurance carriers funded the remaining $55.0 million.

        On April 23, 2008, we announced that our Company and the named individual defendants had entered into an agreement to settle the class-action shareholder litigation in a claim brought by the Canadian Commercial Workers Industry Pension Plan. Pursuant to the terms of the settlement agreement, the parties agreed that the sole source of compensation for the plaintiffs in this action was the settlement amount previously agreed to in the settlement of the U.S. securities class actions.

        The foregoing agreements to settle the U.S. and Canadian securities class actions contained no admission of wrongdoing by our Company or any of the named individual defendants, and neither our Company nor any of the named individual defendants acknowledged any liability or wrongdoing by entering into these agreements.

Treppel Matter

        On December 23, 2008, we announced that we reached a settlement to resolve all outstanding litigation involving former Banc of America Securities analyst Jerry Treppel, including all claims asserted against our Company by Mr. Treppel, and all claims by and against each of Mr. Melnyk and Mr. Treppel. The financial terms of this settlement were not material to our results of operations or cash flows.

Disposal of Non-Core Assets

Investments

        We have identified certain non-core assets for divestiture including our equity investments in Depomed, Inc. ("Depomed") and Financière Verdi ("Verdi"). During 2008, we realized a gain of $3.1 million in the aggregate on the sale of 4,234,132 common shares of Depomed for total cash proceeds of $13.2 million. Subject to market conditions, we intend to dispose our remaining 168,376 common shares of Depomed within the next 12 months. At February 25, 2009, our remaining investment in Depomed shares had an estimated fair value of $350,000. In the second quarter of 2008, we sold our entire investment in common shares and convertible debt of Verdi for cash proceeds of $12.2 million, resulting in a gain on disposal of $3.5 million.

Corporate Headquarters

        We have initiated a program to locate a buyer for our corporate headquarters in Mississauga, Ontario (including a parcel of vacant land adjacent to this facility that was classified as held for sale in the third quarter of 2008). Subsequent to any sale transaction, we intend to continue occupying the building under a leaseback arrangement with the buyer. We expect to complete the sale and leaseback of this facility in the first half of 2009.

        Based on a preliminary value estimate for this facility, we expect to recognize a loss on disposal of approximately $7 million. Although that value estimate was an indicator of impairment at December 31, 2008, the expected loss on disposal has not been recognized in our Consolidated Financial Statements. As required by U.S. GAAP, we evaluate our corporate-level assets for impairment on an entity-wide basis, and only recognize an

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


impairment loss on these assets if the carrying amount of all the assets and liabilities of our Company exceed the undiscounted cash flows of our Company as a whole. On that basis, the carrying value of our corporate headquarters was determined to be recoverable at December 31, 2008.

Share Repurchase Program

        In May 2008, we announced a share repurchase program of up to 14,000,000 common shares, representing approximately 9% of our Company's then issued and outstanding common shares. This program will be principally funded by proceeds from the sale of non-core assets. During 2008, we repurchased a total of 2,818,400 common shares under this program, at a weighted-average price of $10.46 per share, for total consideration of $29.8 million. The excess of the cost of the common shares repurchased over their assigned value totaled $3.8 million.

        The share repurchase program will terminate on June 1, 2009, or upon such earlier time that we complete our purchases. The terms of our credit facility require lenders' consent for share repurchases in excess of $50 million in the aggregate per calendar year. To date, we have not requested or obtained such consent from the lenders.

OUTLOOK

        The loss of market exclusivity and generic competition of key products could have a material negative impact on our future results of operations and cash flows. Significant ongoing intellectual property proceedings are as follows:

    Ultram® ER — Par Pharmaceuticals Companies, Inc. ("Par") is seeking FDA approval for 100mg, 200mg and 300mg generic versions of Ultram® ER . Patent infringement trial proceedings are expected to commence in April 2009. We believe a Court ruling of non-infringement in favour of Par could result in the introduction of generic competition to Ultram® ER in the second quarter of 2009, at the earliest, should Par obtain FDA approval of its generic formulation and should it decide to launch at risk pending a possible appeal.

    Cardizem® LA — Andrx Pharmaceuticals, Inc. ("Andrx") (a subsidiary of Watson Pharmaceuticals, Inc. ("Watson")) is seeking FDA approval for all dosage strengths of Cardizem® LA. In December 31, 2007, we reached a settlement agreement with Watson with respect to our patent litigation against Andrx. Under the terms of the settlement agreement, we will receive a royalty based on sales of Watson's generic version of Cardizem® LA . The agreement generally provides that Watson will not commence marketing and sales of its generic product earlier than April 1, 2009. As part of the settlement, we granted Watson an exclusive license to our U.S. patents covering Cardizem® LA for a generic version of Cardizem® LA.

    Cardizem® CD — Sun Pharmaceutical Industries, Ltd., India ("Sun India") is seeking FDA approval for generic versions of Cardizem® CD , including the 360mg dosage strength which currently is not subject to generic competition. There are currently no unexpired patents listed against our 360mg Cardizem® CD product in the FDA's Orange Book database. FDA approval of Sun India's 360mg product could have a material adverse impact on the overall sales of our Cardizem® CD branded product and on the carrying value of the intangible asset associated with the Cardizem® trademark.

        We intend to continue to aggressively defend our intellectual property against infringement.

        We do not currently anticipate any meaningful contribution from our existing product-development pipeline until the 2010-2011 timeframe. Any success in our product-development programs would be reflective of the investments in research and development we make over a number of years. On an ongoing basis, we review and optimize the projects in our development portfolio to reflect changes in the competitive environment and emerging opportunities. Our future level of research and development expenditures will depend on, among other things, the outcome of clinical testing of our products under development, delays or changes in

67



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


government required testing and approval procedures, technological developments, and strategic marketing decisions.

        As part of our New Strategic Focus on specialty CNS markets, we are targeting an investment of approximately $600 million in research and development from 2008 to 2012. In this regard, business development efforts to in-license or acquire products targeting specialty CNS markets are active with a number of U.S. and international companies. Until we in-license or acquire new specialty CNS products, we expect our research and development expenses to track below historical levels, reflecting reduced project spending and the closure of our research and development facility in Ireland.

        We are currently reviewing our procurement levels and practices and the structure of our support functions to ensure they are appropriately aligned with our Company's size and revenue base. Over the next several quarters, our ongoing and planned efficiency initiatives are expected to result in additional charges to earnings. Cumulatively, these charges, including $72.8 million recorded in 2008, are expected to be in the range of $80 million to $100 million, of which the cash component is expected to be $20 million to $40 million, including $10.2 million incurred through December 31, 2008. We anticipate that these efficiency initiatives, including the closures of our Puerto Rico and Ireland facilities, once fully implemented, will result in annual savings of $30 million to $40 million. We also remain focused on the resolution of our remaining legacy litigation matters.

CHANGES IN BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Board of Directors

        Effective May 1, 2008, our Board of Directors appointed Dr. Douglas Squires as Chairman of the Board of Directors. Dr. Squires was previously our Interim Chairman and CEO.

        At our 2008 annual meeting of shareholders held on August 8, 2008, the following new members were elected to our Board of Directors: Serge Gouin, Chairman of Quebecor Media Inc.; David Laidley, retired partner and former Chairman of Deloitte & Touche Canada; Spencer Lanthier, retired partner and former Chairman and Chief Executive of KPMG Canada; Mark Parrish, President of the International Association of Pharmaceutical Wholesalers and Senior Advisor, Frazer Healthcare Ventures; and Robert Power, former Executive Vice-President of Global Business Operations of Wyeth. In addition, Dr. Laurence Paul, Lloyd Segal, Dr. Squires, Michael Van Every, and William Wells were re-elected to our Board of Directors.

        Following the 2008 annual meeting of shareholders, the independent members of our Board of Directors appointed Mr. Lanthier as Lead Director.

Senior Management

        Effective May 1, 2008, our Board of Directors appointed Mr. Wells to succeed Dr. Squires as our CEO. Mr. Wells joined our Board of Directors in 2005, and had been Lead Director since June 30, 2007. As CEO, Mr. Wells remains on our Board of Directors. Consistent with our historical practice and our Company's corporate, operational and tax structure, Mr. Wells, as our key decision maker, is based in Barbados, where he also serves as President of Biovail Laboratories International SRL, our Company's principal operating subsidiary.

        Effective November 24, 2008, Dr. Christian Fibiger was appointed to the newly created role of Chief Scientific Officer ("CSO"). As CSO, Dr. Fibiger will be based in Barbados and will oversee the development of our product pipeline. In June 2008, we appointed Dr. Robert Butz as Vice-President, Medical and Scientific Affairs, and, in August 2008, Dr. Neil Sussman was appointed Vice-President, Neurologic and Psychiatric Development. Each of these individuals has extensive pharmaceutical industry experience and expertise in the field of CNS disorders.

        Effective September 3, 2008, Margaret Mulligan, FCA, was appointed as our new CFO. Mrs. Mulligan succeeded Adrian de Saldanha, who had served as our Interim CFO since March 24, 2008.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

MAJOR PRODUCTS

        The following table displays selected information regarding our major brand name products by therapeutic area:

 
BRAND NAME
  INDICATION(S)
  MARKET
  COMMERCIALIZATION
 

Specialty CNS

 

Xenazine®

  Huntington's chorea     U.S.   Supply and distribution agreement with Ovation.
 

Nitoman®

  Hyperkinetic movement disorders, including Huntington's chorea     Canada   Effective December 1, 2008, marketed and distributed by our internal sales organization, Biovail Pharmaceuticals Canada ("BPC").
 

Non-Specialty CNS

 

Wellbutrin XL®

  Depression     U.S.   Supply and distribution agreement with affiliates of GlaxoSmithKline plc ("GSK").
 

Ativan®

  Anxiety     U.S.   Distributed by our subsidiary BTA Pharmaceuticals, Inc. ("BTA").
 

Aplenzin™

  Depression     U.S.   Supply and distribution agreement with sanofi-aventis.
 

Wellbutrin® XL, SR

  Depression     Canada   Marketed and/or distributed by BPC.
 

Zyban®

  Smoking cessation     Canada   Distributed by BPC.
 

Pain Management

 

Ultram® ER

  Moderate to moderately severe chronic pain     U.S.   Supply and distribution agreement with Ortho-McNeil, Inc. ("OMI"), now known as PriCara (a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.).
 

Ralivia™

  Moderate to moderately severe chronic pain     Canada   Marketed and distributed by BPC.
 

Antiviral

 

Zovirax®

  Herpes     U.S.   Distributed by BTA and promoted by Sciele Pharma, Inc. ("Sciele") from December 2006 until October 2008. In January 2009, Publicis Selling Solutions, Inc. ("PSS"), a contract sales organization, assumed promotional marketing responsibility.
 

Cardiovascular

 

Cardizem® LA

  Hypertension and angina     U.S.   Supply and distribution agreement with Kos Pharmaceuticals, Inc. ("Kos") (a subsidiary of Abbott Laboratories).
 

Cardizem® CD

  Hypertension and angina     U.S.   Distributed by BTA.
 

Vasotec®, Vaseretic®

  Hypertension and congestive heart failure     U.S.   Distributed by BTA.
 

Tiazac®

  Hypertension and angina     U.S.   Supply and distribution agreement with Forest Laboratories, Inc. ("Forest").
 

Isordil®

  Angina     U.S.   Distributed by BTA.
 

Glumetza®

  Type 2 diabetes     U.S.   Supply agreement with Depomed.
 

Tiazac® XC, Tiazac®

  Hypertension and angina     Canada   Marketed and/or distributed by BPC.
 

Glumetza®

  Type 2 diabetes     Canada   Marketed and distributed by BPC.
 

Cardizem® CD

  Hypertension and angina     Canada   Distributed by BPC.
 

69



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

        In addition to the brand name products noted above, our product portfolio includes bioequivalent ("Generic") versions of Adalat CC, Cardizem® CD, Procardia XL and Voltaren XR products, which we supply to an affiliate of Teva Pharmaceuticals Industries Ltd. ("Teva") for distribution in the U.S.

SELECTED ANNUAL INFORMATION

        The following table provides selected financial information for each of the last three years:

 
   
   
   
  Change  
 
  Years Ended December 31   2007 to 2008   2006 to 2007  
($ in 000s, except per share data)
  2008   2007   2006   $   %   $   %  

Revenue

  $ 757,178   $ 842,818   $ 1,067,722     (85,640 )   (10 )   (224,904 )   (21 )

Income from continuing operations

    199,904     195,539     215,474     4,365     2     (19,935 )   (9 )

Net income

    199,904     195,539     211,626     4,365     2     (16,087 )   (8 )

Basic and diluted earnings per share:

                                           
 

Income from continuing operations

  $ 1.25   $ 1.22   $ 1.35     0.03     2     (0.13 )   (10 )
 

Net income

  $ 1.25   $ 1.22   $ 1.32     0.03     2     (0.10 )   (8 )
                               

Cash dividends declared per share

  $ 1.50   $ 1.50   $ 1.00             0.50     50  
                               

Total assets

  $ 1,623,565   $ 1,782,115   $ 2,192,442     (158,550 )   (9 )   (410,327 )   (19 )

Long-term obligations

            410,525             (410,525 )   (100 )
                               

Impact of Current Market Conditions

        During 2008, weakening general economic and financial market conditions had a negative impact on our results of operations, as reflected in the $4.2 million restructuring charge we recorded to reflect lower expected sublease rentals for our Bridgewater, New Jersey facility, and an $8.6 million other-than-temporary impairment charge in respect of our investment in auction rate securities (as described below under "Liquidity and Capital Resources — Auction Rate Securities"). With these exceptions, however, our results of operations, financial condition, and cash flows were not materially affected by impairment charges, or other transactions or events related to the economic downturn in 2008. In particular, we did not observe a notable change in the demand for our products and services as a result of the deterioration in general economic conditions, nor did the uncertainty in the global credit and capital markets have a notable impact on our liquidity, as we had no need to raise capital due to the sufficiency of our existing cash resources and continuing cash flows to fund our current operations and growth objectives in 2008.

Results of Operations

        Total revenue declined $85.6 million, or 10%, to $757.2 million in 2008, compared with $842.8 million in 2007. A significant factor in this decline was lower revenue from Wellbutrin XL® as a result of the launch of a generic version of the 150mg product on May 30, 2008, which followed the earlier genericization of the 300mg dosage strength in December 2006. This decline also reflected a reduction in Cardizem® LA product sales, due to lower prescription volumes in 2008, and higher shipments of 120mg and 180mg dosage strengths in the first quarter of 2007 to address a backorder that existed at the end of 2006. Those factors were partially offset by the impact of higher pricing of our off-patent branded pharmaceutical ("Legacy") products, which more than offset declining prescription volumes for these products.

        Total revenue declined $224.9 million, or 21%, to $842.8 million in 2007, compared with $1,067.7 million in 2006. This decline was due mainly to the impact of generic competition on sales of 300mg Wellbutrin XL® product, as well as the impact of the tiered supply price for Wellbutrin XL® sales to GSK. In addition, this decline reflected lower revenue from Generic product sales, due mainly to lower prescription volumes and pricing on certain of these products. Those factors were partially offset by higher revenue from Ultram® ER , Zovirax® and Cardizem® LA product sales, reflecting price increases and/or higher prescription volumes. In

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


addition, product sales were negatively impacted in 2006 by certain manufacturing issues we experienced related primarily to the production of lower dosage 120mg and 180mg Cardizem® LA products. We resumed full production of Cardizem® LA in early 2007.

        Changes in foreign currency exchange rates had a negligible overall effect on total revenue in 2008 relative to 2007; however, exchange rate changes increased total revenue by approximately $5.1 million, or 0.6%, in 2007, compared with 2006, due to a strengthening of the Canadian dollar relative to the U.S. dollar in 2007. A stronger Canadian dollar, while favourable on revenue, has an adverse impact on our operating expenses. Where possible, we manage our exposure to foreign currency exchange rate changes through operational means, mainly by matching our cash flow exposures in foreign currencies. As a result, the positive impact of a stronger Canadian dollar on revenue generated in Canadian dollars, but reported in U.S. dollars, is largely counteracted by an opposing effect on operating expenses incurred in Canadian dollars. As our Canadian dollar-denominated expenses exceeded our Canadian dollar-denominated revenue base, the appreciation of the Canadian dollar in 2007 had the overall effect of reducing our net income as reported in U.S. dollars.

        Net income increased $4.4 million, or 2%, to $199.9 million (basic and diluted EPS of $1.25) in 2008, compared with $195.5 million (basic and diluted EPS of $1.22) in 2007, and net income in 2007 declined $16.1 million, or 8%, compared with $211.6 million (basic and diluted EPS of $1.32) in 2006.

        The following table displays specific items that impacted net income in the last three years, and the impact of these items (individually and in the aggregate) on basic and diluted EPS. EPS figures may not add due to rounding.

 
  2008   2007   2006  
($ in 000s, except per share data; Income (Expense))
  Amount   EPS Impact   Amount   EPS Impact   Amount   EPS Impact  

Deferred income tax benefit(1)

  $ 90,000   $ 0.56   $   $   $   $  

Restructuring costs

    (70,202 ) $ (0.44 )   (668 ) $     (15,126 ) $ (0.09 )

Legal settlements, net of insurance recoveries

    (32,565 ) $ (0.20 )   (95,114 ) $ (0.59 )   (14,400 ) $ (0.09 )

Loss on impairment of investments

    (9,869 ) $ (0.06 )   (8,949 ) $ (0.06 )     $  

Management succession costs(2)

    (7,414 ) $ (0.05 )     $       $  

Gain on disposal of investments

    6,534   $ 0.04     24,356   $ 0.15       $  

Proxy contest costs(2)

    (6,192 ) $ (0.04 )     $       $  

Equity loss

    (1,195 ) $ (0.01 )   (2,528 ) $ (0.02 )   (529 ) $  

Loss on early extinguishment of debt

      $     (12,463 ) $ (0.08 )     $  

Intangible asset impairments, net of gain on disposal

      $     (9,910 ) $ (0.06 )   (143,000 ) $ (0.89 )

Contract costs (recovery)

      $     1,735   $ 0.01     (54,800 ) $ (0.34 )

Asset impairments of discontinued operation(3)

      $       $     (1,084 ) $ (0.01 )
                           

Total

  $ (30,903 ) $ (0.19 ) $ (103,541 ) $ (0.64 ) $ (228,939 ) $ (1.43 )
                           

(1)
Included in provision for (recovery of) income taxes in the 2008 consolidated statement of income.

(2)
Included in selling, general and administrative expenses in the 2008 consolidated statement of income.

(3)
Included in loss from discontinued operation in the 2006 consolidated statement of income.

Cash Dividends

        Our current dividend policy contemplates the payment of a quarterly dividend of $0.375 per share, subject to our financial condition and operating results, and the discretion of our Board of Directors. This policy is reviewed by our Board of Directors from time to time with regard to our capital requirements, and strategic and business development considerations.

        Cash dividends declared per share were $1.50, $1.50 and $1.00 in 2008, 2007 and 2006, respectively. On February 26, 2009, our Board of Directors declared a quarterly cash dividend of $0.375 per share, payable on April 6, 2009. Upon payment of this dividend, we will have distributed $4.875 per share to our shareholders since implementing our dividend program in December 2005.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Financial Condition

        At December 31, 2008 and 2007, we had cash and cash equivalents of $317.5 million and $433.6 million, respectively, and there were no borrowings outstanding under our $250 million credit facility, or other outstanding long-term debt. Operating cash flows are a significant source of liquidity. We utilized those cash flows, and a portion of our existing cash resources, to fund the following amounts paid during 2008:

    $101.9 million related to the acquisition of Prestwick;

    $83.0 million to fund the settlement of the U.S. and Canadian securities class actions;

    $45.1 million to GSK in settlement of the accrued contract costs associated with the introduction of generic competition to Wellbutrin XL® (as described below under "Results of Operations — Contract Costs (Recovery)"); and

    $10.0 million to settle the SEC investigation.

        At December 31, 2008, we had dividends payable of $59.3 million in respect of our third quarter 2008 results, which were paid on January 5, 2009. In 2007, the comparable third quarter dividend was paid on November 30, 2007. In addition, at December 31, 2008, we accrued $24.6 million in respect of the agreement in principle to settle the USAO investigation, which has not been paid pending the final Court approval of the settlement agreement, and $5.3 million in respect of the settlement of the OSC investigation, which was paid in January 2009.

RESULTS OF OPERATIONS

        We operate our business on the basis of a single reportable segment — pharmaceutical products. This basis reflects how management reviews the business, makes investing and resource allocation decisions, and assesses operating performance.

Revenue

        Our revenue is derived primarily from the following sources:

    sales of pharmaceutical products developed and manufactured by us, as well as sales of proprietary and in-licensed products;

    pharmaceutical clinical research and laboratory testing services, and product development activities in collaboration with third parties; and

    royalties from the sale of products we developed or acquired, and the co-promotion of pharmaceutical products owned by other companies.

        The following table displays the dollar amount of each source of revenue for each of the last three years; the percentage of each source of revenue, compared with total revenue in the respective year; and the percentage changes in the dollar amount of each source of revenue. Percentages may not add due to rounding.

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s)
  $   %   $   %   $   %   $   %   $   %  

Product sales

    714,548     94     801,046     95     1,021,278     96     (86,498 )   (11 )   (220,232 )   (22 )

Research and development

    24,356     3     23,828     3     21,593     2     528     2     2,235     10  

Royalty and other

    18,274     2     17,944     2     24,851     2     330     2     (6,907 )   (28 )
                                               

Total revenue

    757,178     100     842,818     100     1,067,722     100     (85,640 )   (10 )   (224,904 )   (21 )
                                           

72



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Product Sales

        The following table displays product sales by internal reporting category for each of the last three years; the percentage of each category compared with total product sales in the respective year; and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s)
  $   %   $   %   $   %   $   %   $   %  

Wellbutrin XL®

    120,745     17     212,325     27     450,329     44     (91,580 )   (43 )   (238,004 )   (53 )

Ultram® ER

    81,875     11     86,714     11     53,724     5     (4,839 )   (6 )   32,990     61  

Xenazine®/Nitoman®(1)

    3,736     1                     3,736     NM          

Zovirax®

    150,613     21     147,120     18     112,388     11     3,493     2     34,732     31  

BPC(2)

    70,580     10     61,889     8     68,723     7     8,691     14     (6,834 )   (10 )

Cardizem® LA

    48,002     7     69,300     9     56,509     6     (21,298 )   (31 )   12,791     23  

Legacy

    154,206     22     136,855     17     139,853     14     17,351     13     (2,998 )   (2 )

Generic

    83,246     12     86,843     11     141,075     14     (3,597 )   (4 )   (54,232 )   (38 )

Glumetza® (U.S.)

    1,545                         1,545     NM          

Teveten

                    (1,323 )               1,323     NM  
                                               

Total product sales

    714,548     100     801,046     100     1,021,278     100     (86,498 )   (11 )   (220,232 )   (22 )
                                           

NM — Not meaningful

(1)
Includes Nitoman® sales made prior to December 1, 2008.

(2)
Effective December 1, 2008, BPC assumed the marketing and distribution of Nitoman®.

Wellbutrin XL®

        Wellbutrin XL® product sales declined $91.6 million, or 43%, to $120.7 million in 2008, compared with $212.3 million in 2007, reflecting that the positive effect on our supply prices of price increases implemented by GSK during 2008, was more than offset by the impact on volumes resulting from the introduction of generic competition to the 150mg product in May 2008, as well as the continuing sales erosion of the 300mg product following the genericization of that dosage strength in December 2006. In addition, our supply price for Wellbutrin XL® is based on an increasing tiered percentage of GSK's net selling price. The supply price is reset to the lowest tier at the start of each calendar year. As a result of the introduction of generic competition to the 150mg product, GSK total sales of Wellbutrin XL® did not meet the sales-dollar threshold to increase our supply price above the first tier in 2008, which accounted for approximately 4% of the year-over-year decline. We do not anticipate that GSK's net sales of Wellbutrin XL® will meet the sales dollar-threshold to increase our supply price above the first tier in 2009, or beyond.

        The $238.0 million, or 53%, decline in Wellbutrin XL® product sales to $212.3 million in 2007, compared with $450.3 million in 2006, reflected the impact that the introduction of generic competition to the 300mg product had on volumes, as well as on the tiered supply price for Wellbutrin XL®. Due to the impact of generic competition, GSK's net sales of Wellbutrin XL® in 2007 only met the sales-dollar threshold to increase our supply price from the first to second tier in the fourth quarter, while in the second and third quarters of 2006, GSK's net sales exceeded the thresholds to achieve the second and third tier supply prices, respectively. As a result, approximately 40% of the decline in Wellbutrin XL® product sales in 2007 was attributable to the impact of tier pricing, with the balance of the decline due mainly to lower volumes of 300mg product sold to GSK. Those factors were partially offset by: the positive effect on our supply price of a reduction in GSK's 2006 year-end provision for 300mg product returns, due to slower than anticipated generic erosion; the positive effect on our supply price of price increases implemented by GSK during 2007 and 2006; and the inclusion of Wellbutrin XR® sold to GSK for the European market.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Ultram® ER

        Ultram® ER product sales declined $4.8 million, or 6%, to $81.9 million in 2008, compared with $86.7 million in 2007, reflecting a provision of $6.5 million (exclusive of $600,000 of inventory write-offs and $1.0 million of administrative expenses) related to a voluntary recall of certain lots of Ultram® ER 100mg tablets from wholesalers and pharmacies initiated in the fourth quarter of 2008, due to a manufacturing issue not related to patient safety. The recall included affected product still at PriCara. We expect to address any resulting shortfall in our supply of 100mg product to PriCara in the first half of 2009. Ultram® ER product sales were also impacted in 2008 by lower sales of sample supplies to PriCara. Those factors were partially offset by the positive effect on our supply price of price increases implemented by PriCara during 2008 and a change in prescription mix from the 100mg product to the higher 200mg and 300mg dosage strengths. Effective January 1, 2009, our contractual supply price to PriCara (which is determined based on a percentage PriCara's net selling price for Ultram® ER) declined by 2.5 percentage points.

        In 2007, Ultram® ER product sales increased $33.0 million, or 61%, to $86.7 million, compared with $53.7 million in 2006, due to higher prescription volumes, as well as a contractual increase in our supply price to PriCara effective January 1, 2007, and the positive effect on our supply price of a price increase implemented by PriCara during 2007. Those factors were partially offset by a reduction in inventory levels of Ultram® ER owned by PriCara over the course of 2007.

Xenazine®/Nitoman®

        We recognized $2.6 million of revenue from Xenazine® products sales in the U.S. following the launch of this product by Ovation on November 24, 2008. Sales of Nitoman® in Canada made prior to December 1, 2008 amounted to $1.1 million. Nitoman® sales were $426,000 in December 2008, which are included in BPC product sales described below.

Zovirax®

        Zovirax® product sales increased $3.5 million, or 2%, to $150.6 million in 2008, compared with $147.1 million in 2007, and increased $34.7 million, or 31%, in 2007, compared with $112.4 million in 2006, reflecting price increases we implemented for these products during each of those years. These price increases more than offset modest declines in prescription volumes in 2008 and 2007, compared with the immediately preceding years.

        In December 2006, we entered into a five-year exclusive promotional services agreement with Sciele, whereby we were to pay Sciele an annual fee to provide detailing and sampling support for Zovirax® products to U.S. physicians. In October 2008, we terminated our agreement with Sciele as a result of Sciele's merger with Shionogi & Co., Ltd. Commencing in January 2009, we engaged PSS to continue the promotion of Zovirax®. By switching to a contract sales organization, we will retain a greater share of Zovirax®'s economics, as we do not have a revenue-sharing provision in our agreement with PSS.

BPC

        Sales of BPC products increased $8.7 million, or 14%, to $70.6 million in 2008, compared with $61.9 million in 2007, and declined $6.8 million, or 10%, in 2007, compared with $68.7 million in 2006. Changes in exchange rates between the Canadian dollar and the U.S. dollar in 2008 had a negligible overall effect on BPC's Canadian dollar-denominated revenue as reported in U.S. dollars; however, excluding the positive effect of the strengthening of the Canadian dollar relative to the U.S. dollar in 2007, BPC product sales declined 15% in 2007, compared with 2006.

        The increase in BPC product sales in 2008, compared with 2007, was primarily due to higher sales of our promoted Wellbutrin® XL, Tiazac® XC, Ralivia™ and Glumetza® products, which more than offset lower sales, resulting from generic competition, of our Tiazac® and Wellbutrin® SR products. On the other hand, the decline in BPC product sales in 2007, compared with 2006, reflected that lower sales of our genericized Tiazac® and

74



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


Wellbutrin® SR products more than offset year-over-year increases in sales of our promoted Tiazac® XC and Wellbutrin® XL products.

Cardizem® LA

        Cardizem® LA product sales include the amortization of deferred revenue associated with the cash consideration received from the sale to Kos of the distribution rights to Cardizem® LA in May 2005, which is being amortized over seven years on a straight-line basis. This amortization amounted to $15.1 million in each of the last three years.

        Revenue from sales of Cardizem® LA declined $21.3 million, or 31%, to $48.0 million in 2008, compared with $69.3 million in 2007, reflecting lower prescription volumes in 2008, and higher shipments of 120mg and 180mg Cardizem® LA products to Kos in the first quarter of 2007 made to address the backorder for those strengths that existed at the end of 2006. Those factors were partially offset by the positive effect on our supply price of price increases implemented by Kos during 2008.

        Cardizem® LA product sales increased $12.8 million, or 23%, to $69.3 million in 2007, compared with $56.5 million in 2006. The increase in Cardizem® LA product sales reflected the positive effect on our supply price of price increases implemented by Kos during 2007, which more than offset a decline in prescription volumes. In addition, certain manufacturing issues related primarily to the production of 120mg and 180mg dosage strengths negatively impacted sales in 2006.

Legacy

        Our Legacy products include Ativan®, Cardizem® CD, Vasotec®, Vaseretic®, Tiazac®, and Isordil® which are sold primarily in the U.S. Although we do not actively promote these products as they have been genericized, our Legacy products continue to benefit from high brand awareness and physician and patient loyalty.

        Sales of Legacy products increased $17.4 million, or 13%, to $154.2 million in 2008, compared with $136.9 million in 2007, reflecting the price increases implemented for these products (excluding Tiazac®) during 2008, which more than offset year-over-year declines in prescription volumes. Legacy product sales declined $3.0 million, or 2%, to $136.9 million in 2007, compared with $139.9 million in 2006, reflecting lower pricing and/or prescription volumes for branded and generic Tiazac®, as a result of the introduction of an additional generic competitor in November 2006.

Generic

        Sales of Generic products declined $3.6 million, or 4%, to $83.2 million in 2008, compared with $86.8 million in 2007, and declined $54.2 million, or 38%, in 2007, compared with $141.1 million in 2006, primarily due to lower prescription volumes and pricing for these products because of increased competition and changes in Teva's customer base, as well as shelf-stock adjustments granted by Teva to its customers. In 2008, those factors were partially offset by the benefit of a $4.5 million adjustment made by Teva in the third quarter to reduce its chargeback provision related to past sales of our Generic products.

Glumetza® (U.S.)

        We recognized $1.5 million of revenue in 2008 related to our initial supply of 1000mg Glumetza® product and samples to Depomed for the U.S. market.

Research and Development Revenue

        Research and development revenue from clinical research and laboratory testing services provided to external customers by our contract research division increased $739,000, or 3%, to $22.6 million in 2008, compared with $21.9 million in 2007, and increased $295,000, or 1%, in 2007, compared with $21.6 million in

75



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


2006. Other product development activities conducted on behalf of third parties generated revenue of $1.7 million and $1.9 million in 2008 and 2007, respectively.

Royalty and Other Revenue

        Royalties from third parties on sales of products we developed or acquired and other revenue increased $330,000, or 2%, to $18.3 million in 2008, compared with $17.9 million in 2007, and declined $6.9 million, or 28%, in 2007, compared with $24.9 million in 2006. In December 2006, we ended our co-promotion of Ultram® ER and AstraZeneca Pharmaceuticals LP's Zoladex® 3.6mg product in the U.S., and, as a result, we did not earn any revenue from co-promoting these products in 2007 or 2008.

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 revenue in the respective year; and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s)
  $   %   $   %   $   %   $   %   $   %  

Cost of goods sold

    197,167     26     223,680     27     211,152     20     (26,513 )   (12 )   12,528     6  

Gross margin

    72 %         72 %         79 %                              

Research and development

    92,844     12     118,117     14     95,479     9     (25,273 )   (21 )   22,638     24  

Selling, general and administrative

    188,922     25     161,001     19     238,441     22     27,921     17     (77,440 )   (32 )

Amortization of intangible assets

    51,369     7     48,049     6     56,457     5     3,320     7     (8,408 )   (15 )

Restructuring costs

    70,202     9     668         15,126     1     69,534     NM     (14,458 )   (96 )

Legal settlements, net of insurance recoveries

    32,565     4     95,114     11     14,400     1     (62,549 )   (66 )   80,714     561  

Intangible asset impairments, net of gain on disposal

            9,910     1     143,000     13     (9,910 )   (100 )   (133,090 )   (93 )

Contract costs (recovery)

            (1,735 )       54,800     5     1,735     (100 )   (56,535 )   (103 )
                                               

Total operating expenses

    633,069     84     654,804     78     828,855     78     (21,735 )   (3 )   (174,051 )   (21 )
                                           

NM — Not meaningful

Cost of Goods Sold and Gross Margins

        Cost of goods sold includes: manufacturing, packaging, shipping and handling costs for products we produce; the cost of products we purchase from third parties; royalty payments we make to third parties; and lower of cost or market adjustments to inventories.

        Gross margins based on product sales were 72%, 72% and 79% in 2008, 2007 and 2006, respectively. The following factors had an unfavourable impact on gross margins in 2008, compared with 2007:

    a lower absorption of overhead costs due mainly to excess manufacturing capacity associated with decreased production volumes for Wellbutrin XL®, Cardizem® LA and Generic products;

    the reduced contribution from higher margin 150mg Wellbutrin XL® product sales as a result of the introduction of generic competition, and the inclusion of lower margin Xenazine® and Nitoman® product sales;

    the provision for returns of recalled Ultram® ER 100mg tablets, and a write-off to cost of goods sold of $600,000 of affected Ultram® ER product remaining in our inventory;

    an increase in amortization expense of $6.4 million in 2008, compared with 2007, related to the $40.7 million deferred charge for payments we made to GSK in consideration for reduced supply prices for Zovirax® products; and

76



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

    the inclusion of $2.4 million of costs associated with the transfer of certain manufacturing and packaging processes from our Puerto Rico facilities to our Steinbach, Manitoba facility in connection with our New Strategic Focus, partially reduced by lower depreciation expense as a result of the write-down of the manufacturing plants and equipment located in Puerto Rico.

        Those factors were partially offset by:

    the positive impact of price increases we implemented for Zovirax® and certain Legacy products during 2008, and the positive effect on our supply prices for Wellbutrin XL®, Ultram® ER and Cardizem® LA of the price increases implemented by our strategic marketing partners during 2008;

    the inclusion of the $4.5 million chargeback adjustment from Teva in the third quarter of 2008; and

    lower charges for obsolescence related to inventories of certain of our products that were in excess of anticipated demand, and a recovery from PriCara in 2008 of $1.0 million related to the cost of Ultram® oral disintegrating tablet ("ODT") inventory that had been previously written-off.

        The following factors had an unfavourable impact on gross margins in 2007, compared with 2006:

    lower volumes of higher margin 300mg Wellbutrin XL® product sold to GSK, net of the reduction in GSK's provision for 300mg product returns;

    lower supply prices for 150mg and 300mg Wellbutrin XL® product sold to GSK, as a result of not achieving the third tier supply price in 2007, and the later achievement of the second tier supply price in 2007 as compared to 2006;

    the negative impact of lower pricing on Generic product sales;

    the inclusion of amortization expense of $9.1 million related to the Zovirax® deferred charge;

    the inclusion of $7.9 million for our one-third share of a royalty expense on sales of 150mg Wellbutrin XL® product following the settlement in February 2007 of a patent-infringement suit between GSK and Andrx;

    lower absorption of overhead costs due to decreased Wellbutrin XL® production volumes;

    increases in obsolescence reserves for excess inventory; and

    the unfavourable impact of foreign currency exchange rate changes on Canadian dollar-denominated manufacturing expenses.

        Those factors were partially offset by:

    the positive impact of price increases we implemented for Zovirax® and certain Legacy products during 2007, and the positive effect on our supply prices for Wellbutrin XL®, Ultram® ER and Cardizem® LA of the price increases implemented by our strategic marketing partners during 2007, together with the contractual increase in our supply price for Ultram® ER; and

    lower levels of rejected lots of Ultram® ER and Cardizem® LA in 2007, as a result of the resolution of manufacturing issues we experienced related to these products in 2006.

Research and Development Expenses

        Expenses related to internal research and development programs include: employee compensation costs; overhead and occupancy costs; clinical trial costs; clinical manufacturing and scale-up costs; and other third-party development costs. Research and development expenses also include costs associated with providing contract research services to external customers.

        In the second half of 2008, following the announcement of our New Strategic Focus, we conducted a review of the projects in our development portfolio in order to identify existing programs that were consistent with our New Strategic Focus on specialty CNS products, or which represented traditional reformulation opportunities

77



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


that met our financial and commercialization criteria. Our pipeline included a number of products that fit into the latter category, including BVF-045 and BVF-324, as well as our ANDA programs. However, as a consequence of our review, we terminated the BVF-239 program for the treatment of a cardiovascular disease.

        In addition to BVF 239, we have also decided to discontinue the development of BVF-012, an enhanced absorption formulation of venlafaxine, following a reassessment of the product's commercial potential.

        Our remaining pipeline products are in various stages of development, with the most advanced being the ANDA programs BVF-065, BVF-203 and BVF-058, which are currently being reviewed by the FDA. We are pursuing a development partner to share the risks and costs associated with the clinical development of BVF-045, and we currently anticipate initiating Phase III studies for BVF-324 in Europe in mid-2009.

        The following table displays the dollar amount of each research and development expense category for each of the last three years; the percentage of each category compared with total revenue in the respective year; and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s)
  $   %   $   %   $   %   $   %   $   %  

Internal research and development programs

    69,811     9     100,610     12     77,795     7     (30,799 )   (31 )   22,815     29  

Contract research services provided to external customers

    23,033     3     17,507     2     17,684     2     5,526     32     (177 )   (1 )
                                               

Total research and development expenses

    92,844     12     118,117     14     95,479     9     (25,273 )   (21 )   22,638     24  
                                           

        Internal research and development expenses declined $30.8 million, or 31%, to $69.8 million in 2008, compared with $100.6 million in 2007, reflecting the closure of our facility in Ireland and reduced direct project spending as we sought to optimize the projects in our development portfolio. These declines also reflected the cost of clinical trial and scale-up activities conducted in 2007 related to Aplenzin™ and Phase III safety studies conducted in connection with the BVF-146 program (as described below). Internal research and development program expenses increased $22.8 million, or 29%, to $100.6 million in 2007, compared with $77.8 million in 2006, primarily due to the costs of clinical and scale-up activities for Aplenzin™ and BVF-146.

        The BVF-146 program was terminated in March 2008 following a reassessment of the commercial opportunity for a once-daily combination product consisting of tramadol and a non-steroidal anti-inflammatory drug. In the first quarter of 2008, we accrued $7.9 million for the estimated contractual obligations to wind down and close out a long-term safety study that was underway for BVF-146. These obligations primarily consisted of fees and other costs that we are contractually obligated to pay to the contract research organization and investigators conducting this study. The anticipated findings from this study were determined to have no alternative future use in other identifiable projects. At December 31, 2008, $2.1 million remained accrued related to the settlement of the remaining obligations.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

        Costs associated with providing contract research services to external customers increased $5.5 million, or 32%, to $23.0 million in 2008, compared with $17.5 million in 2007, reflecting higher unabsorbed overhead costs and $1.2 million of employee severance payments at our contract research division due to the decline in activity related to internal product-development programs. The cost of providing contract research services was relatively unchanged in 2007, compared with 2006.

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; product promotion expenses; overhead and occupancy costs; and other general and administrative costs.

        Selling, general and administrative expenses increased $27.9 million, or 17%, to $188.9 million in 2008, compared with $161.0 million in 2007, and declined $77.4 million, or 32%, in 2007, compared with $238.4 million in 2006.

        The increase in selling, general and administrative expense in 2008, compared with 2007, was primarily due to:

    a decrease in insurance recoveries related to legal costs of $20.5 million in 2008, as we have exhausted our director and officer liability insurance for claims related to the legacy litigation and regulatory matters in respect of our 2002 to 2004 policy period;

    the inclusion of management succession costs of $7.4 million and proxy contest costs of $6.2 million in 2008 (as described below);

    the inclusion of consulting costs of $4.1 million in 2008 related to the development and implementation of our New Strategic Focus;

    an increase in promotional spending related to the launch of Ralivia™ in Canada of $3.6 million in 2008;

    an increase in compensation expense related to deferred share units ("DSUs") granted to directors of $1.5 million, as the cost of the annual grant of DSUs in 2007 was more than offset by a decline in the fair value of outstanding DSUs, due to a decline in the underlying trading price of our common shares; and

    the inclusion of $1.0 million of third-party administrative costs associated with the recall of Ultram® ER 100mg tablets.

        Those factors were partially offset by:

    a decrease in legal fees of $18.9 million in 2008, as a result of the recent settlement of certain legacy litigation and regulatory matters, partially offset by higher indemnification payments (as described below).

        The decline in selling, general and administrative expenses in 2007, compared with 2006, was primarily due to:

    cost savings in 2007 associated with a headcount reduction in our U.S. operations, as a result of the elimination of our U.S. specialty sales force in December 2006, and a discontinuance of spending on sales and marketing activities to support Zovirax®, partially offset by compensation of $17.2 million paid to Sciele for its promotional services (as described below under "Restructuring Costs");

    a decrease in legal costs of $19.0 million, net of insurance recoveries, related to ongoing litigation and regulatory matters (as described below);

79



MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

    lower expenses related to Sarbanes-Oxley Act of 2002 compliance, and corporate governance and strategic planning initiatives completed in 2006;

    lower stock-based compensation expense due to a reduction in the overall number of stock options granted to employees in 2007, together with a lower estimated grant-date fair value for these options, as well as a recovery of compensation expense related to DSUs in 2007, as a result of the decline in the underlying trading price of our common shares; and

    overall cost containment initiatives.

        Those factors were partially offset by:

    the unfavourable impact of foreign currency exchange rate changes on Canadian dollar-denominated selling, general and administrative expenses.

        The management succession costs described above were associated with the contractual obligations related to Dr. Squires ceasing to serve as our CEO and the ensuing appointment of Mr. Wells to that role, as well as previously unrecognized compensation expense in the amount of $2.1 million, recognized upon the cancellation in May 2008 of certain stock options and Restricted Share Units ("RSUs") previously granted to Dr. Squires. In addition, in the fourth quarter of 2008, these succession costs included contractual severance benefits payable to Mr. Howling and Mr. Miszuk upon their departure from our Company.

        The proxy contest costs described above were incurred in connection with the contested election of our nominees to the Board of Directors at our 2008 annual meeting of shareholders.

        Legal costs amounted to $41.3 million, $39.6 million and $58.6 million in 2008, 2007 and 2006, respectively. Legal costs in 2007 were reported net of insurance recoveries of $20.5 million. Legal costs included amounts related to matters we do not consider to be in the ordinary course of business, such as the S.A.C. complaint, governmental and regulatory inquiries, securities class actions, and defamation claims (as described in note 28 to our Consolidated Financial Statements). As a result of the settlements and agreements in principle to resolve most of these matters (as described above under "Recent Developments — Resolution of Legacy Litigation and Regulatory Matters"), we do not expect to incur additional significant legal costs related to these matters. However, we may continue to incur considerable legal costs related to new litigation proceedings and to the remaining unresolved legacy matters (including our indemnification obligations to certain former officers and directors in respect of certain of these legacy proceedings) for an indefinite period, as we cannot predict the outcome or timing of when each of these matters may be resolved.

Amortization of Intangible Assets

        Amortization expense increased $3.3 million, or 7%, to $51.4 million in 2008, compared with $48.0 million in 2007, due to the inclusion of amortization of the Prestwick identifiable intangible assets. The decline in amortization expense of $8.4 million, or 15%, to $48.0 million in 2007, compared with $56.5 million in 2006, reflected reduced amortization related to Vasotec®, Vaseretic® and Glumetza® intangible assets following the write-down of these assets in 2006 (as described below under "Impairment of Intangible Assets, Net").

Restructuring Costs

        In 2008, we incurred a restructuring charge of $70.2 million, as described above under "Recent Developments — Restructuring".

        In 2007, we incurred restructuring costs of $668,000 associated with the December 2006 restructuring described below. This charge related primarily to employee retention bonuses and additional contract termination costs, which were partially offset by higher than anticipated proceeds from the sale of leased vehicles at auction, and a change in the estimated future sublease rentals that could be obtained for the vacated portion of our Bridgewater, New Jersey facility.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

        In December 2006, we eliminated our remaining U.S. specialty sales force and implemented other measures to reduce the operating and infrastructure costs of our U.S. operations, including the abandonment of large-scale manufacturing at our Chantilly, Virginia facility. We reduced our sales force and related functions by 115 positions, and administrative and other functions by 73 positions. These measures were considered necessary to address a lack of product-acquisition, or co-promotion opportunities, available to us on reasonable terms, to fully utilize our sales force. In 2006, we incurred a related restructuring charge $15.1 million consisting primarily of employee termination benefits, asset impairments, contract termination costs, and professional fees.

        As a result of the December 2006 restructuring, we no longer maintained a direct commercial presence in the U.S, and, consequently, we had engaged Sciele to promote Zovirax® to U.S. physicians. The cost savings associated with the elimination of our sales and marketing activities to support Zovirax® (net of the compensation paid to Sciele), and the reduction in headcount in our U.S. operations had a positive impact on our results of operations and cash flows in each of 2008 and 2007, relative to 2006.

Legal Settlements, Net

        In 2008, we recorded a charge of $32.6 million for legal settlements, which included $24.6 million related to the agreement in principle to settle with the USAO and $5.3 million related to the settlement of the OSC investigation, and, in 2007, we recorded a net charge of $95.1 million for legal settlements, of which $83.1 million (net of expected insurance recoveries) related to the settlement of the U.S. and Canadian securities class actions, and $10.0 million related to the settlement of the SEC investigation (as described above under "Recent Developments — Resolution of Legacy Litigation and Regulatory Matters").

        In 2006, we recorded a charge of $14.4 million for legal settlements, which included $11.7 million related to our one-third share of a settlement reached by GSK with Andrx related to a patent infringement suit by Andrx in respect of its U.S. patent purportedly covering 150mg Wellbutrin XL® product. We also agreed to pay one-third of the ongoing royalties on sales of 150mg Wellbutrin XL® product, which are recorded in cost of goods sold.

Intangible Asset Impairments, Net

        We perform an evaluation of intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Impairment exists when the carrying amount of an asset is not recoverable based on related undiscounted future cash flows, and its carrying amount exceeds its estimated fair value based on related discounted future cash flows.

        In 2008, we recorded an impairment charge of $7.5 million related to the write-off of the carrying value of our technology intangible assets (as described above under "Recent Developments — Restructuring"), which is included in restructuring costs in our 2008 consolidated statement of income.

        In 2007, during our annual evaluation of intangible assets for impairment, we identified certain product rights and technology intangible assets that were not recoverable due to the absence of any material future cash flows. We determined that the extent to which these assets were anticipated to be used in the foreseeable future had been adversely affected due to changes in market conditions and/or technological advances. The assets identified as impaired included the product rights associated with Zolpidem ODT and Ultram® ODT due to the following events or changes in circumstances:

    In December 2007, we decided not to market Zolpidem ODT for the treatment of insomnia following a negative assessment of its commercial potential due to the genericization of the brand name drug (Ambien) in April 2007.

    Also in December 2007, OMI notified us of its decision to terminate the Ultram® ODT supply agreement based on market considerations.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

        As a result, we recorded an impairment charge of $9.9 million in 2007 to write down the carrying value of the Zolpidem ODT and Ultram® ODT product rights, as well as to write down the other identified product rights and technology intangible assets.

        In 2006, we recorded an impairment charge of $147.0 million as a result of the following events or changes in circumstances:

    In September 2006, we were informed by Kos that it had decided to discontinue its involvement with Vasocard™. We had been developing Vasocard™ as a line extension to our Vasotec® and Vaseretic® product lines. We determined that without Kos's continued involvement, Vasocard™ had limited commercial potential, and, as a result, we suspended its development. Our evaluation of the estimated future cash flows associated solely with the existing Vasotec® and Vaseretic® product lines resulted in an impairment charge of $132.0 million to the related trademarks and product rights.

    In October 2006, Depomed was granted a Canadian patent pertaining to Glumetza®. As a result, the prices we set for Glumetza® are subject to regulation by the Patented Medicine Prices Review Board ("PMPRB") in Canada. Since its launch in the Canadian market in November 2005, the sales performance (in terms of prescription volumes) of Glumetza® had been less than originally anticipated due to the competitive pricing and existing formulary listing of immediate-release generic formulations of metformin (the active drug compound in Glumetza®). We revised our sales forecast for Glumetza® to reflect both the possible future pricing concessions that may be required by the PMPRB and the underlying prescription trend since the launch of this product. On the basis of that forecast, our evaluation of the estimated future cash flows associated with the Glumetza® product line resulted in an impairment charge of $15.0 million to the related product right.

        Partially offsetting the impairment charge in 2006 was a $4.0 million gain we recorded on the disposal of four cardiovascular products to Athpharma Limited ("Athpharma"). We originally acquired these products from Athpharma in April 2003, and we expensed the original cost of these products at the date of acquisition.

Contract Costs (Recovery)

        In 2006, we accrued a provision of $46.4 million for the estimated amount of a payment we expected to make to GSK as a result of the introduction of generic competition to Wellbutrin XL®. The maximum amount of this payment was reduced by the total dollar amount of Wellbutrin XL® sample supplies purchased by GSK. During 2007, we recognized a partial recovery of this provision as GSK purchased additional sample supplies worth $1.3 million. In July 2008, we paid GSK $45.1 million in settlement of the remaining liability.

        In 2006, we accrued a provision of $8.4 million based on our estimate of the payment we were required to make to Kos for its lost profits due to our failure to supply minimum required quantities of Cardizem® LA during 2006. In 2007, we reduced that liability by $400,000 to reflect an agreed upon settlement amount of $8.0 million, which was paid to Kos in July 2007.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Non-Operating Income (Expense)

        The following table displays the dollar amount of each non-operating income or expense category for each of the last three years; and the percentage changes in the dollar amount of each category.

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s, Income (Expense))
  $   $   $   $   %   $   %  

Interest income

    9,400     24,563     29,199     (15,163 )   (62 )   (4,636 )   (16 )

Interest expense

    (1,018 )   (9,745 )   (35,203 )   8,727     (90 )   25,458     (72 )

Foreign exchange gain (loss)

    (1,057 )   5,491     (2,360 )   (6,548 )   (119 )   7,851     (333 )

Equity loss

    (1,195 )   (2,528 )   (529 )   1,333     (53 )   (1,999 )   378  

Loss on impairment of investments

    (9,869 )   (8,949 )       (920 )   10     (8,949 )   NM  

Gain on disposal of investments

    6,534     24,356         (17,822 )   (73 )   24,356     NM  

Loss on early extinguishment of debt

        (12,463 )       12,463     (100 )   (12,463 )   NM  
                                   

Total non-operating income (expense)

    2,795     20,725     (8,893 )   (17,930 )   (87 )   29,618     (333 )
                               

NM — Not meaningful

Interest Income (Expense)

        Interest income declined $15.2 million, or 62%, to $9.4 million in 2008, compared with $24.6 million in 2007, and declined $4.6 million, or 16%, in 2007, compared with $29.2 million in 2006, reflecting year-over-year declines in our cash balances, primarily as a result of the redemption of our 77/8% Senior Subordinated Notes ("Notes") effective April 1, 2007, the acquisition of Prestwick in September 2008, and legal settlement and other payments made during 2008, together with lower prevailing interest rates.

        Interest expense (which includes standby fees and the amortization of deferred financing costs) declined $8.7 million, or 90%, to $1.0 million in 2008, compared with $9.7 million in 2007, and declined $25.5 million, or 72%, in 2007, compared with $35.2 million in 2006. Interest expense mainly comprised interest on our Notes prior to their redemption effective April 1, 2007.

Foreign Exchange Gain (Loss)

        We recognized foreign exchange losses of $1.1 million and $2.4 million in 2008 and 2006, respectively. In 2007, the Canadian dollar was trading at a then 30-year high relative to the U.S. dollar, which contributed to the recognition of a foreign exchange gain of $5.5 million in that year.

Equity Loss

        We recorded equity losses of $1.2 million, $2.5 million and $529,000 in 2008, 2007 and 2006, respectively, related to our investment in Western Life Sciences ("WLS"), a venture fund that invests in early-stage biotechnology companies. As of the end of the first quarter of 2008, our cumulative share of the net losses of WLS exceeded our investment. As we are not committed to make further capital contributions to WLS, we did not recognize any additional equity losses related to this investment in the last three quarters of 2008.

Loss on Impairment of Investments

        In 2008 and 2007, we recorded losses of $9.9 million and $8.9 million, respectively, related primarily to other-than-temporary declines in the estimated fair value of a portion of our investment in auction rate securities (as described below under "Liquidity and Capital Resources — Auction Rate Securities"), as well as the write-down of the carrying values of certain available-for-sale equity investments to reflect other-than-temporary declines in their quoted market values.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Gain on Disposal of Investments

        In 2008, we recognized a gain of $3.1 million on the sale of a portion of our investment in common shares of Depomed, and we recognized a gain of $3.5 million on the disposal of our investment in common shares and convertible debt of Verdi (as described above under "Recent Developments — Disposal of Non-Core Assets").

        In 2007, we received cash consideration of $14.9 million on the liquidation of our investment in convertible preferred stock of Reliant Pharmaceuticals, Inc. ("Reliant"), following its acquisition by GSK, resulting in a gain on disposal of $8.6 million. We also recorded a gain of $15.7 million on the sale to Verdi of a portion of our investment in common shares of Ethypharm S.A. ("Ethypharm"). We received proceeds on disposal of $39.4 million in cash and $5.6 million in convertible debt of Verdi. We exchanged the remaining portion of our Ethypharm investment for common shares of Verdi.

Loss on Early Extinguishment of Debt

        In 2007, we recorded a charge of $12.5 million on the early redemption of our Notes, which comprised the premium paid to Noteholders of $7.9 million, as well as the net write-off of unamortized deferred financing costs, discount, and fair value adjustment associated with the Notes, which totaled $4.6 million.

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 percentage changes in the dollar amount of each provision. Percentages may not add due to rounding.

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s, Income (Expense))
  $   $   $   $   %   $   %  

Current income tax expense

    (17,000 )   (13,200 )   (14,500 )   (3,800 )   29     1,300     (9 )

Deferred income tax benefit

    90,000             90,000     NM          
                               

Total recovery of (provision for) income taxes

    73,000     (13,200 )   (14,500 )   86,200     (653 )   1,300     (9 )
                               

NM — Not meaningful

        We recorded current provisions for income taxes of $17.0 million, $13.2 million and $14.5 million in 2008, 2007 and 2006, respectively, which reflected effective tax rates of 13% in 2008, compared with 6% in each of 2007 and 2006. Our effective tax rate reflected the fact that most of our revenue and income was earned in Barbados, which has lower statutory tax rates than those that apply in Canada. Dividends from such after-tax business income are received tax-free in Canada. The increase in the effective tax rates in 2008, compared with 2007 and 2006, was primarily due to the charges associated with the agreement in principle to settle the USAO investigation (as described above under "Recent Developments — Resolution of Legacy Litigation and Regulatory Matters") and restructuring activities (as described above under "Recent Developments — Restructuring") that are not deductible or do not affect the income tax provision because of unrecognized tax losses in the local jurisdictions. In addition, certain components of the provision for income taxes do not vary with pre-tax income, including withholding taxes and provisions for uncertain tax positions.

        In 2008, we recognized a deferred income tax benefit of $90.0 million, as described above under "Recent Developments — Reduction in Valuation Allowance on Deferred Tax Assets".

Discontinued Operation

        In May 2006, we completed the sale of our Nutravail division and recorded an inventory write-off of $1.3 million to cost of goods sold, and an impairment charge of $1.1 million to write off the carrying value of

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


Nutravail's long-lived assets. The following amounts related to Nutravail have been reported as a discontinued operation in our consolidated statements of income and cash flows in 2006.

($ in 000s)
  Year Ended
December 31
2006
 

Revenue

  $ 1,289  
       

Loss from discontinued operation before asset impairments

    (2,764 )

Asset impairments

    (1,084 )
       

Loss from discontinued operation

  $ (3,848 )
       

SUMMARY OF QUARTERLY RESULTS

        The following table presents a summary of our quarterly results of operations and cash flows from continuing operations in 2008 and 2007:

 
  2008   2007  
($ in 000s, except per share data)
  Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4  

Revenue

  $ 208,498   $ 186,095   $ 181,089   $ 181,496   $ 247,005   $ 203,027   $ 188,890   $ 203,896  

Expenses

    145,358     210,368     132,726     144,617     148,358     140,567     127,890     237,989  
                                   

Operating income (loss)

    63,140     (24,273 )   48,363     36,879     98,647     62,460     61,000     (34,093 )
                                   

Net income (loss)

    56,376     (25,289 )   48,437     120,380     93,819     67,824     65,867     (31,971 )
                                   

Basic and diluted earnings (loss) per share

  $ 0.35   $ (0.16 ) $ 0.31   $ 0.76   $ 0.58   $ 0.42   $ 0.41   $ (0.20 )
                                   

Net cash provided by (used in) operating activities

  $ 92,676   $ 67,056   $ (62,370 ) $ 106,963   $ 119,828   $ 98,277   $ 43,415   $ 79,333  
                                   

Fourth Quarter of 2008 Compared to Fourth Quarter of 2007

Results of Operations

        Total revenue declined $22.4 million, or 11%, to $181.5 million in the fourth quarter of 2008, compared with $203.9 million in the fourth quarter of 2007, primarily due to the decline in Wellbutrin XL® product sales as a result of the introduction of generic competition to the 150mg product in May 2008, and the impact of the recall of certain lots of Ultram® ER 100mg tablets in the fourth quarter of 2008. In addition, a weakening of the Canadian dollar relative to the U.S. dollar in the fourth quarter of 2008, compared with the fourth quarter of 2007, negatively impacted BPC product sales by approximately $4.2 million.

        Net income increased $152.4 million to $120.4 million (basic and diluted EPS of $0.76) in the fourth quarter of 2008, compared with a net loss of $32.0 million (basic and diluted loss per share of $0.20) in the fourth quarter of 2007, primarily due to:

    an increase of $90.0 million related the recognition of the deferred income tax benefit in the fourth quarter of 2008;

    a decrease of $87.1 million in legal settlements (net or insurance recoveries) in the fourth quarter of 2008, related primarily to the settlements of the U.S. and Canadian securities class actions and the SEC investigation, which were accrued for in the fourth quarter of 2007; and

    a decrease of $13.2 million in research and development expenses in the fourth quarter of 2008, as a result of: the substantial completion of development work related to the BVF-065, BVF-203 and BVF-058 ANDA programs and the termination of the BVF-146 program in the first quarter of 2008; the

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

      cost savings from the closure of our research and development facility in Ireland; and the overall decline in direct project spending due to the efforts to optimize of our development portfolio.

        Those factors were partially offset by:

    an increase of $12.6 million in selling, general and administrative expenses in the fourth quarter of 2008, primarily as a result of increased legal costs due to higher indemnification payments and lower insurance recoveries, partially offset by lower promotional costs related to Zovirax® due to the termination of our agreement with Sciele in October 2008;

    a decline in gross profit on product sales of $12.3 million, or 9%, to $119.4 million in the fourth quarter of 2008, compared with $131.7 million in the fourth quarter of 2007, primarily due to the genericization of the 150mg Wellbutrin XL® product and the recall of Ultram® ER 100mg tablets; and

    an increase of $10.9 million in restructuring costs recognized in the fourth quarter of 2008.

Cash Flows

        Net cash provided by continuing operating activities increased $27.6 million, or 35%, to $107.0 million in the fourth quarter of 2008, compared with $79.3 million in the fourth quarter of 2007, primarily due to an increase of $56.4 million related to the net change in operating assets and liabilities. The most significant change was reflected in accounts receivable as a result of net collections from GSK in the fourth quarter of 2008, due to lower 150mg Wellbutrin XL® product sales, and the timing of purchases by wholesale customers, which resulted in higher shipments in the fourth quarter of 2007.

        The change in operating assets and liabilities was partially offset by a decrease of $28.8 million related to income from operations before changes in operating assets and liabilities, due mainly to the lower gross profit on product sales and higher legal costs (net of insurance recoveries), partially offset by the decrease in research and development spending.

FINANCIAL CONDITION

        The following table presents a summary of our financial condition at December 31, 2008 and 2007:

 
  At December 31    
   
 
 
  2008   2007   Change  
($ in 000s)
  $   $   $   %  

Working capital(1)

    223,198     339,439     (116,241 )   (34 )

Long-lived assets(2)

    968,935     969,265     (330 )    

Shareholders' equity

    1,201,599     1,297,819     (96,220 )   (7 )

(1)
Total current assets less total current liabilities.

(2)
Property, plant and equipment, intangible assets, and goodwill.

Working Capital

        Working capital declined $116.2 million, or 34%, to $223.2 million at December 31, 2008, compared with $339.4 million at December 31, 2007, primarily due to:

    a net decline in cash and cash equivalents of $116.1 million, which reflected the following amounts paid in 2008: $101.9 million related to the acquisition of Prestwick; $83.0 million to fund the settlement of the U.S. and Canadian securities class actions; $45.1 million to GSK to settle the Wellbutrin XL® contract costs; and $10.0 million to settle the SEC investigation, which, in the aggregate, were in excess of operating cash flows for the year;

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

    a decrease of $62.1 million in insurance recoveries receivables related primarily to the portion of the U.S. and Canadian securities class actions settlement funded by our insurance carriers;

    an increase of $59.3 million in cash dividends declared but unpaid;

    a decrease of $21.2 million in inventories, related primarily to reductions in raw material inventory, which reflected lower production requirements for certain products; and

    a decrease of $21.1 million in accounts receivable, with the most significant change resulting from net collections from GSK due to lower 150mg Wellbutrin XL® product sales in 2008.

        Those factors were partially offset by:

    a decrease of $148.0 million in accrued legal settlements related to the settlements of the U.S. and Canadian securities class actions and the SEC investigation, partially offset by an increase of $32.6 million related primarily to the agreement in principle to settle with the USAO and the settlement of the OSC investigation; and

    a decrease of $45.1 million in accrued contract costs related to the Wellbutrin XL® settlement with GSK.

Long-Lived Assets

        Long-lived assets were $968.9 million at December 31, 2008, a decrease of $330,000, or less than 1%, compared with $969.3 million at December 31, 2007, primarily due to:

    the addition of Prestwick's identifiable intangible assets of $157.9 million; and

    additions to property, plant and equipment of $22.0 million, including expenditures related to the expansion of our corporate headquarters and the construction of a new facility in Barbados, as well as ongoing upgrades to our manufacturing facilities.

        Those factors were partially offset by:

    the depreciation of plant and equipment of $25.8 million and the amortization of intangible assets of $60.5 million;

    the impairment charge of $51.8 million related to the write-downs of the carrying values of property, plant and equipment located in Puerto Rico and Ireland;

    the impairment charge of $7.5 million related to the write-off of our technology intangible assets;

    the reclassification of $6.8 million from property, plant and equipment to assets held for sale related to the aggregate carrying value of the Ireland facility and the vacant land adjacent to our corporate headquarters; and

    the impact of foreign exchange rate changes on the reported value in U.S. dollars of property, plant and equipment located in Canada, due to the impact of a weaker Canadian dollar relative to the U.S. dollar at the end of 2008.

Shareholders' Equity

        Shareholders' equity declined $96.2 million, or 7%, to $1,201.6 million at December 31, 2008, compared with $1,297.8 million at December 31, 2007, primarily due to:

    cash dividends declared and dividend equivalents on RSUs of $239.9 million in the aggregate;

    a negative foreign currency translation adjustment of $32.4 million to other comprehensive income, due mainly to the impact of the weakening of the Canadian dollar relative to the U.S. dollar in 2008, which decreased the reported value of our Canadian dollar-denominated net assets; and

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

    the repurchase of $29.8 million of common shares under our share repurchase program.

        Those factors were partially offset by:

    net income of $199.9 million (including $7.9 million of stock-based compensation recorded in additional paid-in capital).

CASH FLOWS

        Our primary source of cash is the collection of accounts receivable related to product sales. Our primary uses of cash include: dividend payments; business development transactions; legal costs and litigation and regulatory settlements; salaries and benefits; inventory purchases; research and development spending; sales and marketing activities; capital expenditures; and, in 2007, loan repayments associated with our Notes. The following table displays cash flow information for each of the last three years:

 
  Years Ended December 31   Change  
 
  2008   2007   2006   2007 to 2008   2006 to 2007  
($ in 000s)
  $   $   $   $   %   $   %  

Net cash provided by continuing operating activities

    204,325     340,853     522,517     (136,528 )   (40 )   (181,664 )   (35 )

Net cash used in continuing investing activities

    (107,831 )   (15,045 )   (40,447 )   (92,786 )   617     25,402     (63 )

Net cash used in continuing financing activities

    (210,311 )   (728,650 )   (92,256 )   518,339     (71 )   (636,394 )   690  

Net cash used in discontinued operation

            (558 )           558     (100 )

Effect of exchange rate changes on cash and cash equivalents

    (2,277 )   1,943     (5 )   (4,220 )   (217 )   1,948     NM  
                                   

Net increase (decrease) in cash and cash equivalents

    (116,094 )   (400,899 )   389,251     284,805     (71 )   (790,150 )   (203 )

Cash and cash equivalents, beginning of year

    433,641     834,540     445,289     (400,899 )   (48 )   389,251     87  
                                   

Cash and cash equivalents, end of year

    317,547     433,641     834,540     (116,094 )   (27 )   (400,899 )   (48 )
                               

Operating Activities

        Net cash provided by continuing operating activities declined $136.5 million, or 40%, to $204.3 million in 2008, compared with $340.9 million in 2007, primarily due to:

    a decrease of $209.9 million related to income from operations before changes in operating assets and liabilities, due mainly to:

    the payments made in 2008 of $83.0 million to fund the settlement of the U.S. and Canadian securities class actions and $45.1 million to settle the Wellbutrin XL® contract costs with GSK, as well as $10.0 million paid to settle the SEC investigation; and

    a decline in gross profit on product sales of $60.0 million, or 10%, to $517.4 million in 2008, compared with $577.4 million in 2007, reflecting lower sales of Wellbutrin XL® and Cardizem® LA, partially offset by higher Legacy product sales.

        Those factors were partially offset by:

    an increase of $30.1 million related to the change in accrued liabilities, due mainly to the settlement of restructuring costs related to the December 2006 restructuring and the elimination of interest payable on our Notes in 2007;

    an increase of $17.6 million related to the change in inventories, due mainly to the reduction in raw material inventory purchases;

    an increase of $16.2 million related to the change in income taxes payable, due mainly to the timing of payments; and

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

    an increase of $15.2 million related to the change in insurance recoveries receivable, reflecting the timing of reimbursement of certain legal costs by our insurance carriers.

        Net cash provided by continuing operating activities declined $181.7 million, or 35%, to $340.9 million in 2007, compared with $522.5 million in 2006, primarily due to:

    a decrease of $156.0 million related to income from operations before changes in operating assets and liabilities, due mainly to: lower gross profit on product sales; and higher research and development expenses, partially offset by: lower sales force and marketing costs; lower restructuring costs; lower net legal costs (after insurance recoveries); and reduced interest expense; and

    a decrease of $40.2 million related to the change in accrued liabilities, due mainly to the settlement of restructuring costs, and the elimination of interest payable on our Notes.

        Those factors were partially offset by:

    an increase of $13.4 million related to the change in accounts receivable, due mainly to the decline in Wellbutrin XL® 300mg product sales in 2007.

Investing Activities

        Net cash used in continuing investing activities increased $92.8 million, or 617%, to $107.8 million in 2008, compared with $15.0 million in 2007, primarily due to:

    cash paid of $101.9 million to acquire Prestwick, net of cash acquired; and

    a decrease of $27.5 million related to the disposal of our investments in Depomed and Verdi in 2008 for proceeds (received as of December 31, 2008) of $25.2 million, compared with the disposal of our investments in Ethypharm and Reliant in 2007 for net proceeds of $52.7 million.

        Those factors were partially offset by:

    a decrease in additions to marketable securities of $28.2 million related primarily to $27.0 million of auction rate securities purchased in 2007; and

    a decrease in capital expenditures of $13.1 million, mainly as a result of the decision to close our Puerto Rico manufacturing facilities.

        Net cash used in continuing investing activities declined $25.4 million, or 63%, to $15.0 million in 2007, compared with $40.4 million in 2006, primarily due to:

    net proceeds of $52.7 million on the disposal of our investments in Ethypharm and Reliant in 2007; and

    a decrease in capital expenditures of $9.7 million, primarily as a result of the completion of an expansion of our Steinbach manufacturing facility in 2006.

        Those factors were partially offset by

    an increase of $31.3 million in additions to marketable securities, including the $27.0 million of auction rate securities added in 2007.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Financing Activities

        Net cash used in continuing financing activities declined $518.3 million, or 71%, to $210.3 million in 2008, compared with $728.7 million in 2007, primarily due to:

    principal and premium payments of $406.8 million to redeem our Notes in 2007;

    a decrease of $141.2 million in dividends paid related primarily to an increase in declared but unpaid dividends in 2008, and the payment of a special dividend of $0.50 per share in 2007; and

    a decrease of $11.2 million related to the final payment made to GSK in 2007 related to Zovirax®.

        Those factors were partially offset by:

    the repurchase of $29.8 million of common shares in 2008 under our share repurchase program; and

    a decrease of $11.2 million in proceeds related to the issuance of common shares on the exercise of stock options in 2007.

        Net cash used in continuing financing activities increased $636.4 million, or 690%, to $728.7 million in 2007, compared with $92.3 million in 2006, primarily due to:

    a $406.8 million increase related to the redemption of our Notes in 2007; and

    an increase in dividends paid of $241.5 million in 2007.

        Those factors were partially offset by:

    a decrease of $14.0 million in repayments of other long-term obligations, related primarily to the final payments for Vasotec® and Vaseretic® in 2006.

LIQUIDITY AND CAPITAL RESOURCES

        The following table displays our net financial asset position at December 31, 2008 and 2007:

 
  At December 31    
   
 
 
  2008   2007   Change  
($ in 000s)
  $   $   $   %  

Cash and cash equivalents

    317,547     433,641     (116,094 )   (27 )

Short-term investment

    278         278     NM  

Marketable securities

    22,635     28,312     (5,677 )   (20 )
                     

Total financial assets

    340,460     461,953     (121,493 )   (26 )
                   

NM — Not meaningful

        We believe that our existing cash resources, together with cash expected to be generated by operations and from the potential sale of non-core assets, as well as funds available under our undrawn $250 million credit facility, will be sufficient to meet our operational and capital expenditure requirements; support our current dividend policy and share repurchase program; cover the costs associated with our operating efficiency initiatives; and meet our working capital needs, for at least the next 12 months, based on our current expectations. We anticipate total capital expenditures of approximately $5 million to $10 million in 2009. No major capital expenditure projects are planned for 2009.

        We cannot, however, predict the amount or timing of our need for additional funds under various circumstances, such as significant business development transactions; new product development projects;

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(All dollar amounts expressed in U.S. dollars)


changes to our capital structure; or other factors that may require us to raise additional funds through borrowings, or the issuance of debt or equity securities. In addition, certain contingent events, such as the resolution of certain legal proceedings (as described in note 28 to our Consolidated Financial Statements), if realized, could have a material adverse impact on our liquidity and capital resources.

        The credit and capital markets have experienced unprecedented deterioration in 2008, including the failure of a number of significant and established financial institutions in the U.S. and abroad, and may continue to deteriorate in 2009, all of which will have an impact on the availability of credit and capital in the near term. These market conditions may limit our access to additional funding at any reasonable rate.

Cash and Cash Equivalents

        Our cash and cash equivalents are held in cash operating accounts, or are invested in securities such as treasury bills, money market funds, term deposits, or commercial paper with a minimum investment-grade credit rating of "A1/P1".

Short-Term Investment

        We have classified our remaining investment in common shares of Depomed as a short-term investment based on our intent to dispose of these shares within the next 12 months, subject to market conditions.

Auction Rate Securities

        Our marketable securities portfolio currently includes $26.8 million of principal invested in nine individual auction rate securities. These securities represent interests in collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations, and other structured credits, including corporate bonds. Some of the underlying collateral for these securities consists of sub-prime mortgages. These securities have long-term maturities for which the interest rates are typically reset each month through a dutch auction. Those auctions historically have provided a liquid market for these securities. With the liquidity issues recently experienced in global credit and capital markets, these securities have experienced multiple failed auctions, as the amount of auction rate securities submitted for sale has exceeded the amount of purchase orders.

        The estimated fair values of the auction rate securities at December 31, 2008 and 2007 were $10.3 million and $18.0 million, respectively, which reflected write-downs of $16.4 million and $8.8 million, respectively, to the cost bases at those dates. We recorded impairment charges of $8.6 million in 2008 (including $4.4 million reclassified from other comprehensive income) and $6.0 million in 2007, reflecting the portion of the auction rate securities that we have concluded has an other-than-temporary decline in estimated fair value due to a shortfall in the underlying collateral value for those securities. These charges did not have a material impact on our liquidity. In addition, we recorded unrealized losses in other comprehensive income of $3.4 million in 2008 and $2.8 million in 2007, reflecting adjustments to the portion of the auction rate securities that we have concluded have a temporary decline in estimated fair value. We do not consider this decline in estimated fair value to be other-than-temporary based on the adequacy of the underlying collateral value for those securities. In addition, it is our intent to hold those securities until a recovery in market value occurs (or until maturity, if necessary), and, based on our existing cash resources, together with cash expected to be generated by operations, we do not expect to be required to sell those securities at a loss.

        Due to the absence of observable market quotes for the auction rate securities, we utilized valuation models based on unobservable inputs in order to estimate the fair value of these securities at December 31, 2008 and 2007, including models that consider the expected cash flow streams, and collateral values as reported in the trustee reports for the respective securities, which include adjustments for defaulted securities and further adjustments for purposes of collateralization tests as outlined in the trust indentures. The key assumptions used in these models relate to the timing of cash flows, discount rates, estimated amount of recovery, and

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(All dollar amounts expressed in U.S. dollars)


probabilities assigned to various liquidation scenarios. The valuation of the auction rate securities is subject to uncertainties that are difficult to predict. Factors that may impact our valuation include changes to the credit ratings of these securities, the underlying assets supporting these securities, the rates of default of the underlying assets, the underlying collateral value, and overall market liquidity.

        The credit and capital markets may continue to deteriorate in 2009. If uncertainties in these markets continue, or these markets deteriorate further, or we experience any additional declines in underlying collateral values on the auction rate securities, we may incur additional write-downs to these securities, which could have a material impact on our results of operations, financial condition and cash flows. We have discontinued additional investments in auction rate securities, and have commenced arbitration proceedings against Credit Suisse Securities (USA) LLC in respect of these securities (as described in note 28 to our Consolidated Financial Statements).

Debt Capacity

        We currently do not have any outstanding borrowings under our $250 million committed credit facility. In June 2007, we received lender consent, pursuant to our request under the annual extension option, to extend the maturity date of this facility for an additional year to June 2010. This facility may be used for general corporate purposes, including acquisitions. This facility includes an accordion feature which allows it to be increased up to $400 million; however, in the current global credit environment, it is not expected that this feature would be available on reasonable terms. At December 31, 2008, we were in compliance with all financial and non-financial covenants associated with this facility.

Credit Ratings

        In September 2008, Standard and Poor's lowered our corporate credit rating from "BB" to "BB-" and our bank loan rating from "BBB-" to "BB+" with stable outlook, citing concerns that our New Strategic Focus and the associated rationalization of our operations will involve a long time frame, significant investments, and high execution risk, and that our share repurchase program could weaken our liquidity.

CONTRACTUAL OBLIGATIONS

        The following table summarizes our contractual obligations at December 31, 2008:

 
  Payments Due by Period  
($ in 000s)
  Total   2009   2010
and 2011
  2012
and 2013
  Thereafter  

Operating lease obligations

  $ 24,806   $ 5,436   $ 7,749   $ 7,211   $ 4,410  

Purchase obligations(1)

    54,130     31,679     13,832     5,769     2,850  
                       

Total contractual obligations

  $ 78,936   $ 37,115   $ 21,581   $ 12,980   $ 7,260  
                       

(1)
Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and include obligations for minimum inventory and capital expenditures, and outsourced information technology, product promotion, and clinical research services.

        The above table does not reflect any milestone payments in connection with research and development arrangements with third parties. These payments are contingent on the achievement of specific developmental, regulatory and/or commercial milestones. These arrangements generally permit us to unilaterally terminate development of the products, which would allow us to avoid making the contingent payments. From a business perspective, however, we view these payments favourably as they signify that the products are moving successfully through the development phase toward commercialization. In addition, under certain arrangements, we may have to make royalty payments based on a percentage of future sales of the products in the event

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)


regulatory approval for marketing is obtained. In connection with current research and development agreements with third parties, we may be required to make potential milestone payments of up to $12.0 million in the aggregate, as well as royalty payments based on a percentage of future sales of the products, in the event regulatory approval is obtained.

        Also excluded from the above table is a liability for unrecognized tax benefits totaling $63.7 million. The liability for unrecognized tax benefits has been excluded because we cannot currently make a reliable estimate of the period in which the unrecognized tax benefits will be realized.

OFF-BALANCE SHEET ARRANGEMENTS

        In the normal course of business, we enter into agreements that include indemnification provisions for product liability and other matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These provisions are generally subject to maximum amounts, specified claim periods, and other conditions and limits. We did not pay or accrue any material amounts under these provisions in 2008 or 2007.

OUTSTANDING SHARE DATA

        Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange.

        At February 25, 2009, we had 158,216,132 issued and outstanding common shares, as well as 4,155,911 stock options and 369,761 restricted share units ("RSUs") outstanding. Each stock option entitles the holder to purchase one of our common shares at the end of the vesting period at a pre-determined option price. Each RSU represents the right of the holder to receive one of our common shares at the end of the vesting period.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates on investments and debt obligations, and equity market prices on long-term investments. We use derivative financial instruments from time to time as a risk management tool and not for trading or speculative purposes.

Inflation; Seasonality

        Our results of operations have not been materially impacted by inflation or seasonality.

Foreign Currency Risk

        We operate internationally, but a majority of our revenue and expense activities and capital expenditures are denominated in U.S. dollars. Following the substantial liquidation of our Irish subsidiary group during 2008, our only other significant transactions are denominated in Canadian dollars. We also face foreign currency exposure on the translation of our operations in Canada from Canadian dollars to U.S. dollars. Where possible, we manage foreign currency risk by managing same currency assets in relation to same currency liabilities, and same currency revenue in relation to same currency expenses. As a result, both favourable and unfavourable foreign currency impacts to our Canadian dollar-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our Canadian dollar-denominated revenue. At December 31, 2008, the effect of a hypothetical 10% immediate and adverse change in the Canadian dollar exchange rate (relative to the U.S. dollar) on our Canadian dollar-denominated cash, cash equivalent, accounts receivable, accounts payable, and intercompany balances would not have a material impact on our net income. Given recent currency market volatility, in the first quarter of 2009, we have entered into short-dated forward contracts to seek to mitigate foreign exchange risk.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Interest Rate Risk

        The primary objective of our policy for the investment of temporary cash surpluses is the protection of principal, and, accordingly, we generally invest in investment-grade debt securities with varying maturities, but typically less than three months. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk, and, as a result, a hypothetical 10% immediate and adverse change in interest rates would not have a material impact on the realized value of these investments.

        We are also exposed to interest rate risk on our investment in auction rate securities. Interest rates on these securities are typically reset every month; however, following the failure to complete successful auctions and the reset of interest rates due to market liquidity issues, interest on these securities is being calculated and paid based on prescribed spreads to LIBOR. As we are guaranteed a fixed spread to market interest rates, our interest rate risk exposure is minimal, and, as a result, a hypothetical 10% immediate and adverse change in interest rates would not have a material impact on the fair value of these securities.

        We do not currently have any long-term debt, nor do we currently utilize interest rate swap contracts to hedge against interest rate risk.

Investment Risk

        We are exposed to investment risks primarily on our available-for-sale equity investments. The fair values of these investments are subject to significant fluctuations due to stock market volatility; changes in general economic conditions; and/or changes in the financial condition of each investee. We regularly review the carrying values of our investments and record losses whenever events and circumstances indicate that there have been other-than-temporary declines in their fair values. At December 31, 2008, a hypothetical 10% immediate and adverse change in the quoted market prices of our available-for-sale equity investments would not have a material impact on the fair value of these investments.

        We are also exposed to investment risks on our investment in auction rate securities due to the current market liquidity issues, as described above under "Liquidity and Capital Resources — Auction Rate Securities".

RELATED PARTY TRANSACTIONS

        In 2006, we contracted with Global IQ, a clinical research organization, for a long-term safety study on BVF-146 (which was subsequently terminated). Prior to April 2007, during which time Dr. Peter Silverstone, our former Senior Vice-President, Medical and Scientific Affairs, retained an interest in Global IQ, we were invoiced $581,000 in 2007 and $1.2 million in 2006 by Global IQ for this study (excluding investigator and other pass-through costs). Dr. Silverstone indicated to us that he disposed of his interest in Global IQ in April 2007. Dr. Silverstone resigned from our Company effective April 4, 2008.

        In 2007, we received $734,000 in full settlement of the principal and accrued interest on a relocation assistance loan granted to a former executive officer in March 2001.

        In 2006, Mr. Melnyk reimbursed us $420,000 for expenses incurred in connection with the analysis of a potential investment in a company that Mr. Melnyk decided to pursue personally following a determination by our Board of Directors that the investment opportunity was not, and would not in the future be, of interest to us.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Critical accounting policies and estimates are those policies and estimates that are most important and material to the preparation of our consolidated financial statements, and which require management's most subjective and complex judgments due to the need to select policies from among alternatives available, and to make estimates about matters that are inherently uncertain. We base our estimates on historical experience and other factors that we believe to be reasonable under the circumstances. Under certain product manufacturing and supply agreements, we rely on estimates for future returns, rebates, and chargebacks made by our strategic

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(All dollar amounts expressed in U.S. dollars)


marketing partners. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business and new information as it becomes available. If historical experience and other factors we use to make these estimates do not reasonably reflect future activity, our results of operations and financial position could be materially impacted.

        Our critical accounting policies and estimates relate to the following:

    revenue recognition;

    intangible assets;

    goodwill;

    contingencies;

    income taxes; and

    stock-based compensation.

Revenue Recognition

        We recognize product sales revenue when title has transferred to the customer and the customer has assumed the risks and rewards of ownership. Revenue from product sales is recognized net of provisions for estimated cash discounts, allowances, returns, rebates, and chargebacks, as well as distribution fees paid to certain of our wholesale customers. We establish these provisions concurrently with the recognition of product sales revenue.

        Our supply prices to our strategic marketing partners in the U.S. for Wellbutrin XL®, Ultram® ER, Xenazine®, Cardizem® LA, Tiazac®, and Generic products are determined after taking into consideration estimates for future returns, rebates, and chargebacks provided to us by each partner. We make adjustments as needed to state those estimates on a basis consistent with our revenue recognition policy and our methodology for estimating returns, rebates, and chargebacks related to our own direct product sales. Revenue from sales of these products accounted for approximately 45% of our total gross product sales in 2008, compared with 55% and 70% in 2007 and 2006, respectively. The declines in the percentage of gross product sales comprised of these products in 2008 and 2007, relative to 2006, was primarily due to the impact of the genericization of 150mg and 300mg dosage strengths of Wellbutrin XL ® in May 2008 and December 2006, respectively.

        We continually monitor our product sales provisions and evaluate the estimates used as additional information becomes available. We make adjustments to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We are required to make subjective judgments based primarily on our evaluation of current market conditions and trade inventory levels related to our products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or an adjustment related to past sales, or both.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Continuity of Product Sales Provisions

        The following table presents the activity and ending balances for our product sales provisions for each of the last three years.

($ in 000s)
  Cash
Discounts
  Allowances   Returns   Rebates and
Chargebacks
  Distribution
Fees
  Total  

Balance, January 1, 2006

  $ 367   $ 833   $ 23,205   $ 8,632   $ 4,885   $ 37,922  

Current year provision

    5,365     1,427     23,176     16,251     7,411     53,630  

Prior year provision

            (3,838 )   442     (1,292 )   (4,688 )

Payments or credits

    (5,423 )   (1,919 )   (17,422 )   (18,583 )   (8,654 )   (52,001 )
                           

Balance, December 31, 2006

    309     341     25,121     6,742     2,350     34,863  
                           

Current year provision

    6,304     1,110     13,868     18,969     12,583     52,834  

Prior year provision

            (563 )   (1,500 )       (2,063 )

Payments or credits

    (5,871 )   (1,152 )   (19,064 )   (16,248 )   (10,607 )   (52,942 )
                           

Balance, December 31, 2007

    742     299     19,362     7,963     4,326     32,692  
                           

Current year provision

    6,766     1,632     19,919     24,448     10,670     63,435  

Prior year provision

            (4,599 )   (1,297 )       (5,896 )

Payments or credits

    (6,898 )   (1,702 )   (9,590 )   (24,841 )   (11,278 )   (54,309 )
                           

Balance, December 31, 2008

  $ 610   $ 229   $ 25,092   $ 6,273   $ 3,718   $ 35,922  
                           

Use of Information from External Sources

        We use information from external sources to estimate our product sales provisions. We obtain prescription data for our products from IMS Health, an independent pharmaceutical market research firm. We use this data to identify sales trends based on prescription demand and to estimate inventory requirements. We obtain inventory data directly from our three major U.S. wholesalers, Cardinal Health, Inc. ("Cardinal"), McKesson Corporation ("McKesson") and AmerisourceBergen Corporation ("ABC"), which together accounted for approximately 85% of our direct product sales in the U.S. over the past three years. The inventory data received from these wholesalers excludes inventory held by customers to whom they sell. Third-party data with respect to prescription demand and inventory levels are subject to the inherent limitations of estimates that rely on information from external sources, as this information may itself rely on certain estimates and reflect other limitations.

        The following table indicates information about the inventories of our products owned by Cardinal, McKesson and ABC at December 31, 2008 (which excludes inventories owned by regional wholesalers, warehousing chains, and indirect customers in the U.S., and inventories owned by wholesalers and retailers in Canada). Our distribution agreements with Cardinal, McKesson and ABC limit the amount of inventory they can own to between 1/2 and 11/2 months of supply of our products. As a result, inventory in the wholesale distribution channel does not vary substantially. The inventory data from these wholesalers is provided to us in the aggregate rather than by specific lot number, which is the level of detail that would be required to determine the original sale date and remaining shelf life of the inventory. However, the inventory reports we receive from these wholesalers include data with respect to inventories on hand with less than 12 months remaining shelf life. As indicated in the following table, these wholesalers owned overall 1.1 months of supply of our products at December 31, 2008, of which only $197,000 had less than 12 months remaining shelf life. Therefore, we believe

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(All dollar amounts expressed in U.S. dollars)


the collection of lot information would provide limited additional benefit in estimating our product sales provisions.

 
   
  At December 31, 2008   At December 31, 2007  
($ in 000s)
  Original Shelf Life (In Months)   Total Inventory   Months On Hand (In Months)   Inventory With Less Than 12 Months Remaining Shelf Life   Total Inventory   Months On Hand (In Months)   Inventory With Less Than 12 Months Remaining Shelf Life  

Zovirax®

    36-48   $ 17,769     1.3   $ 91   $ 15,863     1.5   $ 93  

Cardizem®

    36-48     7,146     0.8     15     8,437     1.6     12  

Ativan®

    24     2,523     1.0     80     2,425     1.0     9  

Vasotec® and Vaseretic®

    24     2,034     1.1     10     1,705     1.2     17  

Isordil®

    36-60     273