10-K 1 valeant2013form10-k.htm 10-K Valeant 2013 Form 10-K




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                   
Commission file number 001-14956
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
BRITISH COLUMBIA, CANADA
State or other jurisdiction of
incorporation or organization
98-0448205
(I.R.S. Employer Identification No.)
2150 St. Elzéar Blvd. West
Laval, Quebec
Canada, H7L 4A8B
(Address of principal executive offices)
Registrant's telephone number, including area code (514) 744-6792
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
 
Name of each exchange on which registered 
Common Shares, No Par Value
 
New York Stock Exchange, Toronto Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the common shares held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $25,293,645,000 based on the last reported sale price on the New York Stock Exchange on June 28, 2013.
The number of outstanding shares of the registrant’s common stock, as of February 21, 2014 was 334,869,413.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s proxy statement for the 2014 Annual Meeting of Shareholders. Such proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2013.





TABLE OF CONTENTS

GENERAL INFORMATION

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



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Basis of Presentation
General
Except where the context otherwise requires, all references in this Annual Report on Form 10-K (“Form 10-K”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries, taken together. In this Form 10-K, references to “$” and “US$” are to United States dollars, references to “C$” are to Canadian dollars, references to “€” are to Euros, references to “AUD$” are to Australian dollars, references to “R$” are to Brazilian real, references to “MXN$” are to Mexican peso, references to “PLN” are to Polish zloty and references to “¥” are to Japanese yen. Unless otherwise indicated, the statistical and financial data contained in this Form 10-K are presented as of December 31, 2013.
Trademarks
The following words are some of the trademarks in our Company’s trademark portfolio and are the subject of either registration, or application for registration, in one or more of Canada, the United States of America (the “U.S.”) or certain other jurisdictions: ACANYA®, AFEXA®, AKREOS®, AMBI®, ANTI-ANGIN®, ANTIGRIPPIN®, ARESTIN®, ATRALIN®, B&L®, B+L®, BAUSCH & LOMB®, BAUSCH + LOMB®, BEDOYECTA®, BENZACLIN®, BESIVANCE®, BIAFINE®, BIOTRUE®, BIOVAIL®, CALADRYL®, CARAC®, CARDIZEM®, CERAVE®, CESAMET®, CLEAR + BRILLIANT®, CLODERM®, COLD-FX®, COLDSORE-FX®, COMFORTMOIST®, CONDITION & ENHANCE®, CORN HUSKERS®, CORTAID®, CRYSTALENS®, DERMAGLOW®, DERMIK®, DIASTAT®, DIFFLAM®, DUROMINE®, DURO-TUSS®, EFUDEX®, ELASTIDERM®, ERTACZO®, FRAXEL®, HYPERGEL™, JUBLIA®, LACRISERT®, LIPOSONIX®, LODALIS™, LOTEMAX®, LUZU™, MEDICIS®, MEPHYTON®, METERMINE®, MOISTURESEAL™, NU-DERM®, OBAGI®, OBAGI NU-DERM®, OBAGI CLENZIDERM®, OBAGI-C®, OCUVITE®, ORTHO DERMATOLOGICS®, PERLANE®, PERLANE-L®, POTIGA®, PRESERVISION®, PROLENSA®, PUREVISION®, PURPOSE®, RENOVA®, RENU®, RENU MULTIPLUS®, RESTYLANE®, RESTYLANE-L®, RETIN-A MICRO®, RIKODEINE®, SCULPTRA®, SCULPTRA AESTHETIC®, SHOWER TO SHOWER®, SOFLENS®, SOLODYN®, SOLTA MEDICAL®, STELLARIS®, SYPRINE®, TARGRETIN®, THERMAGE®, THERMAGE CPT®, TIAZAC®, TROBALT®, VALEANT®, VALEANT V & DESIGN®, VALEANT PHARMACEUTICALS & DESIGN®, VANOS®, VICTUS®, XENAZINE®, ZIANA®, and ZYCLARA®.
WELLBUTRIN®, WELLBUTRIN® XL, WELLBUTRIN XL® and ZOVIRAX® are trademarks of The GlaxoSmithKline Group of Companies and are used by us under license. ULTRAM® is a trademark of Johnson & Johnson and is used by us under license. MVE® is a registered trademark of DFB Technology Ltd. and is used by us under license. ELIDEL® and XERESE® are registered trademarks of Meda Pharma SARL and are used by us under license. VISUDYNE® is a registered trademark of Novartis Pharma AG and is used by us under license. DYSPORT® is a registered trademark of Ipsen Biopharm Limited and is used by us under license. MONOPRIL®, CEFZIL®, DURACEF® and MEGACE® are registered trademarks of Bristol-Myers Squibb Company and are used by us under license. BENSAL HP® is a registered trademark and is used by us under license from SMG Pharmaceuticals, LLC. EMERVEL® is a registered trademark of Galderma S.A. and is used by us under license. NEOTENSIL™ is a trademark of Living Proof, Inc. and is used by us under license. OPANA® is a registered trademark of Endo Pharmaceuticals Inc. and is used by us under license.
In addition to the trademarks noted above, we have filed trademark applications and/or obtained trademark registrations for many of our other trademarks in the U.S., Canada and in other jurisdictions and have implemented, on an ongoing basis, a trademark protection program for new trademarks.
Forward-Looking Statements
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:
To the extent any statements made in this Annual Report on Form 10-K contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, “forward-looking statements”).
These forward-looking statements relate to, among other things: the expected benefits of our acquisitions and other transactions, such as cost savings, operating synergies and growth potential of the Company; business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as certain litigation and regulatory

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proceedings; general market conditions; and our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity and income taxes.
Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-K that contain forward-looking statements are qualified by these cautionary statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:
the challenges and difficulties associated with managing the rapid growth of our Company and a larger, more complex business;
the introduction of generic competitors of our brand products;
the introduction of products that compete against our products that do not have patent or data exclusivity rights, which products represent a significant portion of our revenues;
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
our ability to identify, acquire, close and integrate acquisition targets successfully and on a timely basis;
factors relating to the integration of the companies, businesses and products acquired by the Company (including the integration relating to our recent acquisitions of Solta Medical, Inc. (“Solta Medical”), Bausch & Lomb Holdings Incorporated (“B&L”), Obagi Medical Products, Inc. (“Obagi”), and Medicis Pharmaceutical Corporation ("Medicis”)), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, and the achievement of the anticipated benefits from such integrations;
factors relating to our ability to achieve all of the estimated synergies from our acquisitions, including from our recent acquisition of B&L (which we anticipate will be greater than $850 million), as a result of cost-rationalization and integration initiatives. These factors may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions, some of which have not yet been made;
our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
our substantial debt and debt service obligations and their impact on our financial condition and results of operations;
our future cash flow, our ability to service and repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected levels of operations, acquisition activity and general economic conditions;
interest rate risks associated with our floating debt borrowings;
the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets (including the challenges created by new and different regulatory regimes in those markets);
adverse global economic conditions and credit market and foreign currency exchange uncertainty in the countries in which we do business;

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economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
our ability to retain, motivate and recruit executives and other key employees;
our ability to obtain and maintain sufficient intellectual property rights over our products and defend against challenge to such intellectual property;
the outcome of legal proceedings, investigations and regulatory proceedings;  
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits and/or withdrawals of products from the market;
the availability of and our ability to obtain and maintain adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, Health Canada and other regulatory approvals, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
the availability and extent to which our products are reimbursed by government authorities and other third party payors, as well as the impact of obtaining or maintaining such reimbursement on the price of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price of our products in connection therewith;
the impact of price control restrictions on our products, including the risk of mandated price reductions;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as factors impacting the commercial success of our currently marketed products, which could lead to material impairment charges;
the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
negative publicity or reputational harm to our products and business;
the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing;
our ability to obtain components, raw materials or finished products supplied by third parties and other manufacturing and related supply difficulties, interruptions and delays;
the disruption of delivery of our products and the routine flow of manufactured goods;
the seasonality of sales of certain of our products;
declines in the pricing and sales volume of certain of our products that are distributed by third parties, over which we have no or limited control;
compliance with, or the failure to comply with, health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and pricing practices, worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate;
interruptions, breakdowns or breaches in our information technology systems; and

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other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this Form 10-K, under Item 1A. “Risk Factors”, and in the Company’s other filings with the SEC and CSA. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect actual outcomes, except as required by law.

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PART I
Item 1.    Business
Biovail Corporation (“Biovail”) was formed under the Business Corporations Act (Ontario) on February 18, 2000, as a result of the amalgamation of TXM Corporation and Biovail Corporation International. Biovail was continued under the Canada Business Corporations Act (the “CBCA”) effective June 29, 2005. On September 28, 2010 (the “Merger Date”), Biovail completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) through a wholly-owned subsidiary pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.”
Effective August 9, 2013, we continued from the federal jurisdiction of Canada to the Province of British Columbia, meaning that we became a company registered under the laws of the Province of British Columbia as if we had been incorporated under the laws of the Province of British Columbia.
Unless the context indicates otherwise, when we refer to “we”, “us”, “our” or the “Company” in this Annual Report on Form 10-K (“Form 10-K”), we are referring to Valeant Pharmaceuticals International, Inc. and its subsidiaries on a consolidated basis.
Introduction
We are a multinational, specialty pharmaceutical and medical device company that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries. In the Developed Markets segment, we focus most of our efforts in the eye health, dermatology, and neurology therapeutic classes. In the Emerging Markets segment, we focus primarily on branded generics, OTC products, and medical devices. We are diverse not only in our sources of revenue from our broad drug and medical device portfolio, but also among the therapeutic classes and geographic segments we serve.
Business Strategy
Our strategy is to focus the business on core geographies and therapeutic classes that offer attractive growth opportunities while maintaining our lower selling, general and administrative cost model and decentralized operating structure. We have an established portfolio of durable products with a focus in the eye health and dermatology therapeutic areas. We believe these areas are particularly attractive given that many of the products in these areas:
have potential for strong operating margins and solid growth;
are marked by a higher insured and self-pay component than other therapeutic areas and are less dependent on increasing government reimbursement pressures;
have limited patent risk;
have the potential for line extensions and life-cycle management opportunities; and
are smaller on an individual basis, and therefore typically not the focus of larger pharmaceutical companies.
Another critical element of our strategy is business development. We have completed numerous transactions over the past few years to expand our portfolio offering and geographic footprint, including, among others, the acquisitions of Bausch & Lomb Holdings Incorporated (“B&L”) and Medicis Pharmaceutical Corporation (“Medicis”). We will continue to pursue value-added business development opportunities as they arise.
The growth of our business is further augmented through our lower risk research and development model. This model allows us to advance certain development programs to drive future commercial growth, while minimizing our research and development expense. This is achieved primarily as follows:
focusing our efforts on niche therapeutic areas such as eye health, dermatology and podiatry, aesthetics, and dentistry, including life-cycle management programs for currently marketed products; and
acquiring dossiers and registrations for branded generic products, which require limited manufacturing start-up and development activities.

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In addition to selective acquisitions and product development, our strategy also involves deploying cash through debt repayments and repurchases, as well as share buybacks.
We believe this strategy will allow us to maximize both the growth rate and profitability of the Company and to enhance shareholder value.
Acquisitions
We have completed a number of transactions to expand our product portfolio including, among others, the following acquisitions of businesses and product rights in 2013: B&L, Obagi Medical Products, Inc. (“Obagi”), Natur Produkt International, JSC (“Natur Produkt”) and certain assets from Eisai Inc. (“Eisai”). In addition, in January 2014, we acquired Solta Medical Inc (“Solta Medical”).
For more information regarding our acquisitions, see note 3, note 4 and note 27 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Segment Information
As a result of our acquisition strategy and continued growth, impacted by the December 2012 Medicis acquisition, our Chief Executive Officer (“CEO”), who is our Chief Operating Decision Maker (“CODM”), began to manage the business differently, which necessitated a realignment of the segment structure, effective in the first quarter of 2013. Pursuant to this change, we now have two operating and reportable segments: (i) Developed Markets, and (ii) Emerging Markets. Accordingly, we have restated prior period segment information to conform to the current period presentation. Comparative segment information for 2013, 2012, and 2011 is presented in note 26 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Our current product portfolio comprises approximately 1,500 products.
Developed Markets
The Developed Markets segment consists of (i) sales in the U.S. of pharmaceutical products, OTC products, and medical device products, as well as alliance and contract service revenues, in the areas of eye health, dermatology and podiatry, aesthetics, and dentistry, (ii) sales in the U.S. of pharmaceutical products indicated for the treatment of neurological and other diseases, as well as alliance revenue from the licensing of various products we developed or acquired, and (iii) pharmaceutical products, OTC products, and medical device products sold in Canada, Australia, New Zealand, Western Europe and Japan.
Pharmaceutical Products — Our principal pharmaceutical products are:
An Acne franchise, which includes Solodyn®, a prescription oral antibiotic approved to treat only the red, pus-filled pimples of moderate to severe acne in patients 12 years of age and older, as well as Ziana®, Acanya®, and Atralin®.
Wellbutrin XL®, an extended-release formulation of bupropion indicated for the treatment of major depressive disorder in adults.
Xenazine® is indicated for the treatment of chorea associated with Huntington’s disease. In the U.S., Xenazine® is distributed for us by Lundbeck Inc. under an exclusive marketing, distribution and supply agreement.
Zovirax® Cream and Zovirax® Ointment are prescription topical antivirals which are active against herpes viruses. Zovirax® Cream is indicated for the treatment of recurrent herpes labialis (cold sores) in adults and adolescents (12 years of age and older). Zovirax® Ointment is indicated for the management of initial genital herpes. See note 5 of notes to consolidated financial statements in Item 15 of this Form 10-K for information regarding the agreement with Actavis to launch the authorized generic ointment for Zovirax®.
The Lotemax® franchise was acquired as part of the acquisition of B&L in August 2013 (the “B&L Acquisition”). Lotemax® Gel is a topical corticosteroid indicated for the treatment of post-operative inflammation and pain following ocular surgery. The gel formulation was launched in the first quarter of 2013. This new formulation is a technology that allows the drug to adhere to the ocular surface and offers dose uniformity, which eliminates the need to shake the product in order to ensure the drug is in suspension, a low concentration of preservative, and two known moisturizers.
Arestin® (minocycline hydrochloride) is a subgingival sustained-release antibiotic. Arestin® is indicated as an adjunct to scaling and root planing (SRP) procedures for reduction of pocket depth in patients with adult periodontitis. Arestin® may be used as part of a periodontal maintenance program, which includes good oral hygiene and SRP.

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Prolensa®, acquired as part of the B&L Acquisition in August 2013, is a non-steroidal anti-inflammatory ophthalmic solution for the treatment of inflammation and pain following cataract surgery.
OTC Products — Our principal OTC products are:
PreserVision®, acquired as part of the B&L Acquisition in August 2013, is an antioxidant eye vitamin and mineral supplement.
ReNu Multiplus®, acquired as part of the B&L Acquisition in August 2013, is a sterile, preserved solution used to lubricate and rewet soft (hydrophilic) contact lenses. ReNu Multiplus® product contains povidone, a lubricant that can be used with daily, overnight, and disposable soft contact lenses.
Ocuvite®, acquired as part of the B&L Acquisition in August 2013, is a lutein eye vitamin and mineral supplement that contains lutein (an antioxidant carotenoid), a nutrient that supports macular health by helping filter harmful blue light.
Artelac™, acquired as part of the B&L Acquisition in August 2013, is a solution in the form of eye drops to treat dry eyes caused by chronic tear dysfunction.
CeraVe® is a range of OTC products with essential ceramides and other skin-nourishing and skin-moisturizing ingredients (humectants and emollients) combined with a unique, patented Multivesicular Emulsion (MVE®) delivery technology that, together, work to rebuild and repair the skin barrier. CeraVe® formulations incorporate ceramides, cholesterol and fatty acids, all of which are essential for skin barrier repair and are used as adjunct therapy in the management of various skin conditions.
Device Products — Our principal device products are:
SofLens® Daily Disposable Contact Lenses, acquired as part of the B&L Acquisition in August 2013, use ComfortMoist® Technology (a combination of thin lens design and slow releasing packaging solution) and High Definition Optics™, an aspheric design that reduces aspheric aberration over the range of powers.
Restylane® family of products (Restylane®/Restylane-L®/Perlane®/Perlane-L®) is a range of injectable implant dermal fillers. These products can be used individually to add volume and fullness to the skin to correct moderate to severe facial wrinkles and folds, such as nasolabial folds. Restylane® is also FDA-approved for lip enhancement in patients over 21 years of age, and is uniquely formulated to provide fullness and definition to the lips.
PureVision®, acquired as part of the B&L Acquisition in August 2013, is a Silicone Hydrogel Frequent Replacement Contact Lens using AerGel™ material (which allows natural levels of oxygen to reach the eyes and resists protein buildup), and an aspheric optical design.
Dysport® is a prescription injection neurotoxin (abobotulinumtoxinA) for temporary improvement in the look of moderate to severe glabellar lines in adults less than 65 years of age.
Various ophthalmic surgical products, acquired as part of the B&L Acquisition in August 2013, including intraocular lenses such as Akreos® and Crystalens®, and surgical equipment products such as the VICTUS® femtosecond laser and the Stellaris® PC, a vitreoretinal and cataract surgery system.
Medical device systems for aesthetic applications, acquired as part of the Solta Medical acquisition in January 2014, including the Thermage CPT® system that provides non-invasive treatment options using radiofrequency energy for skin tightening, the Fraxel® repair system for use in dermatological procedures requiring ablation, coagulation, and resurfacing of soft tissue, the Clear + Brilliant® system to improve skin texture and help prevent the signs of aging skin, and the Liposonix® system that destroys unwanted fat cells resulting in waist circumference reduction.
Generic Products — Our principal branded and other generic products are:
Retin-A Micro® (tretinoin gel) microsphere, 0.04%/0.1% Pump, is an oil-free prescription-strength acne treatment proven to start clearing skin in as little as two weeks after the start of treatment, with full results seen after seven weeks of treatment.
Tobramycin and Dexamethasone ophthalmic suspension, acquired as part of the B&L Acquisition in August 2013, is indicated for steroid responsive inflammatory ocular conditions where superficial bacterial ocular infection or a risk of bacterial ocular infection exists.
Latanoprost, acquired as part of the B&L Acquisition in August 2013, is one of a group of medicines known as prostaglandins and is indicated to treat a type of glaucoma called open angle glaucoma and also ocular hypertension.

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Alliance and Royalty, Service and Other — We generate alliance revenue and service revenue from the licensing of dermatological products and from contract services in the areas of dermatology and topical medication. Contract services are primarily focused on contract research for external development and clinical research in areas such as formulations development, in vitro drug penetration studies, analytical sciences and consulting in the areas of labeling and regulatory affairs.
Emerging Markets
The Emerging Markets segment consists of branded generic pharmaceutical products and branded pharmaceuticals, OTC products, and medical device products. Products are sold primarily in Central and Eastern Europe (primarily Poland and Russia), Asia, Latin America (Mexico, Brazil, and Argentina and exports out of Mexico to other Latin American markets), Africa and the Middle East.
Branded and Other Generic Products and Branded Pharmaceuticals — Our Central and Eastern European branded generics and branded pharmaceuticals business covers a broad range of treatments, including antibiotics, treatments for cardiovascular and neurological diseases, dermatological products, diabetic therapies, and eye health products, among many others. Our portfolio in Latin America also includes a range of branded generics.
OTC — Our principal OTC products are:
ReNu Multiplus®, acquired as part of the B&L Acquisition in August 2013, is a sterile, preserved solution used to lubricate and rewet soft (hydrophilic) contact lenses. ReNu Multiplus® product contains povidone, a lubricant that can be used with daily, overnight, and disposable soft contact lenses.
AntiGrippin®, acquired in connection with the Natur Produkt acquisition in February 2013, is for symptomatic treatment of acute respiratory diseases, acute respiratory viral diseases, and influenza.
Bedoyecta®, a brand of vitamin B complex (B1, B6 and B12 vitamins) products. Bedoyecta® products act as energy improvement agents for fatigue related to age or chronic diseases, and as nervous system maintenance agents to treat neurotic pain and neuropathy. Bedoyecta® is sold in an injectable form, as well as in a tablet form.
Device Products — Our principal device products are:
SofLens® Daily Disposable Contact Lenses, acquired as part of the B&L Acquisition in August 2013, use ComfortMoist® Technology (a combination of thin lens design and slow releasing packaging solution) and High Definition Optics™, an aspheric design that reduces aspheric aberration over the range of powers.
Various ophthalmic surgical products, acquired as part of the B&L Acquisition in August 2013, including intraocular lenses such as Akreos®, and surgical equipment products such as the VICTUS® femtosecond laser and the Stellaris® PC, a vitreoretinal and cataract surgery system.
PureVision®, acquired as part of the B&L Acquisition in August 2013, is a Silicone Hydrogel Frequent Replacement Contact Lens using AerGel™ material (which allows natural levels of oxygen to reach the eyes and resists protein buildup), and an aspheric optical design.
Medical device systems for aesthetic applications, acquired as part of the Solta Medical acquisition in January 2014, including the Thermage CPT® system that provides non-invasive treatment options using radiofrequency energy for skin tightening, the Fraxel® repair system for use in dermatological procedures requiring ablation, coagulation, and resurfacing of soft tissue, the Clear + Brilliant® system to improve skin texture and help prevent the signs of aging skin, and the Liposonix® system that destroys unwanted fat cells resulting in waist circumference reduction.
Collaboration Agreements
See note 5 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information regarding various license, development and collaboration agreements.
Research and Development
Our research and development organization focuses on the development of products through clinical trials. We currently have (or had during 2013) a number of compounds in clinical development including: the next generation silicone hydrogel lens (Bausch + Lomb Ultra) with MoistureSeal™ technology (launched in February 2014), Biotrue® ONEday lens (multi-focal version approved by the FDA in December 2013), Latanoprostene bunod, Brimonidine tartrate 0.025%, Luliconazole (approved by the FDA in November 2013), Metronidazole 1.3%, IDP-108 (efinaconazole), IDP-118 and certain life-cycle management projects.

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Our research and development expenses for the years ended December 31, 2013, 2012 and 2011 were $156.8 million, $79.1 million and $65.7 million, respectively, excluding impairment charges.
As of December 31, 2013, approximately 1,000 employees (including regulatory affairs and quality assurance employees) were involved in our research and development efforts.
For more information regarding our products in clinical development, see Item 7 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Products in Development” of this Form 10-K.
Trademarks, Patents and Proprietary Rights
We rely on a combination of contractual provisions, confidentiality policies and procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology and business. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property and proprietary rights, as appropriate.
Trademarks
We believe that trademark protection is an important part of establishing product and brand recognition. We own or license a number of registered trademarks and trademark applications in the U.S., Canada and in certain other countries throughout the world. U.S. federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce. Trademark registrations in Canada remain in force for 15 years and may be renewed every 15 years after issuance, provided that, as in the case of U.S. federal trademark registrations, the mark is still being used in commerce. Other countries generally have similar but varying terms and renewal policies with respect to trademarks registered in those countries.
Data and Patent Exclusivity
We rely on a combination of regulatory and patent rights to protect the value of our investment in the development of our products.
A patent is the grant of a property right which allows its holder to exclude others from, among other things, selling the subject invention in, or importing such invention into, the jurisdiction that granted the patent. In the U.S., Canada and the European Union, generally patents expire 20 years from the date of application. We have obtained, acquired or in-licensed a number of patents and patent applications covering key aspects of our principal products. In the aggregate, our patents are of material importance to our business taken as a whole. However, we do not consider any single patent material to our business as a whole.
In the U.S., the Hatch-Waxman Act provides non-patent regulatory exclusivity for five years from the date of the first FDA approval of a new drug compound in a New Drug Application (“NDA”). The FDA, with one exception, is prohibited during those five years from accepting for filing a generic, or ANDA, that references the NDA. In reference to the foregoing exception, if a patent is indexed in the FDA Orange Book for the new drug compound, a generic may file an ANDA four years from the NDA approval date if it also files a Paragraph IV Certification with the FDA challenging the patent. Protection under the Hatch-Waxman Act will not prevent the filing or approval of another full NDA. However, the NDA applicant would be required to conduct its own pre-clinical and adequate and well-controlled clinical trials to independently demonstrate safety and effectiveness.
A similar data exclusivity scheme exists in the European Union (“EU”), whereby only the pioneer drug company can use data obtained at the pioneer’s expense for up to eight years from the date of the first approval of a drug by the European Medicines Agency (“EMA”) and no generic drug can be marketed for ten years from the approval of the innovator product. Under both the U.S. and the EU data exclusivity programs, products without patent protection can be marketed by others so long as they repeat the clinical trials necessary to show safety and efficacy. Canada employs a similar data exclusivity regulatory regime for innovative drugs.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the U.S. or a disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years.
Proprietary Know-How
We also rely upon unpatented proprietary know-how, trade secrets and technological innovation in the development and manufacture of many of our principal products. We protect our proprietary rights through a variety of methods, including

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confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who may have access to proprietary information.
Government Regulations
Government authorities in the U.S., at the federal, state and local level, in Canada, in the EU and in other countries extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, advertising and promotion, storage, distribution, marketing and export and import of pharmaceutical products and medical devices. As such, our products and product candidates are subject to extensive regulation both before and after approval. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with these regulations could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product candidate, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions or criminal prosecution.
Prior to human use, FDA approval must be obtained in the U.S., approval by Health Canada must be obtained in Canada, EMA approval (drugs) or a CE Marking (devices) must be obtained for countries that are part of the EU and approval must be obtained from comparable agencies in other countries prior to manufacturing or marketing new pharmaceutical products or medical devices.
Regulation by other federal agencies, such as the Drug Enforcement Administration (“DEA”), and state and local authorities in the U.S., and by comparable agencies in certain foreign countries, is also required. In the U.S., the FTC, the FDA and state and local authorities regulate the advertising of medical devices, prescription drugs, over-the-counter drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended (“FDCA”) and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, sale, distribution, advertising and promotion of our products. The FDA requires a Boxed Warning (sometimes referred to as a “Black Box” Warning) for products that have shown a significant risk of severe or life-threatening adverse events and similar warnings are also required to be displayed on the product in certain other jurisdictions.
Manufacturers of pharmaceutical products and medical devices are required to comply with manufacturing regulations, including current good manufacturing practices and quality system management requirements, enforced by the FDA and Health Canada, in the U.S. and Canada respectively, and similar regulations enforced by regulatory agencies in other countries. In addition, we are subject to price control restrictions on our pharmaceutical products in many countries in which we operate.
We are also subject to extensive U.S. federal and state health care marketing and fraud and abuse regulations, such as the federal False Claims Act, federal and provincial marketing regulation in Canada and similar regulations in foreign countries in which we may conduct our business. The federal False Claims Act imposes civil and criminal liability on individuals or entities who submit (or cause the submission of) false or fraudulent claims for payment to the government. The U.S. federal Anti-Kickback Statute prohibits persons or entities from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Due to recent legislative changes, violations of the Anti-Kickback Statute also carry potential federal False Claims Act liability. In addition, in the U.S., companies may not promote drugs or medical devices for “off-label” uses - that is, uses that are not described in the product’s labeling and that differ from those that were approved or cleared by the FDA - and “off-label promotion” has also formed the predicate for False Claims Act liability resulting in significant financial settlements. These and other laws and regulations, rules and policies may significantly impact the manner in which we are permitted to market our products. If our operations are found to be in violation of any of these laws, regulations, rules or policies or any other law or governmental regulation, or if interpretations of the foregoing change, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations.
Environmental Regulation
Our facilities and operations are subject to national, federal, state and local environmental and occupational health and safety laws and regulations in both the U.S. and countries outside the U.S., including those governing the discharges of substances into the air, water and land, the handling, storage and disposal of hazardous wastes, wastewater and solid waste, the cleanup of properties affected by known pollutants and other environmental matters. Certain of our development and manufacturing activities involve the controlled use of hazardous materials. We believe we are in compliance in all material respects with applicable environmental laws and regulations. Existing environmental protection legislation and regulations, and compliance therewith, have had no material adverse effect on our capital expenditures, earnings or competitive position. Capital expenditures for property, facility operations and equipment for environmental control facilities were not material during fiscal year 2013, and we have no current plans to invest in material capital expenditures for environmental control facilities for the fiscal years 2014 or 2015.

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Marketing and Customers
Our top four geographic markets by country, based on 2013 revenue, are: the U.S. and Puerto Rico, Canada, Poland and Russia, which represent 55%, 7%, 5% and 4% of our total revenue for the year ended December 31, 2013, respectively.
The following table identifies external customers that accounted for 10% or more of our total revenue during the year ended December 31, 2013:
 
Percentage of
Total Revenue
2013
McKesson Corporation
19%
Cardinal Health, Inc.
13%
No other customer generated over 10% of our total revenues.
We currently promote our pharmaceutical products to physicians, hospitals, pharmacies and wholesalers through our own sales force and sell through wholesalers. In some limited markets, we additionally sell directly to physicians, hospitals and large drug store chains and we sell through distributors in countries where we do not have our own sales staff. As part of our marketing program for pharmaceuticals, we use direct mailings, advertise in trade and medical periodicals, exhibit products at medical conventions and sponsor medical education symposia.
Competition
Competitive Landscape for Products and Products in Development
The pharmaceutical and medical device industries are highly competitive. Our competitors include specialty and other large pharmaceutical companies, medical device companies, biotechnology companies, OTC companies and generic manufacturers, in the U.S., Canada, the EU and in other countries in which we market our products. The market for eye health products is very competitive, both across product categories and geographies. In addition to larger diversified pharmaceutical and medical device companies, we face competition in the eye health market from mid-size and smaller, regional and entrepreneurial companies with fewer products in niche areas or regions. The dermatology competitive landscape is highly fragmented, with a large number of mid-size and smaller companies competing in both the prescription sector and the OTC and cosmeceutical sectors.
Our competitors are pursuing the development and/or acquisition of pharmaceuticals, medical devices and OTC products that target the same diseases and conditions that we are targeting in eye health, dermatology, aesthetics, neurology and other therapeutic areas. Academic and other research and development institutions may also develop products or technologies that compete with our products, which technologies and products may be acquired or licensed by our competitors. These competitors may have greater financial, R&D or marketing resources than we do. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions or decreased volume of sales, or both. Most new products that we introduce must compete with other products already on the market or products that are later developed by competitors.
We sell a broad range of products, and competitive factors vary by product line and geographic area in which the products are sold. The principal methods of competition for our products include quality, efficacy, market acceptance, price, and marketing and promotional efforts.
Generic Competition
We face increased competition from manufacturers of generic pharmaceutical products when patents covering certain of our currently marketed products expire or are successfully challenged. Generic versions are generally significantly less expensive than branded versions, and, where available, may be required in preference to the branded version under third party reimbursement programs, or substituted by pharmacies. Manufacturers of generic pharmaceuticals typically invest far less in research and development than research-based pharmaceutical companies and therefore can price their products significantly lower than branded products. Accordingly, when a branded product loses its market exclusivity, it normally faces intense price competition from generic forms of the product. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits but also cost advantages as compared with other forms of care.
A number of our products already face generic competition, including Cesamet®, BenzaClin®, Cardizem® CD and Wellbutrin XL® (both in the U.S. and Canada), all of which had generic competitors during 2013. In April 2013, a generic version

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of Zovirax® ointment was introduced by Mylan Inc, and, in August 2013, a generic competitor to Retin-A Micro® was launched. In addition, certain of our products face the expiration of their patent and regulatory exclusivity in 2014 or in later years, following which we anticipate generic competition of these products, including Vanos® for which a generic competitor was launched in January 2014.
In addition, for a number of our products, we have commenced infringement proceedings against potential generic competitors in the U.S. and Canada. If we are not successful in these proceedings, we may face increased generic competition for these products. See note 24 of notes to consolidated financial statements in Item 15 of this Form 10-K for additional details regarding such potential infringement proceedings.
Manufacturing
We currently operate 38 manufacturing plants worldwide. All of our manufacturing facilities that require certification from the FDA, Health Canada or foreign agencies have obtained such approval.
We also subcontract the manufacturing of certain of our products, including products manufactured under the rights acquired from other pharmaceutical companies. Generally, acquired products continue to be produced for a specific period of time by the selling company. During that time, we integrate the products into our own manufacturing facilities or initiate toll manufacturing agreements with third parties.
Products representing the majority of our product sales are produced by third party manufacturers under toll manufacturing arrangements.
In some cases, the principal raw materials, including active pharmaceutical ingredient, used by us (or our third party manufacturers) for our various products are purchased in the open market or are otherwise available from several sources. However, some of the active pharmaceutical ingredient and other raw materials are currently available from a single source and others may in the future become available from only one source. In addition, in some cases, only a single source of such active pharmaceutical ingredient is identified in filings with regulatory agencies, including the FDA, and cannot be changed without prior regulatory approval. Any disruption in the supply of any such active pharmaceutical ingredient or other raw material or an increase in the cost of such material could adversely impact our ability to manufacture such products, the ability of our third party manufacturers to supply us with such products, or our profitability. We attempt to manage the risks associated with reliance on single sources of active pharmaceutical ingredient or other raw materials by carrying additional inventories or, where possible, developing second sources of supply.
Employees
As of December 31, 2013, we had approximately 17,200 employees. These employees included approximately 8,100 in production, 6,400 in sales and marketing, 1,700 in general and administrative positions and 1,000 in research and development (including regulatory affairs and quality assurance). Collective bargaining exists for some employees in a number of markets. We consider our relations with our employees to be good and have not experienced any work stoppages, slowdowns or other serious labor problems that have materially impeded our business operations.
Product Liability Insurance
We have product liability insurance to cover damages resulting from the use of our products. Product liability insurance is expensive and, in the future, may be difficult to obtain or may not be available on acceptable terms, or at all. As a result of the difficulties and costs of acquiring insurance, we may reevaluate and change the types and levels of product liability insurance coverage that we purchase and we may also make the decision to self-insure some of, a significant portion of or all of our product liability risk.
Seasonality of Business
Historically, revenues from our business tend to be weighted toward the second half of the year. Sales in the fourth quarter tend to be higher based on consumer and customer purchasing patterns associated with healthcare reimbursement programs.  Further, the third quarter “back to school” period impacts demand for certain of our dermatology products.  However, as we continue our strategy of selective acquisitions to expand our product portfolio, there are no assurances that these historical trends will continue in the future. 
Geographic Areas

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A significant portion of our revenues is generated from operations or otherwise earned outside the U.S. and Canada. All of our foreign operations are subject to risks inherent in conducting business abroad, including price and currency exchange controls, fluctuations in the relative values of currencies, political and economic instability and restrictive governmental actions including possible nationalization or expropriation. Changes in the relative values of currencies may materially affect our results of operations. For a discussion of these risks, see Item 1A., Risk Factors in this Form 10-K.
See note 26 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information regarding revenues by geographic area.
In 2013, a material portion of our revenue and income was earned in Bermuda, Ireland, Luxembourg and Switzerland, which have low tax rates. See Item 1A., Risk Factors in this Form 10-K relating to tax rates.
Available Information
Our Internet address is www.valeant.com. We post links on our website to the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendment to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. The information on our Internet website is not incorporated by reference into this Form 10-K or our other securities filings and is not a part of such filings.
We are also required to file reports and other information with the securities commissions in all provinces in Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) (http://www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system.
Our filings may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.

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Item 1A.    Risk Factors
Our business, operations and financial condition are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Form 10-K, including those risks set forth under the heading entitled “Forward-Looking Statements”, and in other documents that we file with the SEC and the CSA, before making any investment decision with respect to our securities. If any of the risks or uncertainties actually occur or develop, our business, financial condition, results of operations and future growth prospects could change. Under these circumstances, the market value of our securities could decline, and you could lose all or part of your investment in our securities.
Competitive Risks
We operate in extremely competitive industries. If competitors develop or acquire more effective or less costly pharmaceutical products or medical devices for our target indications, it could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
The pharmaceutical and medical device industries are extremely competitive. Our success and future growth depend, in part, on our ability to acquire, license or develop products that are more effective than those of our competitors or that incorporate the latest technologies and our ability to effectively manufacture and market those products. Many of our competitors, particularly larger pharmaceutical and medical device companies, have substantially greater financial, technical and human resources than we do. Many of our competitors spend significantly more on research and development related activities than we do. Others may succeed in developing or acquiring products that are more effective or less costly than those currently marketed or proposed for development by us. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products and may also establish exclusive collaborative or licensing relationships with our competitors. These competitors and the introduction of competing products (that may be more effective or less costly than our products) could make our products less competitive or obsolete, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We have faced generic competition in the past and expect to face additional generic competition in the future. Generic competition of our products could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Upon the expiration or loss of patent protection for our products, or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a generic competitor of a generic version of our products (which may be sold at significantly lower prices than our products), we could lose a significant portion of sales of that product in a very short period, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Products representing a significant amount of our revenue are not protected by patent or data exclusivity rights or are nearing the end of their exclusivity period.
A significant number of the products we sell have no meaningful exclusivity protection via patent or data exclusivity rights or are protected by patents or regulatory exclusivity periods that will be expiring in the near future. These products represent a significant amount of our revenues. Without exclusivity protection, competitors face fewer barriers in introducing competing products. The introduction of competing products could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Acquisition-related Risks
We have grown at a very rapid pace. Our inability to properly manage or support this growth could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We have grown very rapidly over the past few years as a result of our acquisitions. This growth has put significant demands on our processes, systems and people. We have made and expect to make further investments in additional personnel, systems and internal control processes to help manage our growth. If we are unable to successfully manage and support our rapid growth and the challenges and difficulties associated with managing a larger, more complex business, this could cause a material adverse effect on our business, financial position and results of operations, and the market value of our common stock could decline.

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We may be unable to identify, acquire, close or integrate acquisition targets successfully.
Part of our business strategy includes acquiring and integrating complementary businesses, products, technologies or other assets, and forming strategic alliances, joint ventures and other business combinations, to help drive future growth. We may also in-license new products or compounds. Acquisitions or similar arrangements may be complex, time consuming and expensive. In some cases, we move very rapidly to negotiate and consummate the transaction, once we identify the acquisition target. We may not consummate some negotiations for acquisitions or other arrangements, which could result in significant diversion of management and other employee time, as well as substantial out-of-pocket costs. In addition, there are a number of risks and uncertainties relating to our closing transactions. If such transactions are not completed for any reason, we will be subject to several risks, including the following: (i) the market price of our common shares may reflect a market assumption that such transactions will occur, and a failure to complete such transactions could result in a negative perception by the market of us generally and a decline in the market price of our common shares; and (ii) many costs relating to the such transactions may be payable by us whether or not such transactions are completed.
If an acquisition is consummated (such as our recent acquisitions of B&L and Solta Medical), the integration of the acquired business, product or other assets into our Company may also be complex and time-consuming and, if such businesses, products and assets are not successfully integrated, we may not achieve the anticipated benefits, cost-savings or growth opportunities. Potential difficulties that may be encountered in the integration process include the following:
integrating personnel, operations and systems, while maintaining focus on selling and promoting existing and newly-acquired products;
coordinating geographically dispersed organizations;
distracting management and employees from operations;
retaining existing customers and attracting new customers;
maintaining the business relationships the acquired company has established, including with healthcare providers; and
managing inefficiencies associated with integrating the operations of the Company.
Furthermore, as was the case with the recent B&L Acquisition, we have incurred, and may incur in the future, restructuring and integration costs and a number of non-recurring transaction costs associated with these acquisitions, combining the operations of the Company and the acquired company and achieving desired synergies. These fees and costs may be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. Additional unanticipated costs may be incurred in the integration of the businesses of the Company and the acquired company. There can be no assurance that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the acquired business, will offset the incremental transaction-related costs over time. Therefore, any net benefit may not be achieved in the near term, the long term or at all.
Finally, these acquisitions and other arrangements, even if successfully integrated, may fail to further our business strategy as anticipated or to achieve anticipated benefits and success, expose us to increased competition or challenges with respect to our products or geographic markets, and expose us to additional liabilities associated with an acquired business, product, technology or other asset or arrangement. Any one of these challenges or risks could impair our ability to realize any benefit from our acquisition or arrangement after we have expended resources on them.
Our recent acquisition of B&L involved certain additional risks. We entered into a new business area in connection with the B&L Acquisition, which business may not be successful or which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
With the B&L Acquisition, we have significantly increased our involvement in the eye health industry and we have entered into a number of new business areas, including vision care and surgical eye care, and will be developing and commercializing a range of new products. We may not be successful in these new areas and business units and 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 stock to decline. In addition, B&L has a number of pipeline products that may not align with our lower-risk R&D model, which may result in increased costs, lower success rates or a rationalization of certain projects, each of which may adversely affect our financial results.
Tax-related Risks
Our effective tax rates may increase.

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We have operations in various countries that have differing tax laws and rates. Our tax reporting is supported by current domestic tax laws in the countries in which we operate and the application of tax treaties between the various countries in which we operate. Our income tax reporting will be, and the historic tax reporting of each of Valeant and Biovail is, subject to audit by domestic and foreign authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income earned among the different jurisdictions in which we operate; changes in tax laws in these jurisdictions; changes in the tax treaties between various countries in which we operate; changes in our eligibility for benefits under those tax treaties; and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in a substantial increase in the effective tax rate on all or a portion of our income.
Our provision for income taxes is based on certain estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of net income earned in our various operating jurisdictions, the availability of benefits under tax treaties, and the rates of taxes payable in respect of that income. We enter into many transactions and arrangements in the ordinary course of business in respect of which the tax treatment is not entirely certain. We therefore make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries could seek to tax a greater share of income than will be provided for by us. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions that we may use in determining our consolidated tax provisions and accruals. This could result in a material adverse effect on our consolidated income tax provision, financial condition and the net income for the period in which such determinations are made.
Our deferred tax liabilities, deferred tax assets and any related valuation allowances are affected by events and transactions arising in the ordinary course of business, acquisitions of assets and businesses, and non-recurring items. The assessment of the appropriate amount of a valuation allowance against the deferred tax assets is dependent upon several factors, including estimates of the realization of deferred income tax assets, which realization will be primarily based on forecasts of future taxable income. Significant judgment is applied to determine the appropriate amount of valuation allowance to record. Changes in the amount of any valuation allowance required could materially increase or decrease our provision for income taxes in a given period.
Debt-related Risks
We have incurred significant indebtedness, which may restrict the manner in which we conduct business and limit our ability to implement elements of our growth strategy.
We have incurred significant indebtedness, primarily in connection with our acquisitions (including our acquisition of B&L). We may also incur additional long-term debt and working capital lines of credit to meet future financing needs, subject to certain restrictions under our indebtedness, which would increase our total debt. This additional debt may be substantial. Our indebtedness may restrict the manner in which we conduct business and limit our ability to implement elements of our growth strategy. Some restrictions could include:
limitations on our ability to obtain additional debt financing on favorable terms or at all;
instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of resulting in the acceleration of the maturity of some or all of our outstanding indebtedness (which we may not have the ability to pay);
the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations;
requiring us to issue debt or equity securities or to sell some of our core assets (subject to certain restrictions under our existing indebtedness), possibly on unfavorable terms, to meet payment obligations;
compromising our flexibility to plan for, or react to, competitive challenges in our business and the pharmaceutical and medical device industries;
the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources; and
limitations on our ability to execute business development activities to support our strategies.
Our current corporate credit rating is Ba3 for Moody’s Investors Service and BB- for Standard and Poor’s. A downgrade may increase our cost of borrowing and may negatively impact our ability to raise additional debt capital.

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To service our debt, we will be required to generate a significant amount of cash. Our ability to generate cash depends on a number of factors, some of which are beyond our control, and any failure to meet our debt service obligations could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We have a significant amount of indebtedness. Our ability to satisfy our debt obligations will depend principally upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, may affect our ability to make payments on our debt. If we do not generate sufficient cash flow to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations or to refinance our obligations on commercially reasonable terms could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. Certain non-guarantor subsidiaries include non-U.S. subsidiaries that may be prohibited by law or other regulations from distributing funds to us and/or we may be subject to payment of repatriation taxes and withholdings. In the event that we do not receive distributions from our subsidiaries or receive cash via cash repatriation strategies for services rendered and intellectual property, we may be unable to make required principal and interest payments on our indebtedness.
We are exposed to risks related to interest rates.
Our senior secured credit facilities bear interest based on U.S. dollar London Interbank Offering Rates, or U.S. Prime Rate, or Federal Funds effective rate. Thus, a change in the short-term interest rate environment could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. As of December 31, 2013, we do not have any outstanding interest rate swap contracts.
Risks related to the International Scope of our Business
Our business, financial condition and results of operations are subject to risks arising from the international scope of our operations.
We conduct a significant portion of our business outside the U.S. and Canada and, in light of our growth strategy, we anticipate continuing to expand our operations into new countries, including emerging markets. We sell our pharmaceutical and medical device products in many countries around the world. All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things:
difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as U.S. laws applicable to U.S. companies with foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act, or FCPA;
price and currency exchange controls;
credit market uncertainty;
political and economic instability;
compliance with multiple regulatory regimes;
less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems;
differing degrees of protection for intellectual property;
unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements;
new export license requirements;
adverse changes in tariff and trade protection measures;

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differing labor regulations;
potentially negative consequences from changes in or interpretations of tax laws;
restrictive governmental actions;
possible nationalization or expropriation;
restrictions on the repatriation of funds;
differing local practices, customs and cultures, some of which may not align or comply with our company practices or U.S. laws and regulations;
difficulties with licensees, contract counterparties, or other commercial partners; and
differing local product preferences and product requirements.
Any of these factors, or any other international factors, could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Due to the large portion of our business conducted in currency other than U.S. dollars, we have significant foreign currency risk.
We face foreign currency exposure on the translation into U.S. dollars of the financial results of our operations in Europe, Canada, Australia, Latin America, Asia and Africa. Where possible, we manage foreign currency risk by managing same currency revenue in relation to same currency expenses. As a result, both favorable and unfavorable foreign currency impacts to our foreign currency-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our foreign currency-denominated revenue. In addition, the repurchase of principal under our U.S. dollar denominated debt may result in foreign exchange gains or losses for Canadian income tax purposes. One half of any foreign exchange gains or losses will be included in our Canadian taxable income. Any foreign exchange gain will result in a corresponding reduction in our available Canadian tax attributes.
The general business and economic conditions in those countries in which we conduct business could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We may be impacted by general economic conditions and factors over which we have no control, such as changes in inflation, interest rates and foreign currency rates, lack of liquidity in certain markets and volatility in capital markets. Similarly, adverse economic conditions impacting our customers or uncertainty about global economic conditions could cause purchases of our products to decline, which would adversely affect our revenues and operating results. Moreover, our projected revenues and operating results are based on assumptions concerning certain levels of customer spending. Any failure to attain our projected revenues and operating results as a result of adverse economic or market conditions could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Employment-related Risks
We must continue to retain, motivate and recruit executives and other key employees, and failure to do so could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We must continue to retain, motivate and recruit executives, including our Chief Executive Officer, J. Michael Pearson, and other key employees. A failure by us to retain and motivate executives and other key employees could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Risks related to Intellectual Property and Legal Proceedings
The Company may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We strive to acquire, maintain and defend patent, trademark and other intellectual property protections over our products and the processes used to manufacture these products. However, we may not be successful in obtaining such protections, or the patent, trademark and intellectual property rights we do obtain may not be sufficient in breadth and scope to fully protect our products or prevent competing products, or such patent and intellectual property rights may be susceptible to third party challenges.

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The failure to obtain, maintain, enforce or defend such intellectual property rights, for any reason, could allow third parties to manufacture and sell products that compete with our products or may impact our ability to develop, manufacture and market our own 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 stock to decline.
For certain of our products and manufacturing processes, we rely on trade secrets and other proprietary information, which we seek to protect, in part, by confidentiality and nondisclosure agreements with our employees, consultants, advisors and partners. We also attempt to enter into agreements whereby such employees, consultants, advisors and partners assign to us the rights in any intellectual property they develop. These agreements may not effectively prevent disclosure of such information and disputes may still arise with respect to the ownership of intellectual property. The disclosure of such proprietary information or the loss of such intellectual property rights may impact our ability to develop, manufacture and market our own products or may assist competitors in the development, manufacture and sale of competing products, which could have a material adverse effect on our revenues, financial condition or results of operations and could cause the market value of our common stock to decline.
We may also incur substantial costs and resources in applying for and prosecuting these patent, trademark and other intellectual property rights and in defending or litigating these rights against third parties.
We may become involved in infringement actions which are uncertain, costly and time-consuming and could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
The pharmaceutical and medical device industries historically have generated substantial litigation concerning the manufacture, use and sale of products and we expect this litigation activity to continue. As a result, we expect that patents related to our products will be routinely challenged, and our patents may not be upheld. In order to protect or enforce patent rights, we may initiate litigation against third parties. If we are not successful in defending an attack on our patents and maintaining exclusive rights to market one or more of our products still under patent protection, we could lose a significant portion of sales in a very short period. We may also become subject to infringement claims by third parties and may have to defend against charges that we violated patents or the proprietary rights of third parties. If we infringe the intellectual property rights of others, we could lose our right to develop, manufacture or sell products, including our generic products, or could be required to pay monetary damages or royalties to license proprietary rights from third parties. The outcomes of infringement actions are uncertain and infringement actions are costly and divert technical and management personnel from their normal responsibilities.
In addition, in the U.S., it has become increasingly common for patent infringement actions to prompt claims that antitrust laws have been violated during the prosecution of the patent or during litigation involving the defense of that patent. Such claims by direct and indirect purchasers and other payers are typically filed as class actions. The relief sought may include treble damages and restitution claims. Similarly, antitrust claims may be brought by government entities or private parties following settlement of patent litigation, alleging that such settlements are anti-competitive and in violation of antitrust laws. In the U.S. and Europe, regulatory authorities have continued to challenge as anti-competitive so-called “reverse payment” settlements between branded and generic drug manufacturers. We may also be subject to other antitrust litigation involving competition claims unrelated to patent infringement and prosecution. A successful antitrust claim by a private party or government entity against us could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
If our products cause, or are alleged to cause, serious or widespread personal injury, we may have to withdraw those products from the market and/or incur significant costs, including payment of substantial sums in damages, and we may be subject to exposure relating to product liability claims.
We face an inherent business risk of exposure to significant product liability and other claims in the event that the use of our products caused, or is alleged to have caused, adverse effects. Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. The withdrawal of a product following complaints and/or incurring significant costs, including the requirement to pay substantial damages in personal injury cases or product liability cases, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. Our product liability insurance coverage may not be sufficient to cover our claims and we may not be able to obtain sufficient coverage at a reasonable cost in the future, or we may elect to self-insure.
We are involved in various legal proceedings that could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We are involved in several legal proceedings and may be involved in litigation in the future. These proceedings may be complex and extended and may occupy the resources of our management and employees. These proceedings may also be costly

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to prosecute and defend and may involve substantial awards or damages payable by us if not found in our favor. We may also be required to pay substantial amounts or grant certain rights on unfavorable terms in order to settle such proceedings. Defending against or settling such claims and any unfavorable legal decisions, settlements or orders could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. For more information regarding legal proceedings, see note 24 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Development and Regulatory Risks
The successful development of our pipeline products is highly uncertain and requires significant expenditures and time. The failure to commercialize certain of our pipeline products could have an adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We currently have a number of pipeline products in development. We and our development partners, as applicable, conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our pipeline products in order to obtain regulatory approval for the sale of our pipeline products. Preclinical studies and clinical trials are expensive, complex, can take many years and have uncertain outcomes. Only a small number of our research and development programs may actually result in the commercialization of a product. We will not be able to commercialize our pipeline products if preclinical studies do not produce successful results or if clinical trials do not demonstrate safety and efficacy in humans. Furthermore, success in preclinical studies or early-stage clinical trials does not ensure that later stage clinical trials will be successful nor does it ensure that regulatory approval for the product candidate will be obtained. In addition, the process for the completion of pre-clinical and clinical trials and the regulatory approval submission process are lengthy and may be subject to a number of delays for various reasons, which will delay the commercialization of any successful product. If our development projects are not successful or are significantly delayed, we may not recover our substantial investments in the pipeline product and our failure to bring these pipeline products to market on a timely basis, or at all, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Obtaining necessary government approvals is time consuming and not assured.
FDA and Health Canada approval must be obtained in the U.S. and Canada, respectively, EMA approval (drugs) and CE Marking (devices) must be obtained in countries in the EU and similar approvals must be obtained from comparable agencies in other countries, prior to marketing or manufacturing new pharmaceutical and medical device products for use by humans. Obtaining such regulatory approvals for new products and devices and manufacturing processes can take a number of years and involves the expenditure of substantial resources. Even if such products appear promising in development stages, regulatory approval may not be achieved and no assurance can be given that we will obtain approval in those countries where we wish to commercialize such products. Nor can any assurance be given that if such approval is secured, the approved labeling will not have significant labeling limitations, including limitations on the indications for which we can market a product, or require onerous risk management programs. Furthermore, from time to time, changes to the applicable legislation or regulations may be introduced that change these review and approval processes for our products, which changes may make it more difficult and costly to obtain or maintain regulatory approvals.
Our marketed drugs will be subject to ongoing regulatory review.
Following initial regulatory approval of any products we or our partners may develop or acquire, we will be subject to continuing regulatory review by various government authorities in those countries where our products are marketed or intended to be marketed, including the review of adverse drug events and clinical results that are reported after product candidates become commercially available. The research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, advertising and promotion, storage, distribution, marketing and export and import of pharmaceutical products and medical devices will also be subject to extensive ongoing regulatory requirements. If we fail to comply with the regulatory requirements in those countries where our products are sold, we could lose our marketing approvals or be subject to fines or other sanctions. In addition, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to the regulatory authority requiring us to withdraw the product from the market. Further, if faced with these incidents of adverse drug reactions, unintended side effects or misuse relating to our products, we may elect to voluntarily implement a recall or market withdrawal of our product. A recall or market withdrawal, whether voluntary or required by a regulatory authority, may involve significant costs to us, potential disruptions in the supply of our products to our customers and reputational harm to our products and business, all of which could harm our ability to market our products and could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. Also, as a condition to granting marketing approval of a product, the applicable regulatory agencies may require a company to conduct additional clinical trials, the results of which could result in the subsequent loss of marketing approval, changes in product labeling or new or increased concerns about side effects or efficacy of a product.

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Our marketing, promotional and pricing practices, as well as the manner in which sales forces interact with purchasers, prescribers and patients, are subject to extensive regulation and any material failure to comply could result in significant sanctions against us.
The marketing, promotional, and pricing practices of pharmaceutical and medical device companies, as well as the manner in which companies’ in-house or third-party sales forces interact with purchasers, prescribers, and patients, are subject to extensive regulation, enforcement of which may result in the imposition of civil and/or criminal penalties, injunctions, and/or limitations on marketing practice for our products. Many companies, including us, have been the subject of claims related to these practices asserted by federal authorities. These claims have resulted in fines and other consequences. We are now operating under a Corporate Integrity Agreement (“CIA”) that requires us to maintain a comprehensive compliance program governing our sales, marketing and government pricing and contracting functions. Material failures to comply with the CIA could result in significant sanctions against us, including monetary penalties and exclusion from federal health care programs. Companies may not promote drugs for “off-label” uses - that is, uses that are not described in the product's labeling and that differ from those approved by the FDA, Health Canada, EMA or other applicable regulatory agencies. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. In addition, management's attention could be diverted from our business operations and our reputation could be damaged.
For certain of our products, we depend on reimbursement from third party payors and a reduction in the extent of reimbursement could reduce our product sales and revenue.
Sales of certain of our products are dependent, in part, on the availability and extent of reimbursement from government health administration authorities, private health insurers and other organizations of the costs of our products and our continued participation in such programs. Changes in government regulations or private third-party payors’ reimbursement policies may reduce reimbursement for our products and adversely affect our future results.
Failure to be included in formularies developed by managed care organizations and other organizations may negatively impact the utilization of our products, which could harm our market share and could negatively impact our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Failure to be included in such formularies or to achieve favorable formulary status may negatively impact the utilization and market share of our products. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, 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 stock to decline.
Manufacturing and Supply Risks
If we or our third-party manufacturers are unable to manufacture our products or the manufacturing process is interrupted due to failure to comply with regulations or for other reasons, the interruption of the manufacture of our products could adversely affect our business. Other manufacturing and supply difficulties or delays may also adversely affect our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Our manufacturing facilities and those of our contract manufacturers must be inspected and found to be in full compliance with current good manufacturing practices (“cGMP”), quality system management requirements or similar standards before approval for marketing. Our failure or that of our contract manufacturers to comply with cGMP regulations, quality system management requirements or similar regulations outside of the U.S. can result in enforcement action by the FDA or its foreign counterparts, including, but not limited to, warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of products, total or partial suspension of production or importation, suspension or withdrawal of regulatory approval for approved or in-market products, refusal of the government to renew marketing applications or approve pending applications or supplements, suspension of ongoing clinical trials, imposition of new manufacturing requirements, closure of facilities and criminal prosecution. These enforcement actions could lead to a delay or suspension in production, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
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.

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Although we endeavor to properly maintain our equipment (and require our contract manufacturers to properly maintain their equipment), including through on-site quality control and experienced manufacturing supervision, and have key spare parts on hand, our business could suffer if certain manufacturing or other equipment, or all or a portion of our or their facilities, were to become inoperable for a period of time. This could occur for various reasons, including catastrophic events, such as hurricanes, earthquakes or other natural disasters, explosions, environmental accidents, pandemics, quarantine, equipment failures or delays in obtaining components or replacements, construction delays or defects and other events, both within and outside of our control. We could experience substantial production delays or inventory shortages in the event of any such occurrence until we or they repair such equipment or facility or we or they build or locate replacement equipment or a replacement facility, as applicable, and seek to obtain necessary regulatory approvals for such replacement. Any interruption in our manufacture of products could adversely affect the sales of our current products or introduction of new products and could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
In addition, if we fail to properly forecast demand for, or to maintain an adequate supply of, raw materials or finished product, this could result in supply interruptions or inventory shortages, which could adversely affect the sales of our products or the effective launch of new 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 stock to decline.
The supply of our products to our customers (or, in some case, supply from our contract manufacturers to us) is subject to and dependent upon the use of transportation services. Disruption of transportation services (including as a result of weather conditions) could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline. In addition, any prolonged disruption in the operations of our existing distribution facilities, whether due to technical, labor or other difficulties, weather conditions, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of or damage to any facility or other reasons, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
For some of our finished products and raw materials, we obtain supply from one or a limited number of sources. If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture and deliver our products to the market would be impeded, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Some components and raw materials used in our manufactured products, and some finished products sold by us, are currently available only from one or a limited number of domestic or foreign suppliers. In the event an existing supplier fails to supply product on a timely basis and/or in the requested amount, supplies product that fails to meet regulatory requirements, becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or we are unable to renew current supply agreements when such agreements expire and we do not have a second supplier, we may be unable to obtain the required components, raw materials or products on a timely basis or at commercially reasonable prices. We attempt to mitigate these risks by maintaining safety stock of these products, but such safety stock may not be sufficient. A prolonged interruption in the supply of a single-sourced raw material, including the active pharmaceutical ingredient, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Furthermore, we rely on these third party manufacturers to obtain and maintain the required approvals of their facilities and to maintain their facilities and equipment in compliance with applicable laws and regulations. While we attempt to build in certain contractual obligations on such third party manufacturers, we may not be able to ensure that such third parties comply with these obligations, with the result that the approval and/or production of our products may be delayed or interrupted. In addition, these third party manufacturers may have the ability to increase the supply price payable by us for the manufacture and supply of our products, in some cases without our consent. Our dependence upon others to manufacture our products may adversely affect our profit margins and our ability to obtain approval for and produce our products on a timely and competitive 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 stock to decline.
Commercialization and Distribution Risks
Our approved products may not achieve or maintain expected levels of market acceptance.
Even if we are able to obtain and maintain regulatory approvals for our pharmaceutical and medical device products, generic or branded, the success of these products is dependent upon achieving and maintaining market acceptance. Commercializing products is time consuming, expensive and unpredictable. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees or distributors, successfully commercialize new products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market

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or may have only limited or no commercial success. Levels of market acceptance for our new products could be impacted by several factors, some of which are not within our control, including but not limited to the:
safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors;
scope of approved uses and marketing approval;
availability of patent or regulatory exclusivity;
timing of market approvals and market entry;
availability of alternative products from our competitors;
acceptance of the price of our products;
effectiveness of our sales forces and promotional efforts;
the level of reimbursement of our products;
acceptance of our products on government and private formularies;
ability to market our products effectively at the retail level or in the appropriate setting of care; and
the reputation of our products
Further, the market perception and reputation of our products and their safety and efficacy are important to our business and the continued acceptance of our products. Any negative publicity about our products, such as the discovery of safety issues with our products, adverse events involving our products, or even public rumors about such events, may have a material adverse effect on our business. In addition, 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 or the withdrawal or recall of such similar products could have an adverse effect on sales of our products. Accordingly, new data about our products, or products similar to our products, could cause us reputational harm and could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding safety or efficacy and, in some cases, could result in product withdrawal.
If our products fail to gain, or lose, market acceptance, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Our business may be impacted by seasonality, which may cause our operating results and financial condition to fluctuate.
Demand for certain of our products may be impacted by seasonality. Historically, revenues from our business tend to be weighted toward the second half of the year. Sales in the fourth quarter tend to be higher based on consumer and customer purchasing patterns associated with healthcare reimbursement programs.  Further, the third quarter “back to school” period impacts demand for certain of our dermatology products.  This seasonality may cause our operating results to fluctuate. However, as we continue our strategy of selective acquisitions to expand our product portfolio, there are no assurances that these historical trends will continue in the future. 
We have entered into distribution agreements with other companies to distribute certain of our products at supply prices based on net sales. Declines in the pricing and/or volume, over which we have no or limited control, of such products, and therefore the amounts paid to us, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Certain of our generic products and certain of our other products are the subject of various agreements, pursuant to which we manufacture and sell products to other companies, which distribute such products at a supply price typically based on net sales. Our ability to control pricing and volume of these products is limited and, in some cases, these companies make all distribution and pricing decisions independently of us. If the pricing or volume of such products declines, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We may experience declines in sales volumes or prices of certain of our products as the result of the concentration of sales to wholesalers and the continuing trend towards consolidation of such wholesalers and other customer groups and this could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.

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For certain of our products, a significant portion of our sales are to a relatively small number of customers. If our relationship with one or more of such customers is disrupted or changes adversely or if one or more of such customers experience financial difficulty or other material adverse change in their businesses, it could materially and adversely affect our sales and financial results, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
In addition, wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. The result of these developments could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.
Risks related to Specific Legislation and Regulations
We are subject to various laws and regulations, including “fraud and abuse” laws, anti-bribery laws, environmental laws and privacy and security regulations, and a failure to comply with such laws and regulations or prevail in any litigation related to noncompliance could have a material adverse impact on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Pharmaceutical and medical device companies have faced lawsuits and investigations pertaining to violations of health care “fraud and abuse” laws, such as the federal False Claims Act, the federal Anti-Kickback Statute (“AKS”) and other state and federal laws and regulations. We are subject to various federal and state laws pertaining to healthcare fraud and abuse. The AKS prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical or medical device manufacturers, on the one hand, and prescribers, purchasers, formulary managers and other health care related professionals, on the other hand. Due to recent legislative changes, the government may assert that a claim including items or services resulting from a violation of the AKS constitutes a false or fraudulent claim for purposes of the false claims statutes. More generally, the federal False Claims Act, among other things, prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government. Pharmaceutical and medical device companies have been prosecuted or faced civil liability under these laws for a variety of alleged promotional and marketing activities, including engaging in off-label promotion that caused claims to be submitted for non-covered off-label uses.
We also face increasingly strict data privacy and security laws in the U.S. and in other countries, the violation of which could result in fines and other sanctions. The United States Department of Health and Human Services Office of Inspector General recommends and increasingly states require pharmaceutical companies to have comprehensive compliance programs. In addition, the Physician Payment Sunshine Act enacted in 2010 imposes reporting and disclosure requirements on device and drug manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers. Failure to submit this required information may result in significant civil monetary penalties. While we have developed corporate compliance programs based on what we believe to be current best practices, we cannot assure you that we or our employees or agents are or will be in compliance with all applicable federal, state or foreign regulations and laws. If we are in violation of any of these requirements or any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant criminal and civil fines and penalties, exclusion from federal healthcare programs or other sanctions.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices or may require us to interact with doctors and hospitals, some of which may be state controlled, in a manner that is different than in the U.S. and Canada. We cannot assure you that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in criminal or civil penalties or remedial measures, any of which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, hazardous substances may be released into the environment, which could cause environmental or property damage or personal injuries, and which could subject us to remediation obligations regarding contaminated soil and groundwater or potential liability for damage claims. Under certain laws, we may be required to remediate contamination at certain of our properties regardless of whether the contamination was caused by us or by previous occupants of

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the property or by others. In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and future changes in laws or regulations may require us to install additional controls for certain of our emission sources, to undertake changes in our manufacturing processes or to remediate soil or groundwater contamination at facilities where such cleanup is not currently required.
We are also subject to various privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (as amended, “HIPAA”). HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions (e.g., health care claims information and plan eligibility, referral certification and authorization, claims status, plan enrollment, coordination of benefits and related information), as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. Failure to comply with these laws can result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws and the potential liability associated with the failure to comply with these laws could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably and could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
In the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products profitably. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”)  may affect the operational results of companies in the pharmaceutical and medical device industries, including the Company and other healthcare related industries, by imposing on them additional costs. Effective January 1, 2010, the Health Care Reform Act increased the minimum Medicaid drug rebates for pharmaceutical companies, expanded the 340B drug discount program, and made changes to affect the Medicare Part D coverage gap, or "donut hole". The law also revised the definition of "average manufacturer price" for reporting purposes, which has the potential to affect the amount of our Medicaid drug rebates to states.  Beginning in 2011, the law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. Finally, the law imposed an annual tax on manufacturers of certain medical devices. The Health Care Reform Act also added substantial new provisions affecting compliance, some of which, such as the Physician Payments Sunshine Act, may require us to modify our business practices with health care practitioners.
We are unable to predict the future course of federal or state health care legislation.  A variety of federal and state agencies are in the process of implementing the Health Care Reform Act, including through the issuance of rules, regulations or guidance that materially affect our business. The risk of our being found in violation of these rules and regulations is increased by the fact that many of them have not been fully interpreted by applicable regulatory authorities or the courts, and their provisions are open to a variety of interpretations. The Health Care Reform Act and further changes to health care laws or regulatory framework that reduce our revenues or increase our costs could also have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.
Other Risks
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter for a number of reasons. The following events or occurrences, among others, could cause fluctuations in our financial performance from period to period:
development and launch of new competitive products;
the timing and receipt of FDA approvals or lack of approvals;
costs related to business development transactions;
changes in the amount we spend to promote our products;
delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses;
changes in treatment practices of physicians that currently prescribe certain of our products;

21



increases in the cost of raw materials used to manufacture our products;
manufacturing and supply interruptions;
our responses to price competition;
expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property;
market acceptance of our products;
the timing of wholesaler and distributor purchases;
general economic and industry conditions, including potential fluctuations in foreign currency and interest rates; and
changes in seasonality of demand for certain of our products.
As a result, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. The above factors may cause our operating results to fluctuate and could have a material adverse effect on our business, financial condition and results of operations. In any quarterly period, our results may be below the expectations of market analysts and investors, which could cause the trading price of our common stock to decline.
We have significant goodwill and other intangible assets and potential impairment of goodwill and other intangibles may significantly impact our profitability.
Goodwill and intangible assets represent a significant portion of our total assets. Finite-lived intangible assets are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. If an impairment exists, we would be required to take an impairment charge with respect to the impaired asset. Events giving rise to impairment are difficult to predict and are an inherent risk in the pharmaceutical and medical device industries. As a result of the significance of goodwill and intangible assets, our financial condition and results of operations in a future period could be negatively impacted should such an impairment of goodwill or intangible assets occur, which could cause the market value of our common stock to decline.
We may incur substantial costs with respect to pension and other healthcare benefits provided to B&L employees.
B&L had established certain pension and other benefits plans, pursuant to which they provided pension and current and post-retirement medical and other health and welfare benefits to their employees. Following the B&L Acquisition, we have assumed the obligations under these plans (some of which are underfunded). We will incur costs with respect to these pension and other healthcare benefits, and these costs may increase substantially in the future.
Item 1B.    Unresolved Staff Comments
None.

22



Item 2.    Properties
We own and lease a number of important properties. Our headquarters and one of our manufacturing facilities are located in Laval, Quebec. We also have U.S.-based manufacturing facilities in Rochester, New York; Irvine, California; Greenville, South Carolina; St. Louis, Missouri; Tampa, Florida; and Clearwater, Florida. Outside the U.S., we own or have an interest in manufacturing plants or other properties in Poland, Ireland, Germany, France, Italy, Canada, China, Mexico, Brazil, Serbia, and Vietnam.
We consider our facilities to be 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. Our administrative, marketing, research/laboratory, distribution and warehousing facilities are located in various parts of the world. We co-locate our research and development activities with our manufacturing at the plant level in a number of facilities. Our scientists, engineers, quality control and manufacturing technicians work side-by-side in designing and manufacturing products that fit the needs and requirements of our customers, regulators and business units.
We believe that we have sufficient facilities to conduct our operations during 2014. The following table lists the location, use, size and ownership interest of our principal properties by segment:
Location
 
Purpose
 
Owned
or
Leased
 
Approximate
Square
Footage
Laval, Quebec, Canada
 
Corporate headquarters, manufacturing and warehouse facility
 
Owned
 
337,000

Bridgewater, New Jersey(1)
 
Administration
 
Leased
 
110,000

Developed Markets
 
 
 
 
 
 
Rochester, New York
 
Office, R&D and manufacturing facility
 
Owned
 
953,000

Waterford, Ireland
 
R&D and manufacturing facility
 
Owned
 
339,000

Greenville, South Carolina
 
Distribution facility
 
Leased
 
320,000

Greenville, South Carolina
 
Manufacturing and distribution facility
 
Owned
 
225,000

Tampa, Florida
 
R&D and manufacturing facility
 
Owned
 
171,000

St. Louis, Missouri
 
R&D and manufacturing facility
 
Owned
 
140,000

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

Clearwater, Florida
 
R&D and manufacturing facility
 
Owned
 
102,000

Emerging Markets
 
 
 
 
 
 
Jinan, China
 
Office and manufacturing facility
 
Owned
 
416,000

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

Tlalpan Mexico City, Mexico
 
Offices and manufacturing facility
 
Owned
 
146,000

San Juan del Rio, Mexico
 
Offices and manufacturing facility
 
Owned
 
816,000

Indaiatuba, Brazil
 
Manufacturing facility
 
Owned
 
178,000

Jelenia Gora, Poland
 
Offices, R&D and manufacturing and warehouse facility
 
Owned
 
601,000

Rzeszow, Poland
 
Offices, R&D and manufacturing facility
 
Owned
 
404,000

Belgrade, Serbia
 
Offices and manufacturing facility
 
Owned
 
161,000

___________________
(1)
In December 2013, we signed a lease for a new facility in Bridgewater, New Jersey, and we are in the process of relocating administration functions from our current Bridgewater facility to this new facility.
Item 3.    Legal Proceedings
See note 24 of notes to consolidated financial statements in Item 15 of this Form 10-K, which is incorporated by reference herein.
Item 4.    Mine Safety Disclosures
Not applicable.

23



PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are traded on the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) under the symbol “VRX”. The following table sets forth the high and low per share sales prices for our common shares on the NYSE and TSX for the periods indicated.
 
 
NYSE
 
TSX
 
 
High
$
 
Low
$
 
High
C$
 
Low
C$
2013
 
 
 
 
 
 
 
 
First quarter
 
75.10
 
59.34
 
76.58
 
58.53
Second quarter
 
96.25
 
69.87
 
99.49
 
70.99
Third quarter
 
106.98
 
86.89
 
109.93
 
92.41
Fourth quarter
 
118.25
 
102.60
 
125.71
 
107.30
2012
 
 
 
 
 
 
 
 
First quarter
 
55.80
 
45.52
 
55.24
 
45.32
Second quarter
 
59.94
 
42.47
 
58.98
 
43.99
Third quarter
 
61.11
 
44.01
 
59.88
 
45.07
Fourth quarter
 
61.10
 
52.50
 
60.73
 
52.29
_______________
Source: NYSEnet, TSX Historical Data Access
Market Price Volatility of Common Shares
Market prices for the securities of pharmaceutical, medical devices and biotechnology companies, including our securities, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, the aftermath of public announcements by us, concern as to safety of drugs and medical devices and general market conditions can have an adverse effect on the market price of our common shares and other securities.
Holders
The approximate number of holders of record of our common shares as of February 21, 2014 is 3,508.
Performance Graph
The following graph compares the cumulative total return on our common shares with the cumulative return on the S&P 500 Index, the TSX/S&P Composite Index and a 8-stock Custom Composite Index for the five years ended December 31, 2013, in all cases, assuming reinvestment of dividends. The Custom Composite Index consists of Allergan, Inc.; Endo Health Solutions Inc.; Forest Laboratories, Inc.; Gilead Sciences, Inc.; Mylan Inc.; Perrigo Company; Shire plc and Actavis, Inc.


24



 
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
S&P 500 Index
100
126
146
149
172
228
S&P/TSX Composite Index
100
135
159
145
155
176
Valeant Pharmaceuticals International, Inc.
100
156
334
552
706
1,387
Custom Composite Index
100
128
158
191
217
349
Dividends
No dividends were declared or paid in 2013, 2012 or 2011.
While our Board of Directors will review our dividend policy from time to time, we currently do not intend to pay any cash dividends in the foreseeable future. In addition, the covenants contained in the Third Amended and Restated Credit and Guaranty Agreement, as amended and our bond indentures include restrictions on the payment of dividends.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Selected Financial Information — Cash Dividends”, for additional details about our dividend payments.
Restrictions on Share Ownership by Non-Canadians
There are no limitations under the laws of Canada or in our organizational documents on the right of foreigners to hold or vote securities of our Company, except that the Investment Canada Act (Canada) (the “Investment Canada Act”) may require review and approval by the Minister of Industry (Canada) of certain acquisitions of “control” of our Company by a “non-Canadian”.
Investment Canada Act
An acquisition of control of a Canadian business by a non-Canadian is either reviewable (a “Reviewable Transaction”), in which case it is subject to both a reporting obligation and an approval process, or notifiable, in which case it is subject to only a post-closing reporting obligation. In the case of a Reviewable Transaction, the non-Canadian acquirer must submit an application for review with the prescribed information. The responsible Minister is then required to determine whether the Reviewable Transaction is likely to be of net benefit to Canada, taking into account the assessment factors specified in the Investment Canada Act and any written undertakings that may have been given by the non-Canadian acquirer.
In March 2009, the Investment Canada Act was amended to provide that any investment by a non-Canadian in a Canadian business, even where control has not been acquired, can be reviewed on grounds of whether it may be injurious to national security. Where an investment is determined to be injurious to national security, Cabinet can prohibit closing or, if closed, can order the investor to divest control. Short of a prohibition or divestment order, Cabinet can impose terms or conditions on the investment or can require the investor to provide binding undertakings to remove the national security concern.
Competition Act

25



Part IX of the Competition Act (Canada) (the “Competition Act”) requires that a pre-merger notification filing be submitted to the Commissioner of Competition (the “Commissioner”) in respect of certain classes of merger transactions that exceed certain prescribed thresholds. If a proposed transaction exceeds such thresholds, subject to certain exceptions, the notification filing must be submitted to the Commissioner and the statutory waiting period must expire or be terminated early or waived by the Commissioner before the transaction can be completed.
All mergers, regardless of whether they are subject to Part IX of the Competition Act, are subject to the substantive mergers provisions under Section 92 of the Competition Act. In particular, the Commissioner may challenge a transaction before the Competition Tribunal where the transaction prevents or lessens, or is likely to prevent or lessen, competition substantially in a market. The Commissioner may not make an application to the Competition Tribunal under Section 92 of the Competition Act more than one year after the merger has been substantially completed.
Exchange Controls
Canada has no system of exchange controls. There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to non-resident holders of our securities, except as discussed in “Taxation” below.
Taxation
Canadian Federal Income Taxation
The following discussion is a summary of the principal Canadian federal income tax considerations generally applicable to a holder of our common shares who, at all relevant times, for purposes of the Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “Canadian Tax Act”) deals at arm’s-length with, and is not affiliated with, our Company, beneficially owns its common shares as capital property, does not use or hold such common shares in a business carried on or deemed to be carried on in Canada, and has not entered into, with respect to their Shares, a “derivative forward agreement” as defined in the Act, and who, at all relevant times, for purposes of the application of the Canadian Tax Act and the Canada-U.S. Income Tax Convention (1980, as amended) (the “U.S. Treaty”), is resident in the U.S., is not, and is not deemed to be, resident in Canada and is eligible for benefits under the U.S. Treaty (a “U.S. Holder”). Special rules, which are not discussed in the summary, may apply to a non-resident holder that is an insurer that carries on an insurance business in Canada and elsewhere or that is an “authorized foreign bank” as defined in the Canadian Tax Act.
The U.S. Treaty includes limitation on benefits rules that restrict the ability of certain persons who are resident in the U.S. to claim any or all benefits under the U.S. Treaty. Furthermore, limited liability companies (“LLCs”) that are not taxed as corporations pursuant to the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) do not generally qualify as resident in the U.S. for purposes of the U.S. Treaty. Under the U.S. Treaty, a resident of the U.S. who is a member of such an LLC and is otherwise eligible for benefits under the U.S. Treaty may generally be entitled to claim benefits under the U.S. Treaty in respect of income, profits or gains derived through the LLC. Residents of the U.S. should consult their own tax advisors with respect to their eligibility for benefits under the U.S. Treaty, having regard to these rules.
This summary is based upon the current provisions of the U.S. Treaty and the Canadian Tax Act and our understanding of the current administrative policies and assessing practices of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals to amend the U.S. Treaty and the Canadian Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof. This summary does not otherwise take into account or anticipate changes in law or administrative policies and assessing practices, whether by judicial, regulatory, administrative or legislative decision or action, nor does it take into account provincial, territorial or foreign tax legislation or considerations, which may differ from those discussed herein.    
        This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice generally or to any particular holder. Holders should consult their own tax advisors with respect to their own particular circumstances.
Gains on Disposition of Common Shares
In general, a U.S. Holder will not be subject to tax under the Canadian Tax Act on capital gains arising on the disposition of such holder’s common shares unless the common shares are “taxable Canadian property” to the U.S. Holder and are not “treaty-protected property”.

26



As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Tax Act), (iii) “timber resource property” (as such terms are defined in the Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property.
Common shares will be treaty-protected property where the U.S. Holder is exempt from income tax under the Canadian Tax Act on the disposition of common shares because of the U.S. Treaty. Common shares owned by a U.S. Holder will generally be treaty-protected property where the value of the common shares is not derived principally from real property situated in Canada, as defined in the U.S. Treaty.
Dividends on Common Shares
Dividends paid or credited on the common shares or deemed to be paid or credited on the common shares to a U.S. Holder that is the beneficial owner of such dividends will generally be subject to non-resident withholding tax under the Canadian Tax Act and the U.S. Treaty at the rate of (a) 5% of the amounts paid or credited if the U.S. Holder is a company that owns (or is deemed to own) at least 10% of our voting stock, or (b) 15% of the amounts paid or credited in all other cases. The rate of withholding under the Canadian Tax Act in respect of dividends paid to non-residents of Canada is 25% where no tax treaty applies.
Securities Authorized for Issuance under Equity Compensation Plans
Information required under this Item will be included in our definitive proxy statement for the 2014 Annual Meeting of Shareholders expected to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Form 10-K (the “2014 Proxy Statement”), and such required information is incorporated herein by reference.
Purchases of Equity Securities by the Company and Affiliated Purchases
On November 19, 2012, we announced that our Board of Directors had approved a new securities repurchase program (the “2012 Securities Repurchase Program”). Under the 2012 Securities Repurchase Program, which commenced on November 15, 2012, we could make purchases of up to $1.5 billion of our senior notes, common shares and/or other future debt or shares. The 2012 Securities Repurchase Program terminated on November 14, 2013.
On November 21, 2013, our Board of Directors approved a new securities repurchase program (the “2013 Securities Repurchase Program”). Under the 2013 Securities Repurchase Program, which commenced on November 22, 2013, we may make purchases of up to $1.5 billion of our convertible notes, senior notes, common shares and/or other future debt or shares. The 2013 Securities Repurchase Program will terminate on November 21, 2014 or at such time as we complete our purchases.
During the year ended December 31, 2013, under the 2012 Securities Repurchase Program, we repurchased 507,957 of our common shares for an aggregate purchase price of $35.7 million. In the three-month period ended December 31, 2013, we did not make any purchases of our senior notes or common shares under the 2012 Securities Repurchase Program or the 2013 Securities Repurchase Program.
For more information regarding our 2012 Securities Repurchase Program and 2013 Securities Repurchase Program, see note 16 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Item 6.    Selected Financial Data
The following table of selected consolidated financial data of our Company has been derived from financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The data is qualified by reference to, and should be read in conjunction with the consolidated financial statements and related notes thereto prepared in accordance with U.S. GAAP (see Item 15 of this Form 10-K) as well as the discussion in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. All dollar amounts are expressed in thousands of U.S. dollars, except per share data.

27



 
 
Years Ended December 31,
 
 
2013(1)(2)
 
2012(1)(2)
 
2011(1)(2)
 
2010(1)
 
2009
Consolidated operating data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
5,769,605

 
$
3,480,376

 
$
2,427,450

 
$
1,181,237

 
$
820,430

Operating (loss) income
 
(409,502
)
 
79,685

 
299,959

 
(110,085
)
 
181,154

Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
 
(866,142
)
 
(116,025
)
 
159,559

 
(208,193
)
 
176,455

(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(2.70
)
 
$
(0.38
)
 
$
0.52

 
$
(1.06
)
 
$
1.11

Diluted
 
$
(2.70
)
 
$
(0.38
)
 
$
0.49

 
$
(1.06
)
 
$
1.11

Cash dividends declared per share
 
$

 
$

 
$

 
$
1.28

 
$
0.65

 
 
At December 31,
 
 
2013(1)(2)
 
2012(1)(2)
 
2011(1)(2)
 
2010(1)
 
2009
Consolidated balance sheet:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
600,340

 
$
916,091

 
$
164,111

 
$
394,269

 
$
114,463

Working capital
 
1,373,493

 
954,699

 
433,234

 
327,710

 
93,734

Total assets
 
27,970,797

 
17,950,379

 
13,108,119

 
10,795,117

 
2,059,290

Long-term obligations
 
17,367,702

 
11,015,625

 
6,651,011

 
3,595,277

 
326,085

Common shares
 
8,301,179

 
5,940,652

 
5,963,621

 
5,251,730

 
1,465,004

Valeant Pharmaceuticals International, Inc. shareholders’ equity
 
5,118,723

 
3,717,398

 
3,929,830

 
4,911,096

 
1,354,372

 
 
 
 
 
 
 
 
 
 
 
Number of common shares issued and outstanding (000s)
 
333,037

 
303,861

 
306,371

 
302,449

 
158,311

___________________
(1)
Amounts for 2013, 2012, 2011, and 2010 include the impact of several acquisitions of businesses. For more information regarding our acquisitions, see note 3 of notes to consolidated financial statements in Item 15 of this Form 10-K.
(2)
In 2013, we recognized an impairment charge of $551.6 million related to ezogabine/retigabine (immediate-release formulation) which is co-developed and marketed under a collaboration agreement with GSK, and we wrote off an IPR&D asset of $93.8 million relating to a modified-release formulation of ezogabine/retigabine.
In 2012, we wrote off an IPR&D asset of $133.4 million, relating to the IDP-107 program, which was acquired in September 2010 as part of the Merger.
In 2011, we recognized impairment charges on IPR&D assets of $105.2 million in the fourth quarter of 2011, relating to the A002, A004, and A006 programs acquired as part of the Aton acquisition in 2010, as well as the IDP-109 and IDP-115 dermatology programs.
For more information regarding these impairment charges and other impairment charges, see note 7 and note 12 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

28


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


INTRODUCTION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the audited consolidated financial statements, and notes thereto, prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) as of December 31, 2013 and 2012 and each of the three years in the period ended December 31, 2013 (the “2013 Financial Statements”).
Additional information relating to the Company, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”), is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission (the “SEC”) website at www.sec.gov.
Unless otherwise indicated herein, the discussion and analysis contained in this MD&A is as of February 28, 2014.
All dollar amounts are expressed in U.S. dollars, unless otherwise noted.
COMPANY PROFILE
Valeant Pharmaceuticals International, Inc. (“we”, “us”, “our” or the “Company”) is a multinational, specialty pharmaceutical and medical device company that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries. In the Developed Markets segment, we focus most of our efforts in the eye health, dermatology and neurology therapeutic classes. In the Emerging Markets segment, we focus primarily on branded generics, OTC products, and medical devices. We are diverse not only in our sources of revenue from our broad drug and medical device portfolio, but also among the therapeutic classes and geographic segments we serve.
Effective August 9, 2013, we continued from the federal jurisdiction of Canada to the Province of British Columbia, meaning that we became a company registered under the laws of the Province of British Columbia as if we had been incorporated under the laws of the Province of British Columbia. As a result of this continuance, our legal domicile became the Province of British Columbia, the Canada Business Corporations Act ceased to apply to us and we became subject to the British Columbia Business Corporations Act (BCBCA). 
On August 5, 2013, we acquired Bausch & Lomb Holdings Incorporated (“B&L”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated May 24, 2013. Subject to the terms and conditions set forth in the Merger Agreement, B&L became a wholly-owned subsidiary of Valeant Pharmaceuticals International (“Valeant”), our wholly-owned subsidiary (the “B&L Acquisition”). B&L is a global eye health company that focuses primarily on the development, manufacture and marketing of eye health products, including contact lenses, contact lens care solutions, ophthalmic pharmaceuticals and ophthalmic surgical products. We believe we will continue to grow the B&L business due primarily to the expected growth of the overall eye health market and the introduction of new products. Further, we are integrating the B&L business into our decentralized structure which will allow us to continue to realize operational efficiencies and cost synergies. For more information regarding the B&L Acquisition, see note 3 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Our strategy is to focus the business on core geographies and therapeutic classes that offer attractive growth opportunities while maintaining our lower selling, general and administrative cost model and decentralized operating structure. We have an established portfolio of durable products with a focus in the eye health and dermatology therapeutic areas. We believe these areas are particularly attractive given that many of the products in these areas:
have potential for strong operating margins and solid growth;
are marked by a higher insured and self-pay component than other therapeutic areas and are less dependent on increasing government reimbursement pressures;
have limited patent risk;
have the potential for line extensions and life-cycle management opportunities; and
are smaller on an individual basis, and therefore typically not the focus of larger pharmaceutical companies.
Another critical element of our strategy is business development. We have completed numerous transactions over the past few years to expand our portfolio offering and geographic footprint, including, among others, the acquisitions of B&L and Medicis

29


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

Pharmaceutical Corporation (“Medicis”). We will continue to pursue value-added business development opportunities as they arise.
The growth of our business is further augmented through our lower risk research and development model. This model allows us to advance certain development programs to drive future commercial growth, while minimizing our research and development expense. This is achieved primarily as follows:
focusing our efforts on niche therapeutic areas such as eye health, dermatology and podiatry, aesthetics, and dentistry, including life-cycle management programs for currently marketed products; and
acquiring dossiers and registrations for branded generic products, which require limited manufacturing start-up and development activities.
In addition to selective acquisitions and product development, our strategy also involves deploying cash through debt repayments and repurchases, as well as share buybacks.
We believe this strategy will allow us to maximize both the growth rate and profitability of the Company and to enhance shareholder value.
We measure our success through total shareholder return and, on that basis, as of February 21, 2014, the market price of our common shares on the New York Stock Exchange (“NYSE”) has increased approximately 460%, and the market price of our common shares on the Toronto Stock Exchange (“TSX”) has increased approximately 500%, since the Company’s (then named Biovail Corporation (“Biovail”)) acquisition of Valeant on September 28, 2010 (the “Merger”), as adjusted for the post-Merger special dividend of $1.00 per common share (the “post-Merger special dividend”).
ACQUISITIONS AND DISPOSITIONS
Since 2011, we have completed several transactions to expand our product portfolio, including, among others, the following acquisitions and dispositions.

30


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

 
 
Acquisition
 Date
Acquisitions of businesses and product rights
 
2014
 
 
Solta Medical, Inc. (“Solta Medical”)
 
January 2014
2013
 
 
B&L(1)
 
August 2013
Obagi Medical products, Inc. (“Obagi”)
 
April 2013
Certain assets of Eisai Inc. (“Eisai”)
 
February 2013
Natur Produkt International, JSC (“Natur Produkt”)
 
February 2013
2012
 
 
Medicis(2)
 
December 2012
Certain assets of Johnson & Johnson Consumer Companies, Inc. (“J&J ROW”)
 
October 2012
Certain assets of Johnson & Johnson Consumer Companies, Inc. (“J&J North America”)
 
September 2012
Certain assets of QLT Inc. and QLT Ophthalmics, Inc. (collectively, “QLT”)
 
September 2012
OraPharma Topco Holdings, Inc. (“OraPharma”)
 
June 2012
Certain assets of University Medical Pharmaceuticals Corp. (“University Medical”)
 
May 2012
Certain assets of Atlantis Pharma (“Atlantis”)
 
May 2012
Certain assets of Gerot Lannach
 
March 2012
Probiotica Laboratorios Ltda. (“Probiotica”)
 
February 2012
2011
 
 
iNova
 
December 2011
Dermik, a dermatological unit of Sanofi in the U.S. and Canada
 
December 2011
Ortho Dermatologics division of Janssen Pharmaceuticals, Inc.
 
December 2011
Afexa Life Sciences Inc. (“Afexa”)
 
October 2011
AB Sanitas (“Sanitas”)
 
August 2011
Elidel®/Xerese® license agreement
 
June 2011
Zovirax®
 
February 2011/March 2011
PharmaSwiss S.A. (“PharmaSwiss”)
 
March 2011
 
 
Disposition
 Date
Dispositions
 
2013
 
 
Divestiture of certain skincare products sold in Australia
 
October 2013
Divestiture of Buphenyl®
 
June 2013
2012
 
 
Divestitures of 1% clindamycin and 5% benzoyl peroxide gel (“IDP-111”) and 5% fluorouracil cream (“5-FU”)
 
February 2012
2011
 
 
Out-license product rights to Cloderm® Cream, 0.1% to Promius Pharma LLC
 
March 2011
____________________________________
(1)
The B&L Acquisition included acquired in-process research and development (“IPR&D”) assets of $418.3 million related to the development of (i) various vision care products, such as the next generation silicone hydrogel lens (Bausch + Lomb Ultra), (ii) various pharmaceutical products, such as latanoprostene bunod, a nitric oxide-donating prostaglandin for reduction of elevated intraocular pressure in patients with glaucoma or ocular hypertension, and (iii) various surgical products. The projected cash flows from these assets were adjusted for the probabilities of successful development and commercialization of each project. In determining fair value for latanoprostene bunod and the next generation silicone hydrogel lens (Bausch + Lomb Ultra), we assumed that material cash inflows for these products would commence in 2016 and 2014, respectively. In September 2013, the U.S. Food and Drug Administration (“FDA”) approved the next generation silicone hydrogel lens (Bausch + Lomb Ultra), and the product was launched in February 2014. As of December 31, 2013, we estimated that we will incur remaining development costs, including certain milestone payments, of approximately $90 million, in the aggregate, to complete the development of the IPR&D assets.
(2)
The Medicis Acquisition (as defined below) included acquired IPR&D assets of $159.8 million related to the development of several programs, including Luliconazole Cream, Metronidazole 1.3%, and other dermatology and aesthetics programs. The projected cash flows were adjusted for the probability of successful development and commercialization of the products. In determining fair value for these assets, we assumed that significant cash inflows for these products would commence in 2015. In November 2013, the FDA approved the NDA for Luliconazole, which triggered the commencement of amortization. On April 30, 2013, the Company agreed to sell the worldwide rights in its Metronidazole 1.3% Vaginal Gel antibiotic development product, a topical antibiotic for the treatment of bacterial vaginosis, to Actavis Specialty Brands for approximately $55 million, which includes upfront and certain

31


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

milestone payments, and minimum royalties for the first three years of commercialization. As of December 31, 2013, we estimated that we will incur remaining development costs of approximately $25 million, in the aggregate, to complete the development of these IPR&D assets.
For more information regarding our acquisitions and dispositions, see note 3, note 4 and note 27 of notes to consolidated financial statements in Item 15 of this Form 10-K.
PRODUCTS IN DEVELOPMENT
The following products, among others, are currently or were in clinical development during 2013:
B&L Acquisition
With the B&L Acquisition in August 2013, we added several ongoing projects to our research and development portfolio, including:
The next generation silicone hydrogel lens (Bausch + Lomb Ultra), with MoistureSeal™ technology, was approved by the FDA in September 2013 and was launched in February 2014. MoistureSeal™ is a unique combination of material chemistry and production process that has been shown to retain moisture throughout the day, which can help reduce blurriness or visual fluctuations associated with lens dryness.  
Biotrue® ONEday lens is made from the bio-inspired material HyperGel™ that mimics the actions of the natural tear film, matches the water content of the eye, and meets the oxygen needs of the eye for daily wear of contact lenses. A multi-focal version of the Biotrue® ONEday lens was approved by the FDA in December 2013 and is targeted for launch in 2014. 
Latanoprostene bunod, a nitric-oxide donating prostaglandin, is being developed for the reduction of intraocular pressure (IOP) in patients with glaucoma or ocular hypertension. The product is in Phase 3 testing.
Brimonidine tartrate 0.025% is being developed as an ocular redness reliever. Phase 2 studies have demonstrated fast onset and long-lasting efficacy, with low potential for rebound redness. The product is in Phase 3 testing.
Medicis Acquisition
With the acquisition of Medicis in December 2012 (the “Medicis Acquisition”), we added several ongoing projects to our research and development portfolio, including:
Luliconazole, a new imidazole, antimycotic cream for the treatment of tinea cruris, pedis and corporis. The NDA was submitted to the FDA on December 11, 2012. The FDA approved the NDA for Luliconazole under the name Luzu™ in November 2013, and the product is targeted for launch in early 2014.
Metronidazole 1.3%, a topical antibiotic for the treatment of bacterial vaginosis. In April 2013, we agreed to sell the worldwide rights for Metronidazole 1.3% to Actavis Specialty Brands. The rights to Metronidazole 1.3% are expected to be transferred to Actavis Specialty Brands at or shortly following the time of FDA approval of the product NDA, when and if obtained. In May 2013, we filed the NDA in the U.S. For more information see note 27 of notes to consolidated financial statements in Item 15 of this Form 10-K.
Several unique formulation development programs focused on improving the tolerability of existing acne vulgaris treatments, as well as a number of aesthetics programs.
Other
We also have a number of dermatology product candidates in development including:
IDP-108 (efinaconazole), to be marketed as Jublia®, a novel triazole compound, is an antifungal targeted to treat onychomycosis, a fungal infection of the fingernails and toenails primarily in older adults. Valeant holds an exclusive license from Kaken Pharmaceutical Co., Ltd., to commercialize efinaconazole in North America, Central America, South America and the European Union. The mechanism of antifungal activity appears similar to other antifungal triazoles, i.e., ergosterol synthesis inhibition. Jublia® was approved in Canada in October 2013, and we are targeting a launch in Canada in the second quarter of 2014. We filed the NDA in the U.S. in July 2012. As announced in May 2013, we received a Complete Response Letter from the FDA regarding our NDA for Jublia®. We are in the process of addressing the issues raised by the FDA in its letter.

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

Topical and other life-cycle management projects, including IDP-118.
COLLABORATION AGREEMENTS
See note 5 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information regarding our various license, development and collaboration agreements.
RESTRUCTURING AND INTEGRATION
In connection with the B&L and Medicis acquisitions, as well as the Merger and other smaller acquisitions, we have implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:
workforce reductions across the Company and other organizational changes;
closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;
leveraging research and development spend; and
procurement savings.
B&L Acquisition-Related Cost-Rationalization and Integration Initiatives
The complementary nature of the Company and B&L businesses has provided an opportunity to capture significant operating synergies from reductions in sales and marketing, general and administrative expenses, and research and development. In total, we have identified greater than $850 million of cost synergies on an annual run rate basis that we expect to achieve by the end of 2014. This amount does not include potential revenue synergies or the potential benefits of incorporating B&L’s operations into the Company’s corporate structure.
We estimate that we will incur total costs that are approximately half of the estimated annual synergies of greater than $850 million in connection with these cost-rationalization and integration initiatives, which are expected to be substantially completed by the end of 2014. Since the acquisition date, total costs of $364.2 million (including (i) $181.3 million of restructuring expenses, (ii) $14.1 million of acquisition-related costs, and (iii) $168.8 million of integration expenses) have been incurred through December 31, 2013. The estimate of total costs to be incurred primarily includes: employee termination costs payable to approximately 2,500 employees of the Company and B&L who have been or will be terminated as a result of the B&L Acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. These estimates do not include charges of $48.5 million and $4.3 million recognized and paid in the third quarter of 2013 related to the previously cancelled B&L’s performance-based options and the acceleration of unvested stock options for B&L employees as a result of the B&L Acquisition, respectively.
Medicis Acquisition-Related Cost-Rationalization and Integration Initiatives
The complementary nature of the Company and Medicis businesses has provided an opportunity to capture significant operating synergies from reductions in sales and marketing, general and administrative expenses, and research and development. In total, we have realized over $300 million of cost synergies on a run rate basis as of December 31, 2013.
We estimated that we will incur total costs of less than $250 million in connection with these cost-rationalization and integration initiatives, which were substantially completed by the end of 2013. However, certain costs may still be incurred in 2014. Since the acquisition date, total costs of $181.3 million (including (i) $109.2 million of restructuring expenses, (ii) $32.2 million of acquisition-related costs, which excludes $24.2 million of acquisition-related costs recognized in the fourth quarter of 2012 related to royalties to be paid to Galderma S.A. on sales of Sculptra®, and (iii) $39.9 million of integration expenses) have been incurred through December 31, 2013. The estimated costs primarily include: employee termination costs payable to approximately 750 employees of the Company and Medicis who have been terminated as a result of the Medicis Acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. These estimates do not include a charge of $77.3 million recognized and paid in the fourth quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, and share appreciation rights for Medicis employees that was triggered by the change in control.

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

Merger-Related Cost-Rationalization and Integration Initiatives
The complementary nature of the Biovail and Valeant businesses provided an opportunity to capture significant operating synergies from reductions in research and development, sales and marketing, and general and administrative expenses. In total, we realized approximately $350 million of annual cost synergies as of December 31, 2012. Approximately $315 million of cost synergies were realized in 2011, and the full amount of $350 million was realized in 2012.
See note 6 of notes to consolidated financial statements in Item 15 of this Form 10-K for detailed information summarizing the major components of costs incurred in connection with our B&L, Medicis, and Merger acquisition-related initiatives through December 31, 2013.
U.S. HEALTHCARE REFORM
In March 2010, the Patient Protection and Affordable Care Act (the “Act”) was enacted in the U.S. The Act contains several provisions that impact our business. Provisions of the Act include: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on covered drugs; (ii) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and (iii) the expansion of the 340(B) Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers.
Commencing in 2011, the legislation requires that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap. In addition, commencing in 2011, a new fee has been assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). This fee is calculated based upon each entity’s relative share of total applicable branded prescription drug sales to specified U.S. government programs for the preceding calendar year. The aggregate industry wide fee is expected to total $28.0 billion through 2019, ranging from $2.5 billion to $4.1 billion annually.
Additional provisions of the Act will be implemented in the next several years. In 2013, federal subsidies began to be phased in for brand-name prescription drugs filled in the Medicare Part D cover gap. Also in January 2013, Centers for Medicare and Medicaid Services issued final regulations to implement the physician payment disclosure provisions of the Act, which requires pharmaceutical and medical device manufacturers to disclose publicly certain payments to physicians. The law requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of most medical devices beginning in 2013. In 2014, the Act’s private health insurance exchanges will begin to operate along with the mandate on individuals to purchase health insurance. The Act also allows states to expand Medicaid coverage with most of the expansion’s cost paid for by the federal government. While some states have decided to pursue such expansions, others have indicated they will not do so or are still considering doing so.
The Act did not have a material impact on our financial condition or results of operation in 2013, 2012 or 2011. In 2013, 2012 and 2011, we made total payments of $2.4 million, $1.8 million and $0.6 million, respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). We also incurred costs of $28.8 million, $9.8 million and $6.0 million on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”) in 2013, 2012 and 2011, respectively. Under the legislation, the total cost incurred by us for the medical device excise tax during 2013 was $4.2 million.
While the Supreme Court upheld the core provisions of the Act, additional challenges to various provisions of the Act continue to work their way through the courts. We cannot predict at this time what impact these challenges will have on our business. Similarly, we cannot predict how the numerous regulations and requirements still to be proposed or finalized by the Administration and the states will impact our business.
SELECTED FINANCIAL INFORMATION
The following table provides selected financial information for each of the last three years:

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

 
 
Years Ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s, except per share data)
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Revenues
 
5,769,605

 
3,480,376

 
2,427,450

 
2,289,229

 
66
 
1,052,926

 
43
Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
 
(866,142
)
 
(116,025
)
 
159,559

 
(750,117
)
 
NM
 
(275,584
)
 
NM
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
 
 

 
 
 
 
Basic
 
(2.70
)
 
(0.38
)
 
0.52

 
(2.32
)
 
NM
 
(0.90
)
 
NM
Diluted
 
(2.70
)
 
(0.38
)
 
0.49

 
(2.32
)
 
NM
 
(0.87
)
 
NM
 
 
 
As of December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s)
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Total assets
 
27,970,797

 
17,950,379

 
13,108,119

 
10,020,418

 
56
 
4,842,260

 
37
Long-term debt, including current portion
 
17,367,702

 
11,015,625

 
6,651,011

 
6,352,077

 
58
 
4,364,614

 
66
____________________________________
NM — Not meaningful
Financial Performance
Changes in Revenues
Total revenues increased $2,289.2 million, or 66%, to $5,769.6 million in 2013, compared with $3,480.4 million in 2012, primarily due to:
incremental product sales revenue of $854.6 million, in the aggregate, from all 2012 acquisitions, primarily from the Medicis, OraPharma, and J&J North America acquisitions. We also recognized incremental product sales revenue in 2013 of $1,612.0 million, in the aggregate, from all 2013 acquisitions, primarily from the B&L, Natur Produkt, and Obagi acquisitions. The incremental product sales revenue from the 2012 and 2013 acquisitions includes a negative foreign exchange impact of $22.2 million, in the aggregate, in 2013; and
incremental product sales revenue of $271.2 million in 2013, related to growth from the existing business, excluding the declines in Developed Markets described below. In the Developed Markets segment, the revenue increase was driven primarily by price, while volume was the main driver of growth in the Emerging Markets segment.
Those factors were partially offset by:
decrease in product sales in the Developed Markets segment of $293.9 million, in the aggregate, in 2013, primarily related to a decline in sales of the Zovirax® franchise, Retin-A Micro®, BenzaClin® and Cesamet® due to the impact of generic competition;
a negative impact from divestitures, discontinuations and supply interruptions of $67.8 million in 2013. The largest contributors were the discontinuation of Dermaglow® and the divestitures of certain brands sold primarily in Australia;
a decrease in alliance and royalty revenue of $53.0 million, primarily related to the $45.0 million milestone payment received from GSK in connection with the launch of Potiga® recognized in the second quarter of 2012 that did not similarly occur in 2013;
a negative foreign currency exchange impact on the existing business of $24.4 million in 2013; and
a decrease in service revenue of $9.5 million in 2013, primarily due to lower contract manufacturing revenue from the Laval, Quebec facility, which was acquired as part of the acquisition of the Dermik business from Sanofi in December 2011.
Total revenues increased $1,052.9 million, or 43%, to $3,480.4 million in 2012, compared with $2,427.5 million in 2011, primarily due to:
incremental product sales revenue of $709.2 million, in the aggregate, from all 2011 acquisitions, primarily from the iNova, Dermik, Ortho Dermatologics, Sanitas, PharmaSwiss, Elidel®/Xerese® and Afexa acquisitions. We also

35


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

recognized incremental product sales revenue in 2012 of $280.7 million, in the aggregate, from all 2012 acquisitions, primarily from the Probiotica, OraPharma, Medicis, Gerot Lannach, University Medical and Atlantis acquisitions. The incremental product sales revenue from the 2011 and 2012 acquisitions includes a negative foreign exchange impact of $33.3 million, in the aggregate, in 2012;
incremental product sales revenue of $263.9 million in 2012, related to growth from the existing business, excluding the declines in Developed Markets described below. Slightly more than half of this increase was based on volume, and the remainder was a result of pricing actions taken during 2012 and 2011; and
incremental service revenue of $50.3 million in 2012, primarily from the Dermik acquisition.
Those factors were partially offset by:
decrease in product sales in the Developed Markets segment of $115.9 million, in the aggregate, primarily related to a decline in sales of Cardizem® CD, Cesamet®, Ultram® ER, Diastat® and Wellbutrin XL® due to the impact of generic competition;
a negative impact from divestitures and discontinuations of $81.8 million in 2012, including a decrease of $42.8 million in 2012, related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012; and
a negative foreign currency exchange impact on the existing business of $65.4 million in 2012.
Changes in Earnings Attributable to Valeant Pharmaceuticals International, Inc.
Net loss attributable to Valeant Pharmaceuticals International, Inc. (basic and diluted loss per share attributable to Valeant Pharmaceuticals International, Inc. of $2.70) increased $750.1 million, to $866.1 million in 2013, compared with net loss attributable to Valeant Pharmaceuticals International, Inc. of $116.0 million (basic and diluted loss per share attributable to Valeant Pharmaceuticals International, Inc. of $0.38) in 2012, reflecting the following factors:
an increase of $973.1 million in amortization and impairments of finite-lived intangible assets, as described below under “Results of Operations — Operating Expenses — Amortization and Impairments of Finite-Lived Intangible Assets”;
an increase of $549.1 million in selling, general and administrative expense, as described below under “Results of Operations — Operating Expenses — Selling, General and Administrative Expenses”; 
an increase of $362.7 million in interest expense, as described below under “Results of Operations — Non-Operating Income (Expense) — Interest Expense”;
an increase of $175.1 million in other expense, as described below under “Results of Operations — Operating Expenses — Other Expense”;
an increase of $170.4 million in restructuring, integration and other costs, as described below under “Results of Operations — Operating Expenses — Restructuring, Integration and Other Costs”;
an increase of $77.7 million in research and development expenses, as described below under “Results of Operations — Operating Expenses — Research and Development Expenses”;
a decrease of $56.7 million in contribution from (i) alliance and royalty revenue and (ii) service revenue (alliance and royalty revenue and service revenue less cost of alliance and service revenue) primarily due to $45.0 million recognized in 2012 related to the milestone payment received from GSK in connection with the launch of Potiga® that did not similarly occur in 2013;
an increase of $44.9 million in loss on extinguishment of debt, as described below under “Results of Operations — Non-Operating Income (Expense) — Loss on Extinguishment of Debt”; and
a decrease of $29.2 million in foreign exchange and other, as described below under “Results of Operations — Non-Operating Income (Expense) — Foreign Exchange and Other”.
Those factors were partially offset by:
an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of finite-lived intangible assets) of $1,410.5 million, mainly related to the incremental contribution of B&L, Medicis, Natur Produkt, the Eisai assets, Obagi and OraPharma;

36


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

an increase of $172.6 million in recovery of income taxes, as described below under “Results of Operations — Income Taxes”;
a decrease of $42.2 million in acquisition-related costs, as described below under “Results of Operations — Operating Expenses — Acquisition-Related Costs”;
a decrease of $36.3 million in in-process research and development impairments and other charges, as described below under “Results of Operations — Operating Expenses — In-Process Research and Development Impairments and Other Charges”; and
an increase of $24.0 million in acquisition-related contingent consideration net gains, as described below under “Results of Operations — Operating Expenses — Acquisition-Related Contingent Consideration”.
Net loss attributable to Valeant Pharmaceuticals International, Inc. was $116.0 million (basic and diluted loss per share attributable to Valeant Pharmaceuticals International, Inc. of $0.38) in 2012, compared with net income attributable to Valeant Pharmaceuticals International, Inc. of $159.6 million (basic and diluted earnings per share attributable to Valeant Pharmaceuticals International, Inc. of $0.52 and $0.49, respectively) in 2011, reflecting the following factors:
an increase of $371.1 million in amortization and impairments of finite-lived intangible assets primarily related to (i) the acquired identifiable intangible assets of iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis of $210.5 million, in the aggregate, in 2012, and (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011;
an increase of $246.7 million in restructuring, integration and other costs, as described below under “Results of Operations — Operating Expenses — Restructuring, Integration and Other Costs”;
an increase of $183.6 million in selling, general and administrative expense, as described below under “Results of Operations — Operating Expenses — Selling, General and Administrative Expenses”; 
an increase of $147.1 million in interest expense, as described below under “Results of Operations — Non-Operating Income (Expense) — Interest Expense”;
an increase of $80.7 million in in-process research and development impairments and other charges, as described below under “Results of Operations — Operating Expenses — In-Process Research and Development Impairments and Other Charges”;
an increase of $52.8 million in other expense, primarily due to legal settlements and related fees, as described below under “Results of Operations — Operating Expenses — Other Expense”;
an increase of $52.3 million in cost of alliance and service revenues, as described below under “Results of Operations — Operating Expenses — Cost of Alliance and Service Revenues”;
an increase of $45.6 million in acquisition-related costs, as described below under “Results of Operations — Operating Expenses — Acquisition-Related Costs”;
a net realized gain of $21.3 million on the disposal of our equity investment in Cephalon, Inc. (“Cephalon”) realized in 2011 that did not similarly occur in 2012, as described below under “Results of Operations — Non-Operating Income (Expense) — Gain on Investments, Net”; and
a $19.1 million net gain realized on foreign currency forward contracts entered in connection with the acquisitions of iNova and PharmaSwiss in 2011 that did not similarly occur in 2012, as described below under “Results of Operations — Non-Operating Income (Expense) — Foreign Exchange and Other”.
Those factors were partially offset by:
an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of finite-lived intangible assets) of $812.2 million, mainly related to the incremental contribution of Dermik, iNova, Ortho Dermatologics, Sanitas, OraPharma, Zovirax®, Medicis, PharmaSwiss, Elidel®/Xerese®, Probiotica and the Gerot Lannach assets;

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

an increase of $100.6 million in recovery of income taxes, as described below under “Results of Operations — Income Taxes”; and
a decrease of $16.8 million in loss on extinguishment of debt, as described below under “Results of Operations — Non-Operating Income (Expense) — Loss on Extinguishment of Debt”.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $2.5 million in 2013, primarily related to the performance of joint ventures acquired in connection with the B&L Acquisition.
Cash Dividends
No dividends were declared or paid in 2013, 2012 or 2011. While our Board of Directors will review our dividend policy from time to time, we currently do not intend to pay dividends in the foreseeable future. In addition, the covenants contained in the Third Amended and Restated Credit and Guaranty Agreement, as amended (the “Credit Agreement”) and our bond indentures include restrictions on the payment of dividends.
RESULTS OF OPERATIONS
Reportable Segments
As a result of our acquisition strategy and continued growth, impacted by the December 2012 Medicis Acquisition, our Chief Executive Officer (“CEO”), who is our Chief Operating Decision Maker (“CODM”), began to manage the business differently in 2013, which necessitated a realignment of the segment structure, effective in the first quarter of 2013. Pursuant to this change, we now have two operating and reportable segments: (i) Developed Markets, and (ii) Emerging Markets. Accordingly, we have restated prior period segment information to conform to the current period presentation. The following is a brief description of our segments as of December 31, 2013:
Developed Markets consists of (i) sales in the U.S. of pharmaceutical products, OTC products, and medical device products, as well as alliance and contract service revenues, in the areas of eye health, dermatology and podiatry, aesthetics, and dentistry, (ii) sales in the U.S. of pharmaceutical products indicated for the treatment of neurological and other diseases, as well as alliance revenue from the licensing of various products we developed or acquired, and (iii) pharmaceutical products, OTC products, and medical device products sold in Canada, Australia, New Zealand, Western Europe and Japan.
Emerging Markets consists of branded generic pharmaceutical products and branded pharmaceuticals, OTC products, and medical device products. Products are sold primarily in Central and Eastern Europe (primarily Poland and Russia), Asia, Latin America (Mexico, Brazil, and Argentina and exports out of Mexico to other Latin American markets), Africa and the Middle East.
Revenues By Segment
Our primary sources of revenues are the sale of pharmaceutical products, OTC products, and medical devices, as well as contract services. The following table displays revenues by segment for each of the last three years, the percentage of each segment’s revenues compared with total revenues in the respective year, and the dollar and percentage change in the dollar amount of each segment’s revenues. Percentages may not sum due to rounding.
 
 
Years Ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s)
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Developed Markets
 
4,293,216

 
74
 
2,502,264

 
72
 
1,762,535

 
73
 
1,790,952

 
72
 
739,729

 
42
Emerging Markets
 
1,476,389

 
26
 
978,112

 
28
 
664,915

 
27
 
498,277

 
51
 
313,197

 
47
Total revenues
 
5,769,605

 
100
 
3,480,376

 
100
 
2,427,450

 
100
 
2,289,229

 
66
 
1,052,926

 
43
____________________________________
NM — Not meaningful
Total revenues increased $2,289.2 million, or 66%, to $5,769.6 million in 2013, compared with $3,480.4 million in 2012, mainly attributable to the effect of the following factors:

38


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

in the Developed Markets segment:
the incremental product sales revenue of $2,051.0 million (which includes a negative foreign currency exchange impact of $12.5 million), in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from (i) the 2012 acquisitions of Medicis (mainly driven by Solodyn®, Restylane®, Dysport®, Vanos®, Ziana® and Perlane® product sales), OraPharma (mainly driven by Arestin® product sales), certain assets of J&J North America (mainly driven by Ambi®, Shower to Shower® and Purpose® product sales) and certain assets of QLT (Visudyne® product sales); and (ii) the 2013 acquisitions of B&L (driven by Lotemax® Gel, PreserVision® and SofLens® Daily Disposable Contact Lenses product sales), and Obagi (mainly driven by Nu-Derm® and Obagi-C® product sales); and
an increase in product sales from the existing business (excluding the declines described below) of $163.4 million, or 7%, in 2013, driven by growth of the core dermatology brands, including CeraVe® and Acanya®.
Those factors were partially offset by:
decrease in product sales of $293.9 million in 2013, primarily related to a decline in sales of the Zovirax® franchise, Retin-A Micro®, BenzaClin® and Cesamet® due to generic competition. As a result of the approval of a generic Zovirax® ointment in April 2013, we anticipate a continuing decline in Zovirax® ointment revenues in the future, and such declines could be material. Refer to note 5 to the 2013 Financial Statements for details regarding Zovirax® agreements entered into in April 2013 with Actavis, Inc. (“Actavis”). We also anticipate a continuing decline in sales of Retin-A Micro®, BenzaClin® and Cesamet® due to continued generic erosion, however the rate of decline is expected to decrease in the future, and these brands are expected to represent a declining percentage of total revenues primarily due to anticipated growth in other parts of our business and recent acquisitions;
a decrease in alliance and royalty revenue of $59.8 million, primarily related to the $45.0 million milestone payment received from GSK in connection with the launch of Potiga® recognized in the second quarter of 2012 that did not similarly occur in 2013;
a negative impact from divestitures, discontinuations and supply interruptions of $44.8 million in 2013;
a negative foreign currency exchange impact on the existing business of $19.9 million in 2013; and
a decrease in service revenue of $5.1 million in 2013, primarily due to lower contract manufacturing revenue from the Laval, Quebec facility, which was acquired as part of the acquisition of the Dermik business from Sanofi in December 2011.
in the Emerging Markets segment:
the incremental product sales revenue of $415.6 million (which includes a negative foreign currency exchange impact of $9.7 million), in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from (i) the 2012 acquisitions of certain assets of Gerot Lannach and Atlantis and (ii) the 2013 acquisition of B&L (driven by ReNu Multiplus®, SofLens® and SofLens® Daily Disposable Contact Lenses product sales) and Natur Produkt; and
an increase in product sales from the existing business of $107.8 million, or 11%, in 2013 driven by growth in Poland and Russia.
Those factors were partially offset by:
a negative impact from divestitures, discontinuations and supply interruptions of $23.0 million in 2013; and
a negative foreign currency exchange impact on the existing business of $4.5 million in 2013.
Total revenues increased $1,052.9 million, or 43%, to $3,480.4 million in 2012, compared with $2,427.5 million in 2011, mainly attributable to the effect of the following factors:
in the Developed Markets segment:
the incremental product sales revenue of $679.0 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from (i) Dermik (mainly driven by BenzaClin®, Carac® and Sculptra® Aesthetics product sales), Ortho Dermatologics (mainly driven by Retin-A Micro® product sales), iNova (mainly driven by Duromine®, Difflam® and Duro-Tuss® product sales) and Afexa; and (ii) OraPharma, Medicis and University Medical product sales;

39


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

an increase in product sales from the existing business (excluding the declines below) of $200.0 million, or 13%, driven by growth of the core dermatology brands, including Zovirax®, Elidel®, Acanya® and CeraVe®;
alliance revenue of $45.0 million recognized in the second quarter of 2012, related to the milestone payment received from GSK in connection with the launch of Potiga®; and
an increase in service revenue of $28.8 million in 2012, primarily from contract manufacturing revenue from the Laval, Quebec facility, which was acquired as part of the acquisition of the Dermik business from Sanofi in December 2011.
Those factors were partially offset by:
a decrease in product sales of $115.9 million, in the aggregate, primarily related to a decline in sales of Cardizem® CD, Cesamet®, Ultram® ER, Diastat® and Wellbutrin XL® due to the impact of generic competition;
a negative impact from divestitures and discontinuations of $58.6 million in 2012, including a decrease of $42.8 million in 2012 related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012;
alliance revenue of $40.0 million recognized in the second quarter of 2011, related to the milestone payment received from GSK in connection with the launch of Trobalt®; and
a negative foreign currency exchange impact on the existing business of $3.5 million in 2012.
in the Emerging Markets segment:
the incremental product sales revenue of $310.9 million (which includes a negative foreign currency exchange impact of $32.3 million in 2012), in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from (i) the 2011 acquisitions of Sanitas, iNova (mainly driven by Duromine® and Difflam® product sales), and PharmaSwiss; and (ii) the 2012 acquisitions of Probiotica and the Gerot Lannach assets;
an increase in product sales from the existing business of $63.9 million, or 10%, in 2012; and
an increase in service revenue of $21.4 million.
Those factors were partially offset by:
a negative foreign currency exchange impact on the existing business of $61.9 million in 2012; and
a negative impact from divestitures and discontinuations of $23.2 million in 2012.
Segment Profit
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as restructuring and acquisition-related costs, in-process research and development impairments and other charges and other expense, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance. In addition, share-based compensation is not allocated to segments, since the amount of such expense depends on company-wide performance rather than the operating performance of any single segment.
The following table displays profit by segment for each of the last three years, the percentage of each segment’s profit compared with corresponding segment revenues in the respective year, and the dollar and percentage change in the dollar amount of each segment’s profit. Percentages may not add due to rounding.
 
 
Years Ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%
 
$
 
%
Developed Markets
 
573,232

 
13
 
815,902

 
33
 
740,316

 
42
 
(242,670
)
 
(30)
 
75,586

 
10
Emerging Markets
 
92,995

 
6
 
68,958

 
7
 
(24,929
)
 
(4)
 
24,037

 
35
 
93,887

 
NM
Total segment profit
 
666,227

 
12
 
884,860

 
25
 
715,387

 
29
 
(218,633
)
 
(25)
 
169,473

 
24
____________________________________
(1) — Represents profit as a percentage of the corresponding revenues.
NM — Not meaningful

40


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

Total segment profit decreased $218.6 million, or 25%, to $666.2 million in 2013, compared with $884.9 million in 2012, mainly attributable to the effect of the following factors:
in the Developed Markets segment:
an increase in contribution of $1,278.5 million, in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from the product sales of Medicis, B&L, Obagi and OraPharma, including higher expenses for acquisition accounting adjustments related to inventory of $285.6 million, in the aggregate; 
an increase in contribution from product sales from the existing business (excluding the favorable impact related to the acquisition accounting adjustments related to inventory in 2012 that did not similarly occur in 2013 and the declines described below) of $155.2 million, driven by growth of the core dermatology brands, including CeraVe® and Acanya®; and
a favorable impact of $54.1 million related to the existing business acquisition accounting adjustments related to inventory in 2012 that did not similarly occur in 2013.
Those factors were more than offset by:
an increase in operating expenses (including amortization and impairments of finite-lived intangible assets) of $1,333.6 million in 2013, primarily due to an impairment charge of $551.6 million related to ezogabine/retigabine in the third quarter of 2013 and the acquisitions of new businesses within the segment. See note 7 to the 2013 Financial Statements for additional information regarding the ezogabine/retigabine impairment;
a decrease in contribution of $286.7 million in 2013, primarily related to the lower sales of the Zovirax® franchise, Retin-A Micro®, BenzaClin® and Cesamet ® as a result of the continued impact of generic competition;
alliance revenue of $45.0 million recognized in the second quarter of 2012, related to the milestone payment received from GSK in connection with the launch of Potiga® that did not similarly occur in 2013;
a decrease in contribution of $39.6 million in 2013, primarily related to divestitures, discontinuations and supply interruptions; and
a negative foreign currency exchange impact on the existing business contribution of $14.3 million in 2013.
in the Emerging Markets segment:
an increase in contribution of $201.5 million, in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from the sale of B&L, Natur Produkt and Gerot Lannach products, including higher expenses for acquisition accounting adjustments related to inventory of $62.1 million, in the aggregate;
an increase in contribution from product sales from the existing business of $70.9 million in 2013; and
an increase in alliance contribution of $6.1 million in 2013.
Those factors were partially offset by:
an increase in operating expenses (including amortization and impairments of finite-lived intangible assets) of $240.0 million in 2013, primarily associated with the acquisitions of new businesses within the segment;
a decrease in contribution of $12.0 million in 2013 related to divestitures, discontinuations and supply interruptions; and
a negative foreign currency exchange impact on the existing business contribution of $2.4 million in 2013.
Total segment profit increased $169.5 million, or 24%, to $884.9 million in 2012, compared with $715.4 million in 2011, mainly attributable to the effect of the following factors:
in the Developed Markets segment:
an increase in contribution of $508.9 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, primarily from the product sales of Dermik, Ortho Dermatologics, iNova, OraPharma, Medicis and University Medical, including higher expenses for acquisition accounting adjustments related to inventory of $67.9 million, in the aggregate; 

41


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

an increase in contribution from product sales from the existing business (including a favorable impact of $20.5 million related to the acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012 and the declines described below) of $216.2 million, driven by (i) continued growth of the core dermatology brands, including Zovirax®, Elidel®, Acanya® and CeraVe®, and the growth of these seasonal brands has increased the impact of seasonality on our business, particularly during the third quarter of 2012 “back to school” season, (ii) higher sales of Xenazine® which carries a lower margin than the rest of the neurology portfolio, and (ii) a lower supply price for Zovirax® inventory purchased from GSK, as a result of the new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, such that we retain a greater share of the economic interest in the brand; and
alliance revenue of $45.0 million recognized in the second quarter of 2012, related to the milestone payment received from GSK in connection with the launch of Potiga®.
Those factors were partially offset by:
an increase in operating expenses (including amortization and impairments of finite-live intangible assets) of $496.1 million in 2012, primarily related to the higher amortization expense of $109.8 million in 2012 related to ezogabine/retigabine, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011 and the acquisitions of new businesses within the segment;
a decrease in contribution of $105.1 million, in the aggregate, in 2012, primarily related to lower sales of higher margin products such as Cardizem® CD, Cesamet®, Diastat®, Ultram® ER and Wellbutrin XL® as a result of the impact of generic competition;
a decrease in contribution of $45.8 million in 2012, primarily related to divestitures and discontinuations. The largest contributor to the decrease was a reduction in IDP-111 royalty revenue of $42.8 million in 2012, as a result of the sale of IDP-111 in February 2012;
alliance revenue of $40.0 million recognized in the second quarter of 2011, related to the milestone payment received from GSK in connection with the launch of Trobalt®; and
a decrease in contribution from service revenue of $6.7 million in 2012.
in the Emerging Markets segment:
an increase in contribution of $188.3 million, in the aggregate, from all 2011 acquisitions and all 2012 acquisitions, in 2012, primarily from the sale of Sanitas, iNova, PharmaSwiss, Probiotica and Gerot Lannach products, including lower expenses for acquisition accounting adjustments related to inventory of $21.0 million, in the aggregate, in 2012;
an increase in contribution from product sales from the existing business of $53.1 million in 2012, including a favorable impact of $6.8 million related to the acquisition accounting adjustments related to inventory in 2011 that did not similarly occur in 2012; and
an increase in alliance and service revenue of $6.7 million.
Those factors were partially offset by:
an increase in operating expenses (including amortization and impairments of finite-live intangible assets) of $112.6 million in 2012, primarily associated with the acquisitions of new businesses within the segment;
a negative foreign currency exchange impact on the existing business contribution of $31.0 million in 2012; and
a negative impact from divestitures and discontinuations of $10.6 million in 2012.
Operating Expenses
The following table displays the dollar amount of each operating expense category for each of the last three years, the percentage of each category compared with total revenues in the respective year, and the dollar and percentage changes in the dollar amount of each category. Percentages may not sum due to rounding.

42


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

 
 
Years Ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%(1)
 
$
 
%
 
$
 
%
Cost of goods sold (exclusive of amortization and impairments of finite-lived intangible assets shown separately below)
 
1,846,314

 
32
 
905,095

 
26
 
683,750

 
28
 
941,219

 
104
 
221,345

 
32
Cost of alliance and service revenues
 
58,806

 
1
 
64,601

 
2
 
12,348

 
1
 
(5,795
)
 
(9)
 
52,253

 
NM
Selling, general and administrative
 
1,305,164

 
23
 
756,083

 
22
 
572,472

 
24
 
549,081

 
73
 
183,611

 
32
Research and development
 
156,783

 
3
 
79,052

 
2
 
65,687

 
3
 
77,731

 
98
 
13,365

 
20
Amortization and impairments of finite-lived intangible assets
 
1,901,977

 
33
 
928,885

 
27
 
557,814

 
23
 
973,092

 
105
 
371,071

 
67
Restructuring, integration and other costs
 
514,825

 
9
 
344,387

 
10
 
97,667

 
4
 
170,438

 
49
 
246,720

 
NM
In-process research and development impairments and other charges
 
153,639

 
3
 
189,901

 
5
 
109,200

 
4
 
(36,262
)
 
(19)
 
80,701

 
74
Acquisition-related costs
 
36,416

 
1
 
78,604

 
2
 
32,964

 
1
 
(42,188
)
 
(54)
 
45,640

 
138
Acquisition-related contingent consideration
 
(29,259
)
 
(1)
 
(5,266
)
 
 
(10,986
)
 
 
(23,993
)
 
NM
 
5,720

 
(52)
Other expense
 
234,442

 
4
 
59,349

 
2
 
6,575

 
 
175,093

 
NM
 
52,774

 
NM
Total operating expenses
 
6,179,107

 
107
 
3,400,691

 
98
 
2,127,491

 
88
 
2,778,416

 
82
 
1,273,200

 
60
____________________________________
(1) — Represents the percentage for each category as compared to total revenues.
NM — Not meaningful
Cost of Goods Sold (exclusive of amortization and impairments of finite-lived intangible assets)
Cost of goods sold includes: manufacturing and packaging; the cost of products we purchase from third parties; royalty payments we make to third parties; depreciation of manufacturing facilities and equipment; and lower of cost or market adjustments to inventories. Cost of goods sold excludes the amortization and impairments of finite-lived intangible assets described separately below under “— Amortization and Impairments of Finite-Lived Intangible Assets”.
Cost of goods sold increased $941.2 million, or 104%, to $1,846.3 million in 2013, compared with $905.1 million in 2012. As a percentage of revenue, Cost of goods sold increased to 32% in 2013 as compared to 26% in 2012, primarily due to:
the impact of higher acquisition accounting adjustments of $293.6 million in 2013 (equates to 5.1% of 2013 revenue) related to acquired inventories that were sold in 2013;
an unfavorable impact from product mix related to (i) the product portfolio acquired as part of the B&L Acquisition and (ii) decreased sales of the Zovirax® franchise, Retin-A Micro®, BenzaClin® and Cesamet ® which have a higher gross profit margin than our overall margin; and
higher sales of Xenazine® which has a lower margin than the rest of the neurology portfolio.
These factors were partially offset by:
a favorable impact from product mix related to the Medicis product portfolio; and
the benefits realized from worldwide manufacturing rationalization initiatives primarily from Latin America and Canada.
Cost of goods sold increased $221.3 million, or 32%, to $905.1 million in 2012, compared with $683.8 million in 2011. As a percentage of revenue, Cost of goods sold decreased to 26% in 2012 as compared to 28% in 2011, primarily due to:
a favorable impact from product mix and the benefits realized from worldwide manufacturing rationalization initiatives primarily from Latin America and Canada; and
the effect of the lower supply price for Zovirax® inventory purchased from GSK as a result of a new supply agreement that became effective with the acquisition of the U.S. rights to Zovirax®, which favorably impacted cost of goods sold during the first and second quarters of 2012 as compared to the corresponding periods in 2011.
These factors were partially offset by:
an unfavorable foreign exchange impact on contribution, as the foreign exchange benefit to Cost of Goods Sold was more than offset by the negative foreign exchange impact on product sales;

43


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

increased sales of Xenazine® which has a lower margin than the rest of the neurology portfolio;
decreased sales of Cesamet® in Canada which has a higher margin than the rest of our portfolio; and
the impact of higher acquisition accounting adjustments of $19.5 million, to $78.8 million in 2012, compared with $59.3 million in 2011, related to acquired inventories that were subsequently sold in 2012.
Cost of Alliance and Service Revenues
Cost of alliance and services revenues reflects the costs associated with providing contract services to, and generating alliance revenue from, external customers.
Cost of alliance and service revenues decreased $5.8 million, or 9%, to $58.8 million in 2013, compared with $64.6 million in 2012, primarily due to lower contract manufacturing revenue from the Laval, Quebec facility, which was acquired as part of the acquisition of the Dermik business from Sanofi in December 2011.
Cost of alliance and service revenues increased $52.3 million to $64.6 million in 2012, compared with $12.3 million in 2011, primarily due to the inclusion of cost of service revenue from Dermik of $35.7 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include: employee compensation costs associated with sales and marketing, finance, legal, information technology, human resources, and other administrative functions; outside legal fees and consultancy costs; product promotion expenses; overhead and occupancy costs; depreciation of corporate facilities and equipment; and other general and administrative costs.
Selling, general and administrative expenses increased $549.1 million, or 73%, to $1,305.2 million in 2013, compared with $756.1 million in 2012, primarily due to:
increased expenses in our Developed Markets segment ($367.8 million) primarily driven by the acquisitions of new businesses within the segment, including the B&L and Medicis acquisitions, partially offset by the realization of cost synergies;
increased expenses in our Emerging Markets segment ($155.2 million), primarily driven by the acquisitions of new businesses within this segment, including the B&L Acquisition, partially offset by the realization of cost synergies; and
net incremental compensation expense of $15.5 million in the second quarter of 2013 related to certain equity awards held by current non-management directors which were modified from units settled in common shares to units settled in cash. See note 17 to the 2013 Financial Statements for additional information.
As a percentage of revenue, Selling, general and administrative expenses increased to 23% in 2013 as compared to 22% in 2012, primarily due to timing of costs incurred and realization of synergies from the B&L Acquisition. The increase in 2013 was also impacted by the net incremental compensation expense of $15.5 million recognized in the second quarter of 2013 (equates to 0.3% of 2013 revenue) described in the preceding paragraph.
Selling, general and administrative expenses increased $183.6 million, or 32%, to $756.1 million in 2012, compared with $572.5 million in 2011 (as a percentage of revenue, Selling, general and administrative expenses decreased to 22% in 2012 as compared to 24% in 2011), primarily due to:
increased expenses in our Developed Markets segment ($172.9 million) and Emerging Markets segment ($51.7 million), primarily driven by the acquisitions of new businesses within these segments.
This factor was partially offset by:
decreases of $24.9 million in share-based compensation expense charged to selling, general and administrative expenses in 2012, primarily due to the vesting of performance stock units as a result of achieving specified performance criteria recognized in 2011 and the impact of the stock option modification recognized in the first quarter of 2011, partially offset by an incremental charge of $4.8 million in 2012 as some of our performance-based RSU grants triggered a partial payout as a result of achieving certain share price appreciation conditions. Refer to note 17 to the 2013 Financial Statements for further details.
Research and Development Expenses

44


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

Expenses related to research and development programs include: employee compensation costs; overhead and occupancy costs; depreciation of research and development facilities and equipment; clinical trial costs; clinical manufacturing and scale-up costs; and other third-party development costs.
Research and development expenses increased $77.7 million, or 98%, to $156.8 million in 2013, compared with $79.1 million in 2012, primarily due to spending on programs acquired in the B&L Acquisition, including latanoprostene bunod and the next generation silicone hydrogel lens (Bausch + Lomb Ultra), partially offset by lower spending on ezogabine/retigabine reflecting the U.S. launch in the second quarter of 2012. See note 3 to the 2013 Financial Statements for additional information relating to the B&L Acquisition.
Research and development expenses increased $13.4 million, or 20%, to $79.1 million in 2012, compared with $65.7 million in 2011, primarily reflecting spending for a Phase 4 study for Wellbutrin XL® and life-cycle management programs, partially offset by lower spending on ezogabine/retigabine reflecting the U.S. launch in the second quarter of 2012 and the IDP-108 program (an antifungal targeted to treat onychomycosis, a fungal infection of the fingernails and toenails).
Amortization and Impairments of Finite-Lived Intangible Assets
Amortization and impairments of finite-lived intangible assets increased $973.1 million, or 105%, to $1,902.0 million in 2013, compared with $928.9 million in 2012, primarily due to (i) a net increase of $525.1 million for ezogabine/retigabine, as the impairment charge of $551.6 million in the third quarter of 2013 was partially offset by lower amortization for ezogabine/retigabine of $26.5 million in the fourth quarter of 2013, (ii) the amortization of the Medicis, B&L, Eisai and Obagi identifiable intangible assets of $351.9 million, in the aggregate, in 2013, (iii) impairment charges of $31.5 million related to the write-down of the carrying values of assets held for sale related to certain suncare and skincare brands sold primarily in Australia, to their estimated fair value less costs to sell in 2013, (iv) $22.2 million related to the write-off of the carrying value of the Opana® intangible asset in 2013, (v) an increase in the write-offs of $16.9 million, in the aggregate, in 2013, primarily related to the discontinuation of certain products in the Brazilian, Canadian, and Polish markets, and (vi) $10.0 million related to the write-off of certain OTC skincare products in the U.S. in 2013.
As part of our ongoing assessment of potential impairment indicators related to our finite-lived and indefinite-lived intangible assets, we will closely monitor the performance of our product portfolio. If our ongoing assessments reveal indications of impairment, we may determine that an impairment charge is necessary and such charge could be material.
Amortization and impairments of finite-lived intangible assets increased $371.1 million, or 67%, to $928.9 million in 2012, compared with $557.8 million in 2011, primarily due to (i) the amortization of the iNova, Dermik, Ortho Dermatologics, OraPharma, Sanitas, Gerot Lannach, PharmaSwiss and Medicis identifiable intangible assets of $210.5 million, in the aggregate, in 2012, (ii) higher amortization of ezogabine/retigabine of $109.8 million in 2012, which was reclassified from IPR&D to a finite-lived intangible asset in December 2011, (iii) impairment charges of $31.3 million related to the write-down of the carrying values of intangible assets related to certain suncare and skincare brands sold primarily in Australia, which were classified as assets held for sale as of December 31, 2012, to their estimated fair values less costs to sell, (iv) an $18.7 million impairment charge related to the write-down of the carrying value of the Dermaglow® intangible asset, which was classified as an asset held for sale as of December 31, 2012, to its estimated fair value less costs to sell, and (v) impairment charges of $13.3 million related to the discontinuation of certain products in the Brazilian and Polish markets.
Restructuring, Integration and Other Costs
We recognized restructuring, integration, and other costs of $514.8 million in 2013, compared with $344.4 million and $97.7 million in 2012 and 2011, respectively, primarily related to the B&L and Medicis acquisitions and other acquisitions. Refer to note 6 to the 2013 Financial Statements for further details.
In-Process Research and Development Impairments and Other Charges
In-process research and development impairments and other charges represents impairments and other costs associated with compounds, new indications, or line extensions under development that have not received regulatory approval for marketing at the time of acquisition. IPR&D acquired through an asset acquisition is written off at the acquisition date if the assets have no alternative future use. IPR&D acquired in a business combination is capitalized as indefinite-lived intangible assets (irrespective of whether these assets have an alternative future use) until completion or abandonment of the related research and development activities. Costs associated with the development of acquired IPR&D assets are expensed as incurred.
In 2013, we recorded charges of $153.6 million, primarily due to the write-off of (i) $93.8 million relating to the modified-release formulation of ezogabine/retigabine, (ii) $27.3 million of IPR&D assets acquired by Valeant as part of Aton Pharma, Inc.

45


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

(“Aton”) acquisition in May 2010, mainly related to the termination of the A007 (Lacrisert®) development program, (iii) $14.4 million related to the termination of the Mapracorat development program, and (iv) $8.8 million related to a Xerese® life-cycle product. Refer note 12 to the 2013 Financial Statements for additional information.
In 2012, we recorded charges of $189.9 million, primarily due to (i) $133.4 million for the write-off of an acquired IPR&D asset related to the IDP-107 dermatology program, which was acquired in September 2010 as part of the Merger, (ii) an impairment charge of $24.7 million related to a Xerese® life-cycle product, (iii) $12.0 million related to a payment to terminate a research and development commitment with a third party, (iv) $5.0 million related to an upfront payment to acquire the North American rights to Emervel®, and (v) $5.0 million related to the IDP-108 program, including an upfront payment to expand our rights to IDP-108 to include additional territories as well as a milestone payment. Refer note 12 to the 2013 Financial Statements for additional information.
In 2011, we recorded charges of $109.2 million primarily related to the impairment of acquired IPR&D assets relating to the A002, A004, and A006 programs acquired as part of the Aton acquisition in 2010, as well as the IDP-109 and IDP-115 dermatology programs ($105.2 million). The impairment charges were triggered in the fourth quarter of 2011 due to unfavorable study results, feedback received from the FDA which would result in the incurrence of higher costs to perform additional studies, reassessment of risk and the probability of success, and/or pipeline prioritization decisions resulting in the re-allocation of our resources to other research and development (“R&D”) programs.
Acquisition-Related Costs
Acquisition-related costs decreased $42.2 million, or 54%, to $36.4 million in 2013, compared with $78.6 million in 2012, reflecting higher expenses incurred in 2012 related to the Medicis and OraPharma acquisitions and other 2012 acquisitions, partially offset by acquisition activities in 2013 primarily related to the B&L and Obagi acquisitions. See note 3 to the 2013 Financial Statements for additional information regarding business combinations.
Acquisition-related costs increased $45.6 million, or 138%, to $78.6 million in 2012, compared with $33.0 million in 2011, reflecting increased acquisition activity during 2012, primarily driven by costs associated with the Medicis Acquisition. The Medicis Acquisition costs included $39.2 million of expenses incurred with respect to an agreement with Galderma S.A (“Galderma”) which, among other things, resolved all claims asserted in Galderma’s pending litigation related to our acquisition of Medicis. Refer to note 3 to the 2013 Financial Statements for further details.
Acquisition-Related Contingent Consideration
In 2013, we recognized an acquisition-related contingent consideration gain of $29.3 million. The net gain was primarily driven by:
a net gain related to the Elidel®/Xerese®/Zovirax® agreement entered into with Meda Pharma SARL (“Meda”) in June 2011. In April 2013, Mylan Inc. launched a generic Zovirax® ointment, which was earlier than we previously anticipated. Also, in April 2013, we entered into an agreement with Actavis to launch the authorized generic ointment for Zovirax®. Refer to note 5 to the 2013 Financial Statements for further information regarding the agreement with Actavis. As a result of analysis in the third quarter of 2013 of performance trends since the generic entrant, we adjusted the projected revenue forecast, resulting in an acquisition-related contingent consideration net gain of $20.0 million in 2013; and
a net gain of $6.9 million, which resulted from the termination, in the third quarter of 2013, of the A007 (Lacrisert®) development program, which impacted the probability associated with potential milestone payments. Refer to note 7 to the 2013 Financial Statements for further information.
In 2012, we recognized an acquisition-related contingent consideration gain of $5.3 million, primarily driven by (1) a net gain of $10.3 million related to the iNova acquisition due to changes in the estimated probability of achieving the related milestones, partially offset by (2) a net loss of $6.5 million related to the Elidel®/Xerese®/Zovirax® agreement entered into in June 2011, due to fair value adjustments to reflect accretion for the time value of money, partially offset by changes in the projected revenue forecast. Refer to note 3 to the 2013 Financial Statements for further details.
In 2011, we recognized an acquisition-related contingent consideration gain of $11.0 million, primarily driven by the changes in fair value of acquisition-related contingent consideration as follows: (1) a gain of $13.2 million and $9.2 million related to the PharmaSwiss and Aton acquisitions, respectively, partially offset by (2) a loss of $11.2 million related to the Elidel®/Xerese®/Zovirax® agreement entered into in June 2011.
Other Expense

46


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

Other expense includes: legal settlements and related fees and gains/losses from the sale of non-core assets.
In 2013, we recorded charges in other expense of $234.4 million, primarily due to (i) a charge of $142.5 million in the third quarter of 2013 related to a settlement agreement with Anacor Pharmaceuticals, Inc. (“Anacor”), (ii) a charge of $50.0 million in the fourth quarter of 2013 related to AntiGrippin® litigation, and (iii) a loss of $10.2 million related to the sale of certain skincare products sold primarily in Australia in the fourth quarter of 2013. Refer to note 4 and note 24 to the 2013 Financial Statements for further details related to the divestiture of certain skincare products sold in Australia, and the Anacor settlement and AntiGrippin® litigation, respectively.
In 2012, we recorded charges in other expense of $59.3 million, primarily due to legal settlement charges of $56.8 million, mainly related to a settlement of antitrust litigation and the associated legal fees. Refer to note 24 to the 2013 Financial Statements for further details.
In 2011, we recorded charges of $6.6 million, primarily due to (i) the legal settlement charges of $11.8 million primarily due to the settlement of litigation and disputes related to revenue-sharing arrangements with, or other payment obligations to, third parties, partially offset by (ii) a gain of $5.3 million on the out-license of the product rights for Cloderm® in 2011. Refer to note 4 to the 2013 Financial Statements for further details.
Non-Operating Income (Expense)
The following table displays each non-operating income or expense category for each of the last three years, and the dollar and percentage changes in the dollar amount of each category.
 
 
Years Ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s; Income (Expense))
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Interest income
 
8,023

 
5,986

 
4,084

 
2,037

 
34
 
1,902

 
47
Interest expense
 
(844,316
)
 
(481,596
)
 
(334,526
)
 
(362,720
)
 
75
 
(147,070
)
 
44
Loss on extinguishment of debt
 
(65,014
)
 
(20,080
)
 
(36,844
)
 
(44,934
)
 
NM
 
16,764

 
(45)
Foreign exchange and other
 
(9,465
)
 
19,721

 
26,551

 
(29,186
)
 
(148)
 
(6,830
)
 
(26)
Gain on investments, net
 
5,822

 
2,056

 
22,776

 
3,766

 
183
 
(20,720
)
 
(91)
Total non-operating expense
 
(904,950
)
 
(473,913
)
 
(317,959
)
 
(431,037
)
 
91
 
(155,954
)
 
49
____________________________________
NM — Not meaningful
Interest Expense
Interest expense increased $362.7 million, or 75%, to $844.3 million in 2013, compared with $481.6 million in 2012, primarily reflecting the following:
an increase of $308.1 million, in the aggregate, in 2013, primarily related to higher debt balances, driven by the new borrowings during the period. Refer to note 14 to the 2013 Financial Statements for further details; and
an increase of $53.1 million, in the aggregate, in 2013, related to the non-cash amortization of debt discounts and deferred financing costs, including the write-off of deferred financing costs related to the commitment letter entered into in connection with the financing of the B&L Acquisition. Refer to note 14 to the 2013 Financial Statements for further details.
As a result of the financing obtained in connection with the B&L Acquisition, we expect an increase in interest expense in future years. Refer to note 14 to the 2013 Financial Statements for further details.
Interest expense increased $147.1 million, or 44%, to $481.6 million in 2012, compared with $334.5 million in 2011, primarily reflecting the following:
an increase of $167.9 million, in the aggregate, in 2012, related to the borrowings under our senior secured credit facilities and our senior notes; and
an increase of $9.3 million, in the aggregate, in 2012, related to the non-cash amortization of debt discounts and deferred financing costs, including the write-off of deferred financing costs related to the commitment letter entered into in

47


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

connection with the financing of the Medicis Acquisition. Refer to note 14 to the 2013 Financial Statements for further details.
Those factors were partially offset by:
a decrease of $10.7 million in 2012, related to the repurchases and the settlement of 5.375% senior convertible notes due 2014 (the “5.375% Convertible Notes”);
a decrease of $10.0 million in 2012 due to the repayment of our previous term loan A facility in the first quarter of 2011;
a decrease of $4.8 million in 2012 due to an adjustment to amortization of debt issuance costs related to a prior period; and
a decrease of $4.4 million in 2012 related to the redemption of 4.0% convertible subordinated notes due 2013 (the “4% Convertible Notes”) in the second quarter of 2011.
Loss on Extinguishment of Debt
In 2013, we recognized losses of $65.0 million, related primarily due to (i) the redemption of 6.50% senior notes due 2016 (the “2016 Notes”) in December 2013, (ii) the repricing of our Series D tranche B term loan facility and our Series C of the tranche B term loan facility on February 21, 2013, and (iii) the redemption of 9.875% senior notes assumed in connection with the B&L Acquisition in the third quarter of 2013 (see note 3 to the 2013 Financial Statements for additional information). Refer to note 19 to the 2013 Financial Statements for further details.
In 2012, we recognized losses of $20.1 million, mainly on refinancing of our term loan B facility on October 2, 2012 and the settlement of the 5.375% Convertible Notes.
In 2011, we recognized losses of $36.8 million, primarily related to the repurchase of a portion of the 5.375% Convertible Notes ($31.6 million) and the share settlement of the 4.0% Convertible Notes ($4.7 million). Refer to note 16 to the 2013 Financial Statements for further details.
Foreign Exchange and Other
Foreign exchange and other decreased $29.2 million, or 148%, to a loss of $9.5 million in 2013, compared with a gain of $19.7 million in 2012, primarily due to (i) the $29.4 million gain realized in 2012 on an intercompany loan that was not designated as permanent in nature that did not similarly occur in 2013, (ii) an unrealized foreign exchange loss of $8.3 million on an intercompany financing arrangement in the first quarter of 2013, partially offset by (iii) the translation gains on intercompany loans in 2013.
Foreign exchange and other gain decreased $6.8 million, or 26%, to $19.7 million in 2012, compared with $26.6 million in 2011. The gain in 2012 was primarily due to a gain of $29.4 million related to an intercompany loan that was not designated as permanent in nature, and therefore the impact of changes in foreign currency exchange rates was recognized in our consolidated statements of (loss) income. This was partially offset by the translation losses from our European operations in 2012.
Gain on Investments, Net
In 2013, we recognized gain on investment, net of $5.8 million. The gain on investment, net was primarily driven by a realized gain of $4.0 million on the sale of an equity investment acquired as part of the Medicis Acquisition in December 2012.
In March 2011, in connection with an offer to acquire Cephalon, we invested $60.0 million to acquire shares of common stock of Cephalon. On May 2, 2011, Cephalon announced that it had agreed to be acquired by Teva Pharmaceutical Industries Inc. and, consequently, we disposed of our entire equity investment in Cephalon for net proceeds of $81.3 million, which resulted in a net realized gain of $21.3 million that was recognized in earnings in the second quarter of 2011.
Income Taxes
The following table displays the dollar amount of the current and deferred provisions for income taxes for each of the last three years, and the dollar and percentage changes in the dollar amount of each provision. Percentages may not sum due to rounding.

48


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

 
 
Years Ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2012 to 2013
 
2011 to 2012
($ in 000s; (Income) Expense)
 
$
 
$
 
$
 
$
 
%
 
$
 
%
Current income tax expense
 
83,413

 
63,526

 
39,891

 
19,887

 
31
 
23,635

 
59
Deferred income tax benefit
 
(534,196
)
 
(341,729
)
 
(217,450
)
 
(192,467
)
 
56
 
(124,279
)
 
57
Total recovery of income taxes
 
(450,783
)
 
(278,203
)
 
(177,559
)
 
(172,580
)
 
62
 
(100,644
)
 
57
____________________________________
NM — Not meaningful
In 2013, our effective tax rate was impacted by (i) income earned in jurisdictions with a lower statutory rate than in Canada; (ii) the increase in liabilities for uncertain tax positions; (iii) taxable losses in Canada for which no tax benefit will be recognized; (iv) non-deductible stock based compensation and realized foreign exchange gains where a full valuation allowance is recorded against tax loss carryforwards, (v) acquisitions, primarily the B&L Acquisition, which included the expansion of our business into a significant amount of new taxing jurisdictions; and (vi) losses in a jurisdiction with a higher statutory tax rate than in Canada. Our consolidated foreign rate differential reflects the net total of the tax cost or benefit of income earned or losses incurred in jurisdictions outside of Canada as compared to the net total of the tax cost or benefit of such income (on a jurisdictional basis) at the Canadian statutory rate. Tax costs below the Canadian statutory rate generate a beneficial foreign rate differential as do tax benefits generated in jurisdictions where the statutory tax rate exceeds the Canadian statutory tax rate. It is not expected that the net total of the foreign rate differentials generated in each jurisdiction in which we operate will bear a direct relationship to the net total amount of foreign income (or loss) earned outside of Canada.
In the third quarter of 2013, we assessed the realizability of the U.S. foreign tax credits based on an update to the expectations of future foreign source income in light of the B&L Acquisition. It was determined that it was more likely than not that these credits would not be realizable and as such a valuation allowance was established against them.
In each of the fourth quarters of 2012 and 2011, we assessed the realizability of a portion of our deferred tax assets related to operating loss carryforwards in the U.S. In 2011, management determined that U.S. federal losses previously subject to a valuation allowance due to limitation restrictions should be written off and the corresponding valuation allowance reversed as of December 31, 2011. In Canada, we released valuation allowance against a portion of the deferred tax assets in respect of our Canadian tax attributes recognized to the extent of deferred tax liabilities from acquisition. We do not believe, due to the purchase price paid for the B&L Acquisition, that any potential 382 limitation to be applied to the acquired B&L net operating losses will have an impact on their realizability. In determining the amount of the valuation allowance that was necessary, we considered the amount of U.S. tax loss carryforwards, Canadian tax loss carryforwards, scientific research and experimental development pool, and investment tax credits that we would more likely than not be able to utilize based on future sources of income.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table presents a summary of our unaudited quarterly results of operations and operating cash flows in 2013 and 2012:
 
 
2013
 
2012
 
 
Q1
 
Q2
 
Q3
 
Q4
 
Q1
 
Q2
 
Q3
 
Q4
($ in 000s)
 
$
 
$
 
$
 
$
 
$
 
$
 
$
 
$
Revenue
 
1,068,355

 
1,095,762

 
1,541,731

 
2,063,757

 
789,853

 
820,090

 
884,140

 
986,293

Expenses(1)
 
951,349

 
954,249

 
2,433,229

 
1,840,280

 
728,357

 
733,280

 
854,676

 
1,084,378

Operating income (loss)
 
117,006

 
141,513

 
(891,498
)
 
223,477

 
61,496

 
86,810

 
29,464

 
(98,085
)
Net (loss) income attributable to Valeant Pharmaceuticals International, Inc.
 
(27,530
)
 
10,866

 
(973,243
)
 
123,765

 
(12,921
)
 
(21,607
)
 
7,645

 
(89,142
)
(Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
(0.09
)
 
0.04

 
(2.92
)
 
0.37

 
(0.04
)
 
(0.07
)
 
0.03

 
(0.29
)
Diluted
 
(0.09
)
 
0.03

 
(2.92
)
 
0.36

 
(0.04
)
 
(0.07
)
 
0.02

 
(0.29
)
Net cash provided by operating activities
 
255,349

 
305,028

 
201,712

 
279,868

 
167,230

 
254,602

 
166,827

 
67,919

____________________________________
(1)
In the third quarter of 2013, we recognized an impairment charge of $551.6 million related to ezogabine/retigabine (immediate-release formulation) which is co-developed and marketed under a collaboration agreement with GSK. In addition, in the third quarter of 2013, we wrote off an IPR&D asset of $93.8

49


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

million relating to a modified-release formulation of ezogabine/retigabine. See note 7 to the 2013 Financial Statements for additional information regarding these charges.
Fourth Quarter of 2013 Compared to Fourth Quarter of 2012
Results of Operations
Total revenues increased $1,077.5 million, or 109%, to $2,063.8 million in the fourth quarter of 2013, compared with $986.3 million in the fourth quarter of 2012, reflecting the following factors:
incremental product sales revenue of $153.4 million, in the aggregate, from all 2012 acquisitions in the fourth quarter of 2013, primarily from the Medicis Acquisition. We also recognized incremental product sales revenue of $945.0 million, in the aggregate, from all 2013 acquisitions in the fourth quarter of 2013, primarily from the B&L, Natur Produkt, and Obagi acquisitions. The incremental product sales revenue from the 2012 and 2013 acquisitions includes a negative foreign exchange impact of $12.7 million, in the aggregate, in the fourth quarter of 2013; and
incremental product sales revenue of $92.2 million in 2013, related to growth from the existing business (excluding the declines in Developed Markets segment described below), driven by sales of (i) Elidel® and Arestin®, (ii) orphan products (Syprine® and Mephyton®), and (iii) recently launched authorized generic products.
Those factors were partially offset by:
decrease in product sales in the Developed Markets segment of $77.7 million, in the aggregate, in the fourth quarter of 2013, primarily related to a decline in sales of the Retin-A Micro®, Zovirax® franchise and BenzaClin® due to generic competition;
a negative impact from divestitures and discontinuations of $12.6 million in the fourth quarter of 2013;
a decrease in alliance revenue of $10.5 million in the fourth quarter of 2013, primarily in our Developed Markets segment; and
a negative foreign currency impact on the existing business of $11.0 million in the fourth quarter of 2013.
Net income attributable to Valeant Pharmaceuticals International, Inc. was $123.8 million in the fourth quarter of 2013, compared with net loss attributable to Valeant Pharmaceuticals International, Inc. of $89.1 million in the fourth quarter of 2012, reflecting the following factors:
an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of finite-lived intangible assets) of $643.6 million, mainly related to the incremental contribution of B&L, Medicis, and Natur Produkt;
a decrease of $92.9 million in restructuring, integration and other costs. Refer to note 6 to the 2013 Financial Statements for further details;
a decrease of $40.6 million in acquisition-related costs, primarily reflecting higher costs for the Medicis Acquisition in the prior year;
an increase in the recovery of income taxes of $17.6 million primarily due to an increased amortization addback related to large increases in the intangible book basis pursuant to various acquisitions during 2013; and
a decrease of $15.2 million in in-process research and development impairments and other charges mainly due to charges in the prior year that did not similarly occur in the fourth quarter of 2013, including (i) an impairment charge of $24.7 million related to a Xerese® life-cycle product, (ii) $5.0 million related to an upfront payment to acquire the North American rights to Emervel®, and (iii) $5.0 million related to an upfront payment to expand our rights to IDP-108 to include additional territories. This was partially offset by a $14.4 million write-off of the Mapracorat product and an $8.8 million write-off of a Xerese® life-cycle product, both of which were recognized in the fourth quarter of 2013.
Those factors were partially offset by: