Valeant Pharmaceuticals International

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

3300 Hyland Avenue
Costa Mesa, California 92626
(Address of principal executive offices) (Zip Code)


Exhibit Number		Description

99.1		Press release dated November 25, 2003.

99.2		Information contained under the caption “Risk Factors” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

99.3		Information contained under the caption “Selected Consolidated Financial and Other Data” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

99.4		Information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

99.5		Information contained under the caption “Business” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

On November 25, 2003, Valeant Pharmaceuticals International (the “Company”) issued a press release announcing its intention to offer, subject to market and other conditions, up to $275 million principal amount of Senior Notes due 2011 (the “Notes”) (A) to qualified institutional buyers in an offering exempt from registration pursuant to Rule 144A under the Securities Act of 1933 and (B) outside the United States to persons other than U.S. Persons in reliance upon Regulation S under the Securities Act of 1933. The November 25, 2003 press release is attached as Exhibit 99.1 to this report and is incorporated herein by this reference.

The information contained under the captions “Risk Factors,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” in the Company’s preliminary Offering Memorandum dated November 25, 2003, to be used in connection with the offer and sale of the Notes, is attached as Exhibits 99.2, 99.3, 99.4, and 99.5, respectively, to this report and is incorporated herein by this reference.

The information in this Current Report on Form 8-K, including the exhibits thereto, will not be treated as filed for the purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section. This information will not be incorporated by reference into a filing under the Securities Act of 1933, or into another filing under the Exchange Act, unless that filing expressly refers to specific information in this report.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


Exhibit Number		Description

99.1		Press release dated November 25, 2003.

99.2		Information contained under the caption “Risk Factors” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

99.3		Information contained under the caption “Selected Consolidated and Other Financial Data” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

99.4		Information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

99.5		Information contained under the caption “Business” of the registrant’s preliminary Offering Memorandum dated November 25, 2003.

Valeant Pharmaceuticals International Announces
Proposed Private Offering of Senior Notes

COSTA MESA, CA, November 25, 2003 – Valeant Pharmaceuticals International (NYSE: VRX) announced today its intention to offer, subject to market and other conditions, approximately $275 million in principal amount of Senior Notes due 2011. Ribapharm Inc., a wholly owned subsidiary of Valeant Pharmaceuticals, will also be an obligor with respect to the notes, jointly and severally with Valeant Pharmaceuticals, until certain events occur.

Valeant Pharmaceuticals intends to use a portion of the net proceeds of the offering to retire, pursuant to privately negotiated transactions, open market purchases, a tender offer or otherwise, all of the company’s outstanding 6 1/2 percent Convertible Subordinated Notes due 2008 that are not retired with the net proceeds of the company’s recently issued Convertible Subordinated Notes due 2010 and 2013. Any remaining proceeds not used to retire the 6 1/2 percent Convertible Notes will be used for general corporate purposes, including potential acquisitions.

On November 24, 2003, the company retired $139.6 million of the 6 1/2 percent Convertible Subordinated Notes through open market purchases. There are approximately $326 million in principal amount of the 6 1/2 percent Convertible Subordinated Notes outstanding.

This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities. The notes will be privately offered only to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The notes have not been registered under the Securities Act, or any state securities laws, and unless so registered may not be offered or sold in the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.

Valeant Pharmaceuticals International (NYSE: VRX) is a global, publicly traded, research-based specialty pharmaceutical company that discovers, develops,

manufactures and markets a broad range of pharmaceutical products. More information about Valeant can be found at www.valeant.com.

This press release contains forward-looking statements within the meaning of the federal securities laws relating to expectations, plans or prospects for Valeant Pharmaceuticals, including those relating to whether or not Valeant Pharmaceuticals will offer the notes or consummate the offering, the anticipated terms of the notes and the offering and the anticipated use of proceeds of the offering. These statements are based upon the current expectations and beliefs of Valeant Pharmaceuticals’ management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond Valeant Pharmaceuticals’ control and the risk factors and other cautionary statements discussed in Valeant Pharmaceuticals’ filings with the U.S. Securities and Exchange Commission.

In analyzing an investment in the notes offered by this offering memorandum, prospective investors should carefully consider, along with other matters referred to in this offering memorandum, the information set forth below. These and other risks could materially and adversely affect our businesses, operating results or financial condition. You should also refer to the other information contained or incorporated by reference in this offering memorandum before making an investment decision.

If we cannot successfully develop or obtain future products, our growth may be delayed.

Our future growth will depend, in large part, upon our ability to develop or obtain and commercialize new products and new formulations of, or indications for, current products. We are engaged in an active research and development program involving compounds owned by us or licensed from others which we may commercially develop in the future. The process of successfully commercializing products is time consuming, expensive and unpredictable. There can be no assurance that we will be able to develop or acquire new products, obtain regulatory approvals to use these products for proposed or new clinical indications, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or gain market acceptance for such products. It may be necessary for us to enter into other licensing arrangements, similar to our arrangements with Schering-Plough and Roche, with other pharmaceutical companies in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all.

On November 6, 2003, we announced that we were commencing Phase 3 clinical trials of Viramidine. There can be no assurance that our clinical trials for Viramidine will be successful, that we will be granted approval to market Viramidine for the indication we are seeking or that Viramidine will be a commercially successful product. Additionally, there is the potential for product liability claims from patients participating in the clinical trials in the event a participant is harmed by the product. We currently maintain clinical trial insurance. There is no assurance, however, that such insurance will be sufficient to cover all claims.

Likelihood of imminent introduction of generic products puts ribavirin royalties at risk and may impact our ability to finance research and development activities.

Royalty revenues earned by Ribapharm under our ribavirin license agreements with Schering-Plough and Roche represents an important source of revenues to us. Schering-Plough markets ribavirin for use in combination with its interferon product under the trade name “Rebetol” as a therapy for the treatment of hepatitis C and Roche markets ribavirin for use in combination with its interferon product under the name “Copegus.” Under the terms of their license agreements, Schering-Plough and Roche each have sole discretion to determine the pricing of ribavirin and the amount and timing of resources devoted to their respective marketing of ribavirin.

Competition from generic pharmaceutical companies could have a material negative impact on our future royalty revenue. With respect to Schering-Plough, royalties will be affected by the likelihood of reduced sales by Schering-Plough as well as a reduction in the royalty rate per the license agreement. With respect to Roche, under the license agreement, introduction of generics in any market will eliminate the obligation of Roche to pay royalties for net sales in that market. Our research and development activities are largely funded by the royalties received from Schering-Plough and Roche.

Three generic pharmaceutical companies filed Abbreviated New Drug Applications, or ANDAs, with the FDA to market generic forms of ribavarin for use as part of a combination therapy for the treatment of hepatitis C. We commenced litigation to prevent the marketing of a generic form of ribavarin in the U.S. District Court for the Central District of California. In July 2003, the court issued a memorandum of

This decision did not rule on the motion for summary judgment that the patents are invalid. This ruling permits the FDA to approve these generic companies’ ANDAs, in their discretion.

Given the current status of filings with the FDA, including pending generic drug applications and a related Citizen Petition submitted by Ribapharm challenging those applications, generic competition in the United States may be imminent. Although our financial planning has included an expectation of generic competition for ribavirin in the United States as early as the fourth quarter of 2003, a greater-than-expected erosion of royalties from the United States, or a significant decrease in royalties from expected levels for markets other than the United States, could require us to reduce research and development expenditures and other activities.

Various parties are opposing Ribapharm’s ribavirin patents in actions before the European Patent Office, and Ribapharm is responding to these oppositions. While data exclusivity for the combination therapies marketed by Schering-Plough and Roche is scheduled to continue in the major markets of the European Union until 2009 for Schering-Plough and 2012 for Roche, regulatory approvals and schemes may change and/or studies regarding ribavirin in combination with interferon may be replicated, allowing earlier introduction of generics into such markets.

If our focus on the development of Viramidine does not result in an approved and commercially successful product, our business could be adversely affected.

We focus our research and development activities on areas in which we have particular strengths, particularly antivirals. The outcome of any development program is highly uncertain. Although Viramidine appears promising and has advanced to Phase 3 clinical trials, it may yet fail to yield a commercial product. Success in preclinical and early stage clinical trials may not necessarily translate into success in large-scale clinical trials. Further, to be successful in clinical trials, increased investment will be necessary, which may adversely affect short-term profitability.

In addition, we will need to obtain and maintain regulatory approval in order to market Viramidine. Even if Viramidine appears promising in large-scale Phase 3 clinical trials, regulatory approval may not be achieved. The results of clinical trials are susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies. In addition, changes in regulatory policy for product approval during the period of product development and FDA review of a new application may cause delays or rejection. Even if we receive regulatory approval, this approval may include limitations on the indications for which we can market the product. There is no guarantee that we will be able to satisfy the needed regulatory requirements, and we may suffer a significant variation from planned revenue as a result.

As we develop and commercialize new products, we will have to incur a sizeable amount of research and development expenses to advance such products through the clinical trial and regulatory approval process. Such expenditures may have the effect of causing our earnings and cash flows to decline.

We currently are in clinical trials with two products, Viramidine and Hepavir B. On November 6, 2003, we announced that we will initiate Phase 3 trials of Viramidine. These clinical trials will require significant research and development expenditures. We expect that research and development expenses will increase in the fourth quarter of 2003 and in 2004, as compared to research and development expenses during the first nine months of 2003, as we initiate Phase 3 studies of Viramidine and progress continues with the clinical trials of Hepavir B. The increased amount of research and development expenses could negatively impact our earnings and cash flows.

Third parties may be able to sell generic forms of our products or block our sales of our products if our intellectual property rights or data exclusivity rights do not sufficiently protect us; patent rights of third parties may also be asserted against us.

Our success depends in part on our ability to obtain and maintain meaningful exclusivity protection for our products and product candidates throughout the world via patent protection and/or data exclusivity protection. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. We will be able to protect our products from generic substitution by third parties only to the extent that our technologies are covered by valid and enforceable patents, effectively maintained as trade secrets or are protected by data exclusivity. However, our currently pending or future patent applications may not issue as patents. Any patent issued may be challenged, invalidated, held unenforceable or circumvented. Furthermore, our patents may not be sufficiently broad to prevent third parties from producing generic substitutes for our products. Lastly, data exclusivity schemes vary from country to country and may be limited or eliminated as governments seek to reduce pharmaceutical costs by increasing the speed and ease of approval of generic products.

In order to protect or enforce patent and/or data exclusivity rights, we may initiate patent litigation against third parties, and we may be similarly sued by others. We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual property and data exclusivity actions are costly and divert technical and management personnel from their normal responsibilities. We may not prevail in any of these suits. An adverse determination of any litigation or defense proceedings, resulting in a finding of non-infringement or invalidity of our patents, or a lack of protection via data exclusivity, may allow entry of generic substitutes for our products.

Furthermore, because of the substantial amount of discovery required in connection with such litigation, there is a risk that some of our confidential information could be compromised by disclosure during such litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our securities.

Ribapharm’s patents in the United States are the subject of litigation, and the most recent ruling by the court in the ribavirin-related litigation with generic drug companies was not in our favor. See “Likelihood of imminent introduction of generic products puts ribavirin royalties at risk and may impact our ability to finance research and development activities,” above.

Ribapharm has limited patent rights in selected countries of the European Union, Switzerland and Japan relating to the antiviral use of ribavirin. These patents are currently scheduled to expire by 2005, although Ribapharm is seeking to extend these patents until 2010. Ribapharm may not be able to have these patents extended.

The existence of a patent will not necessarily protect us from competition. Competitors may successfully challenge our patents, produce similar drugs that do not infringe our patents or produce drugs in countries that do not respect our patents.

No patent can protect its holder from a claim of infringement of another patent. Therefore, our patent position cannot and does not provide an assurance that the manufacture, sale or use of products patented by us could not infringe a patent right of another.

While we know of no actual or threatened claim of infringement that would be material to us, there can be no assurance that such a claim will not be asserted. If such a claim is asserted, there can be no assurance that the resolution of the claim would permit us to continue producing the relevant product on commercially reasonable terms.

FDA approval must be obtained in the United States and approval must be obtained from comparable agencies in other countries prior to marketing or manufacturing new pharmaceutical products for use by humans. Obtaining FDA approval for new products and manufacturing processes can take a number of years and involves the expenditure of substantial resources. Numerous requirements must be satisfied, including preliminary testing programs on animals and subsequent clinical testing programs on humans, to establish product safety and efficacy. No assurance can be given that we will obtain approval in the United States, or any other country, of any application we may submit for the commercial sale of a new or existing drug or compound. Nor can any assurance be given that if such approval is secured, the approved labeling will not have significant labeling limitations that could affect profitability, or that those drugs or compounds will be commercially successful.

The FDA and other regulatory agencies in other countries also periodically inspect manufacturing facilities both in the United States and abroad. Failure to comply with applicable regulatory requirements can result in, among other things, warning letters, sanctions, fines, delays or suspensions of approvals, seizures or recalls of products, operating restrictions, manufacturing interruptions, costly corrective actions, injunctions, adverse publicity against us and our products, refusal to renew marketing applications, and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could prevent or delay us from obtaining future regulatory approvals or jeopardize existing approvals.

We intend to pursue a strategy of targeted expansion through the acquisition of compatible businesses and product lines and the formation of strategic alliances, joint ventures and other business combinations. There can be no assurance that we will successfully complete or finance any future acquisition or investment or that any acquisitions that we do complete will be completed at prices or on terms that prove to be advantageous to us. The success or failure in integrating the operations of companies that we have acquired or may acquire in the future may have a material impact on our future growth and success.

If competitors develop vaccines or more effective or less costly drugs for our target indications, our business could be seriously harmed.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Ribavirin and many of the drugs that we are attempting to discover will be competing with new and existing therapies. Many companies in the United States and abroad are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. For example, in December 2002, Roche received approval to sell Copegus, its version of ribavirin. In addition, Human Genome Sciences, Inc. submitted an investigational new drug application with the FDA in October 2000 to initiate Phase 1 human clinical trials of Albuferon for treatment of hepatitis C. If Albuferon or other therapies that do not incorporate the use of our products prove to be a more effective treatment for hepatitis C than the combination therapy involving ribavirin, then our royalty revenues from ribavirin could significantly decrease. In addition, there are institutions engaged in research on the development of a vaccine to prevent hepatitis C. The availability of such a vaccine could have a material adverse effect on our revenues from sales of products treating hepatitis C.

Many of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. We believe that many of our competitors spend significantly more on research and development related activities than us. Others may succeed in developing products that are more effective than those currently marketed or proposed for development by us. Progress by other researchers in areas similar to those being explored by us may result in further competitive challenges. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products. They may also establish exclusive collaborative or licensing relationships with our competitors.


	•	Infergen being developed by Amgen, Inc. and Intermune;

	•	Omega interferon being developed by BioMedicines;

	•	Thymosin alfa being developed by SciClone Pharmaceuticals, Inc.;

	•	Albuferon being developed by Human Genome Sciences, Inc.; and

	•	protease inhibitors being developed by Boehringer Ingelheim, Eli Lilly and Company, Vertex Pharmaceuticals Incorporated, Viropharma Incorporated, Wyeth and Gilead Sciences, Inc.

Other companies that engage in research activities similar to our and Ribapharm’s research activities include Abbott Laboratories, Pfizer, Inc., GlaxoSmithKline plc, Merck & Co., Inc. and Novartis AG.

If our products are alleged to be harmful, we may not be able to sell them and we may be subject to product liability claims not covered by insurance.

The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of pharmaceutical products. Using our drug candidates in clinical trials may expose us to product liability claims. These risks will expand with respect to drugs, if any, that receive regulatory approval for commercial sale. Even if a drug were approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim that effects other than those intended may result from our products. While to date no material adverse claim for personal injury resulting from allegedly defective products, including ribavirin, has been successfully maintained against us, a substantial claim, if successful, could have a material negative impact on us.

In the event that anyone alleges that any of our products are harmful, we may experience reduced consumer demand for our products or our products may be recalled from the market. In addition, we may be forced to defend lawsuits and, if unsuccessful, to pay a substantial amount in damages. We do not currently have insurance against product liability risks for commercially developed products. Insurance is expensive and, if we seek such insurance in the future, it may not be available on acceptable terms. Even if obtained, insurance may not fully protect us against potential product liability claims.

We are involved in various legal proceedings that could adversely affect us.

Since July 25, 2002, multiple class actions have been filed in the United States District Courts for the Eastern District of New York, the District of New Jersey and the Central District of California against us and certain of our current and former executive officers. The lawsuits allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, by issuing false and misleading financial results to the market during different class periods ranging from May 3, 2001 to July 10, 2002, thereby artificially inflating the price of our stock. The lawsuits generally claim that the defendants improperly inflated our sales volume and revenues through excess shipment of products to our distributors and improper recognition of revenue from certain royalty payments. The plaintiffs generally seek to recover compensatory damages, including interest. While we intend to defend this matter vigorously, an adverse result could have a material adverse effect on us.

On May 9, 2003, a bondholder filed a class action lawsuit against us and some of our current and former directors. The lawsuit alleges that the defendants violated Sections 11 and 15 of the Securities Act by making false and misleading statements in connection with the offering of 6 1/2% Convertible Subordinated Notes due 2008. We have filed a motion to dismiss the complaint in this action. While we intend to defend this matter vigorously, an adverse result could have a material adverse effect on us.

We are subject to the provisions of a settlement agreement with the Commission, which arose from a civil complaint brought against us by the Commission in 1999. We reached a settlement of the matter which was embodied in court orders entered in 2002. The material terms of the settlement with the Commission are as follows: we, without admitting or denying liability, consented to the entry of a consent judgment permanently enjoining us from violating Section 10(b) of the Exchange Act, and Rule 10b-5, promulgated thereunder. We paid a civil penalty in the amount of $1,000,000. We also consented to various corporate governance undertakings regarding FDA-related press releases. Because the settlement documents explicitly acknowledged that we incurred a “change of control” as of May 29, 2002, we can make an application for termination of the undertakings (upon a showing of “good cause”) 18 months after entry of the judgment, that is, May 2004. As a result of the settlement, we cannot take advantage of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and, therefore, may be hindered in the defense of any future allegations.

In April 2003, we submitted a voluntary disclosure regarding potential violations of Cuban Asset Control Regulations to the Department of Treasury’s Office of Foreign Assets Controls, or OFAC. The subject transactions involved shipments to Cuba over the last five years of foreign-origin pharmaceutical products, specifically vitamins, antibiotics and other medicines, by our Mexican and Panamanian subsidiaries. We believe the sale of these pharmaceutical products would have been licensed had we and our non-U.S. subsidiaries recognized the need for and sought such licenses. We and our non-U.S. subsidiaries were granted a license by OFAC to engage in these transactions for the next one-year period (through mid-October 2004).

In the course of our ongoing investigation into this matter, we discovered additional business activity with Cuba by our Mexican and Panamanian subsidiaries, including the purchase of Cuban-origin medical products from a Cuban company and certain financial transactions. Consequently, we updated our voluntary disclosure with OFAC on August 4, 2003. As of this writing, the voluntary disclosure is in the Civil Penalties Division of OFAC, which has a substantial backlog of similar cases.

Our flexibility in maximizing commercialization opportunities for our compounds may be limited by our obligations to Schering-Plough.

In November 2000, we entered into an agreement that provides Schering-Plough with an option to acquire the rights to up to three of our products that they designate at an early stage of product development and a right for first/last refusal to license various compounds we may develop and elect to license to others. Viramidine was not subject to the option of Schering-Plough, but it would be subject to their right of first/last refusal if we elected to license it to a third party. The interest of potential collaborators in obtaining rights to our compounds or the terms of any agreements we ultimately enter into for these rights may be impacted by our agreement with Schering-Plough. A commercialization partner other than Schering-Plough might have otherwise been preferable due to that potential partner’s strength in a given disease area or geographic region or for other reasons.

We are subject to uncertainty related to health care reform measures and reimbursement policies.

The levels at which government authorities, private health insurers, HMOs and other organizations reimburse the costs of drugs and treatments related to those drugs will have an effect on the successful commercialization of our drug candidates. We cannot be sure that reimbursement in the United States or elsewhere will be available for any drugs we may develop or, if already available, will not be decreased in the future. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our drugs. If reimbursement is not available or is available only to limited levels, we may not be able to obtain a satisfactory financial return on the manufacture and commercialization of any future drugs. In addition, as a result of the trend towards managed health care in the United States, as well as legislative proposals to reduce government insurance programs, third party payors are increasingly attempting to contain health care costs by

limiting both coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of newly approved health care products. Third-party payors may not establish and maintain price levels sufficient for us to realize an appropriate return on our investment in product development.

If our nucleoside analog library is destroyed because of an earthquake or other disaster, our research and development program may be seriously harmed.

The laboratory books and the compounds that comprise our nucleoside analog library are all located at our headquarters in Costa Mesa, California, near areas where earthquakes have occurred in the past.

There are no duplicate copies off-premises and there are no backup copies of the product candidates we are currently developing. No duplicate copies of our nucleoside analog library exist because making copies would be prohibitively expensive and the library has not been moved off-site because our scientific staff is currently in the process of screening it. Our ability to develop potential product candidates from our nucleoside analog library would be significantly impaired if these records were destroyed in an earthquake or other disaster. Any insurance we maintain may not be adequate to cover our losses.

Dependence on key personnel leaves us vulnerable to a negative impact if they leave.

We believe that our continued success will depend to a significant extent upon the efforts and abilities of the key members of management. The loss of their services could have a negative impact on us.

In addition, Ribapharm depends upon the principal members of its scientific staff. Ribapharm’s success depends upon its ability to attract, train, motivate and retain qualified scientific personnel. Qualified personnel are in great demand throughout the biotechnology and pharmaceutical industries. We may not be able to attract additional personnel or retain existing employees.

Our third party manufacturers’ failure to comply with FDA regulations could cause interruption of the manufacture of our products.

Our manufacturers are required to adhere to regulations enforced by the FDA and similar regulatory agencies in other countries. Our dependence upon others to manufacture our products may adversely affect our profit margins and our ability to develop and commercialize products on a timely and competitive basis. Delays or difficulties with contract manufacturers in producing, packaging or distributing our products could adversely affect the sales of our current products or introduction of other products.

Schering-Plough manufactures and sells ribavirin under license from us. In February 2001, Schering-Plough announced that the FDA has been conducting inspections of Schering-Plough’s manufacturing facility in Las Piedras, Puerto Rico that manufactures ribavirin, and has issued reports citing deficiencies concerning compliance with current Good Manufacturing Practices, primarily relating to production processes, controls and procedures. In June 2001, Schering-Plough announced that FDA inspections at this and one other Schering-Plough facility in May and June 2001 cited continuing and additional deficiencies in manufacturing practices. In May 2002, Schering-Plough signed a consent decree of permanent injunction with the FDA, agreeing to measures to assure that the drug products manufactured at their Puerto Rico plant are made in compliance with FDA’s current good manufacturing practice regulations. While Schering-Plough has advised us that the deficiencies were not specifically applicable to the production of ribavirin, the Consent Decree covers the facility producing ribavirin. Schering-Plough’s ability to manufacture and ship ribavirin could be affected by temporary interruption of some production lines to install system upgrades and further enhance compliance, and other technical production and equipment qualification issues.

If the FDA is not satisfied with Schering-Plough’s compliance under the Consent Decree, the FDA could take further regulatory actions against Schering-Plough, including the seizure of products, an injunction against further manufacture, a product recall or other actions that could interrupt production of ribavirin. Interruption of ribavirin production for a sustained period of time could materially reduce our royalty receipts.

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 United States. Approximately 54.4% and 63.1% of our revenue was generated outside the United States during the year ended December 31, 2002, and the nine months ended September 30, 2003, respectively. We sell our pharmaceutical products in 128 countries around the world and employ approximately 4,740 individuals in countries other than the United States. The international scope of our operations may lead to volatile financial results and difficulties in managing our operations because of, but not limited to, the following:


	•	difficulties and costs of staffing, severance and benefit payments and managing international operations;

	•	exchange controls, currency restrictions and exchange rate fluctuations;

	•	unexpected changes in regulatory requirements;

	•	the burden of complying with multiple and potentially conflicting laws;

	•	the geographic, time zone, language and cultural differences between personnel in different areas of the world;

	•	greater difficulty in collecting accounts receivables in and moving cash out of certain geographic regions;

	•	the need for a significant amount of available cash from operations to fund our business in a number of geographic and economically diverse locations; and

	•	political, social and economic instability in emerging markets in which we currently operate.

Many of our key processes, opportunities and expenses are a function of national and/or local government regulation. Significant changes in regulations could have a material adverse impact on our business.

The process by which pharmaceutical products are approved is lengthy and highly regulated. We have developed expertise in managing this process in the many markets around the world. Our multi-year clinical trials programs are planned and executed to conform to these regulations, and once begun, can be difficult and expensive to change should the regulations regarding approval of pharmaceutical products significantly change.

In addition, we depend on patent law and data exclusivity to keep generic products from reaching the market before we have adequately recouped our investment in the discovery and development of our products. In assessing whether we will invest in any development program, or license a product from a third party, we assess the likelihood of patent and/or data exclusivity under the laws and regulations then in effect. If those schemes significantly change in a large market, or across many smaller markets, our ability to protect our investment may be adversely affected.

Appropriate tax planning requires that we consider the current and prevailing national and local tax laws and regulations, as well as international tax treaties and arrangements that we enter into with various government authorities. Changes in national/local tax regulations, or changes in political situations may limit or eliminate the effects of our tax planning.

Due to the large portion of our business conducted outside the United States, we have significant foreign currency risk.

We sell products in many countries that are susceptible to significant foreign currency risk. In some of these markets we sell products for U.S. Dollars. While this eliminates our direct currency risk in such markets, it increases our credit risk because if a local currency is devalued significantly, it becomes more expensive for customers in that market to purchase our products in United States Dollars. We currently do not enter into third party hedges to protect against foreign currency exposure.

We are subject to price control restrictions on our pharmaceutical products in the majority of countries in which we operate.

There is a risk that other jurisdictions may enact price control restrictions, and that the restrictions that currently exist may be increased. Our future sales and gross profit could be materially affected if we are unable to obtain appropriate price increases.

Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds.

We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result. Any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with, or any potential violation of, these laws and regulations could be significant. Any insurance we maintain may not be adequate to cover our losses.

Our stockholder rights plan and anti-takeover provisions of our charter documents could provide our board of directors with the ability to delay or prevent a change in control of us.

Our stockholder rights plan, provisions of our certificate of incorporation and provisions of the Delaware General Corporation Law could provide our board of directors with the ability to deter hostile takeovers or delay, deter or prevent a change in control of us, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.

The following table sets forth our selected historical and other financial data on a consolidated basis for each of the years in the five-year period ended December 31, 2002 and for the nine months ended September 30, 2002 and 2003. The selected historical and other financial data for each of the years in the five-year period ended December 31, 2002 were derived from our audited consolidated financial statements. The selected historical and other data for the nine months ended September 30, 2002 and 2003 were derived from our unaudited financial statements which, in the opinion of management, include the adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our results of operations and financial position for such periods. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any other period. The trends in our sales and net income are affected by several business combinations completed in the fiscal years 1998 through 2002. The information contained in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the notes thereto, included elsewhere in this offering memorandum.


(1)	We recorded $4,034,000 and $241,543,000 of non-recurring and other unusual charges, which are included in selling, general and administrative expenses, for the years ended December 31, 2001 and 2002, respectively and $204,958,000 for the nine months ended September 30, 2002. The non-recurring and other unusual charges include compensation costs related to the change in control, severance costs, expenses incurred in connection with Ribapharm’s initial public offering, write-off of certain assets, environmental clean-up costs and costs incurred in our proxy contests in 2001 and 2002.

(2)	As a result of political and economic events in Eastern Europe, including the Yugoslavian government’s seizure of our Yugoslavian operations effective November 26, 1998, we recorded write-offs and provisions for losses related to Eastern Europe totaling $428,403,000 in the year ended December 31, 1998.

(3)	In August 2003, we repurchased the approximately 20% publicly held minority interest in our Ribapharm subsidiary for an aggregated total purchase price of $207,438,000. In connection with this acquisition, we expensed $117,609,000 associated with acquired IPR&D on projects that had not occurred.

(4)	In April 2002, we completed an underwritten public offering of 29,900,000 shares of common stock, par value $.01 per share, of Ribapharm, previously a wholly-owned subsidiary, representing 19.93% of the total outstanding common stock of Ribapharm. In connection with Ribapharm’s public offering, we recorded a gain on the sale of Ribapharm’s stock of $261,937,000, net of offering costs.

(5)	On April 17, 2002, we used the proceeds of the Ribapharm offering to complete our tender offer and consent solicitation for all of our outstanding 8 3/4% Senior Notes due 2008. The redemption of these notes resulted in a loss on extinguishment of debt of $43,268,000. In July and August 2002, we repurchased $59,410,000 principal amount of our 6 1/2% Convertible Subordinated Notes due 2008. In connection with these repurchases, we recorded a gain on early extinguishment of debt of $17,538,000. The net loss on extinguishment of debt was $25,730,000 for the nine months ended September 30, 2002 and the year ended December 31, 2002.

During 2001, we repurchased $117,559,000 aggregate principal amount of our outstanding 8 3/4% Senior Notes due 2008 and redeemed and repurchased $190,645,000 aggregate principal amount of our 9 1/4% Senior Notes due 2005, resulting in a loss on early extinguishment of debt of $32,916,000.

During 2000, we repurchased $84,355,000 of its outstanding 9 1/4% Senior Notes due 2005 and $12,830,000 of its outstanding 8 3/4% Senior Notes due 2008. The repurchases generated a loss on early extinguishment of debt of $4,962,000.

In July 2001 we issued $525,000,000 aggregate principal amount of 6 1/2% Convertible Subordinated Notes due 2008.


(6)	During 2002, we made the decision to divest our Russian pharmaceuticals segment, biomedicals segment, raw materials businesses and manufacturing capability in Hungary and the Czech Republic, photonics business and Circe unit. This decision required us to evaluate the carrying value of the divested businesses in accordance with the Statement of Accounting Standard, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. As a result of this analysis, we recorded impairment charges of $160,010,000 (net of an income tax benefit of $48,193,000) in the year ended December 31, 2002. The results of operations and the financial position of the divested businesses have been reflected as discontinued operations. During 2002, we recorded a loss of $45,172,000 from discontinued operations reflecting the write-down of assets in Russia.

(7)	During 2002, we completed the transitional impairment test required by SFAS 142, Goodwill and Other Intangible Assets. As a result, we recorded an impairment loss of $25,332,000 offset by a benefit of $3,541,000 for the write-off of negative goodwill. The net amount of $21,791,000 has been recorded as a cumulative effect of change in accounting principle.

(8)	Adjusted EBITDA represents the sum of income (loss) from operations plus depreciation and amortization excluding unusual and non-recurring items and acquired IPR&D. We understand that some industry analysts and investors consider EBITDA to be useful in analyzing the operating performance of a company and its ability to service debt. EBITDA, however, is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to, or more meaningful than, net income as a measure of operating performance or cash flows from operating, investing or financing activities as a measure of liquidity. EBITDA is susceptible to varying interpretations and calculations. Our calculation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. See “SEC Review” for a discussion regarding the treatment of this information in an exchange offer registration statement or a shelf registration statement, as the case may be, which we agreed to file.


(9)	For further information on our gross profit margins reference is made to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


(10)	For the purpose of computing this ratio, Adjusted EBITDA, used in the column under nine months ended September 30, 2002 and 2003, is based on Adjusted EBITDA of $296,548,000 and $230,565,000 for the twelve months ended September 30, 2002 and 2003, respectively.

(11)

For the purpose of computing this ratio, earnings consist of income from continuing operations before income taxes, minority interest and fixed charges. Fixed charges consist of interest expense. For the nine months ended September 30, 2003, non-cash charges of $117,609,000 related to acquired in-process research and development were excluded from the calculation. For the year ended December 31, 1998, non-cash charges of $436,197,000 related to Eastern European charges were excluded from the calculation.

The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in this offering memorandum under “Forward-Looking Statements” and “Risk Factors.” You should read the following discussion in conjunction with “Selected Consolidated Financial and Other Data,” and our audited and unaudited consolidated financial statements and notes as of and for the years ended December 31, 2000, 2001 and 2002 and the nine months ended September 30, 2002 and 2003, respectively, each appearing elsewhere in this offering memorandum.

We are a global, publicly-traded, research-based specialty pharmaceutical company that discovers, develops, manufactures and markets a broad range of pharmaceutical products. We currently generate sales in 128 markets throughout the world. In the first nine months of 2003, product revenues accounted for approximately 73% of our total revenues from continuing operations with our top 10 products contributing approximately 34% of product revenues. Through our wholly-owned subsidiary, Ribapharm, which conducts our research and new product development initiatives, we generate royalty revenues from the sale of ribavirin by Schering-Plough and Roche. In the first nine months of 2003, royalty revenues accounted for 27% of our total revenues from continuing operations. Based on this research and development capability and a worldwide capacity to commercialize our products, we believe we are a leading fully integrated specialty pharmaceutical company focused on neurology, dermatology and infectious disease.

At our May 29, 2002 Annual Meeting of Stockholders, three persons nominated by Franklin Mutual Advisors, LLC and Iridian Asset Management LLC were elected to our Board of Directors. The events at this election, together with events at our 2001 Annual Meeting of Stockholders, constituted a change of control under the terms of employment agreements with some former key executives, our long-term stock incentive plan and our Amended and Restated 1998 Stock Option Plan. As a result of the change of control, we incurred substantial one-time costs, as detailed below.

For the year ended December 31, 2002, we incurred non-recurring and other unusual charges of $241,543,000, which primarily included stock compensation costs related to the change of control under our Amended and Restated 1998 Stock Option Plan ($61,400,000); severance costs related to cash severance payments to former executives, and employee severance benefits ($54,216,000); incentive compensation costs related to the acceleration of vesting of restricted stock upon the change of control ($12,022,000); executive and director bonuses paid in connection with the public offering of Ribapharm ($47,839,000); professional fees related to the public offering of Ribapharm ($13,000,000); the write-off of ICN International AG capitalized offering costs ($18,295,000); the write-down of certain assets ($15,045,000); costs incurred in the proxy contest ($9,850,000); environmental-related expenses ($8,298,000); and Czech flood damages ($1,578,000). During the year ended December 31, 2001, we recorded non-recurring and other unusual charges of $4,034,000, related to the 2001 proxy contest.

Following a change in control in June 2002, we initiated a strategic review which included retaining an investment bank and a consulting firm. As a result of that review, we now intend to emphasize our specialty pharmaceuticals business and bring our overall cost structure in line with industry averages. We have substantially divested ourselves of those businesses that do not fit our strategic growth plans.

As a result of this strategic review, we made the decision to divest our Russian pharmaceuticals segment, biomedicals segment, photonics business, raw materials business and manufacturing capability in Central Europe and Circe unit. The results of these operations and the related financial position have been reflected as

discontinued operations in our consolidated condensed financial statements in accordance with Statement of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The consolidated condensed financial statements have been reclassified to conform to the discontinued operations presentation for all historical periods presented.

In June 2003, we sold our Russian pharmaceuticals segment and certain assets of our biomedicals segment. We received gross proceeds of $55,000,000 in cash for the Russian pharmaceuticals segment and received 727,990 shares of our common stock held by the purchaser, which had a fair market value of approximately $12,369,000 for the assets of our biomedicals segment. We recorded a net loss on disposal of discontinued operations of $7,942,000 related to the sale of these businesses in the nine months ended September 30, 2003.

On September 30, 2003, we sold the remaining assets of our biomedicals segment, Dosimetry, for gross cash proceeds of $58,000,000. We recorded a net gain on disposal of discontinued operations of $23,288,000, net of taxes of $15,526,000 related to the sale of Dosimetry in the quarter ended September 30, 2003.

We are actively marketing for sale the raw materials businesses and manufacturing capability in Hungary and the Czech Republic and are working toward disposing of these assets.

We decided in the second quarter of 2002 to reduce wholesaler inventory levels in our North America pharmaceuticals segment. The inventory levels that our wholesalers had accumulated over a period of time exceeded one year. This decision resulted in a significant decrease in revenues in the North America pharmaceuticals segment in 2002, which continued into the first four months of 2003, as compared to 2001.

As part of our overall repositioning strategy, we re-evaluated the ownership structure of Ribapharm. We determined that the benefits perceived at the time of the initial public offering of Ribapharm had diminished and that the potential advantages to us of repurchasing the publicly held shares of Ribapharm outweighed the advantages of continuing to maintain Ribapharm as a separate publicly-traded entity or completing a spin-off of Ribapharm. In August 2003, we repurchased the approximately 20% minority interest in Ribapharm for an aggregated total purchase price of $207,438,000. We paid $6.25 in cash for each of the 29,900,703 outstanding publicly held shares of Ribapharm.

During the third quarter of 2003, we approved a global manufacturing strategy, which we announced in October 2003. Under this manufacturing strategy, we expect to establish a global manufacturing and supply chain network of five manufacturing sites. A review for potential asset impairment was performed in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In determining asset groups, we grouped assets at the lowest level for which independent identifiable cash flows were available. In determining whether an asset was impaired, we compared undiscounted future cash flows and asset residual values to the asset group carrying value on a site by site basis. This impairment analysis indicated that the asset groups were not impaired as of September 30, 2003; therefore, no impairment losses were recognized in the third quarter of 2003. Based on the estimated remaining useful lives of the manufacturing sites to be disposed of, the book value would exceed the residual value on the estimated disposal date for five of the manufacturing sites. As a result, we have revised the depreciation period on these assets and will incur an additional annual depreciation expense of approximately $6,400,000 through the third quarter of 2005.

We are currently evaluating a disposal plan for each manufacturing site planned to be eliminated from our operations. Our intention is to sell each such site as an operating plant. However, we may not find buyers for all the manufacturing sites. Additionally, we may incur cash expenditures related to severance charges and

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates, including those related to product returns, collectibility of receivables, inventories, intangible assets, income taxes and contingencies and litigation. The actual results could differ from those estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:


	•	We recognize revenue from product sales when the goods are shipped and title and risk of loss transfer to the customer. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against the sales from which they originated. The sales return is recorded as a reduction of product sales. Actual returns could be different from our estimates resulting in future adjustments to revenue.

	•	We earn royalty revenue at the time the products subject to the royalty are sold by a third party. Accordingly we accrue for earned royalty net of estimated returns and discounts. Royalty payments received from Schering-Plough and Roche are reduced by Schering-Plough’s and Roche’s cash payments for discounts, rebates and similar deductions.

	•	We evaluate the collectibility of our receivables on a regular basis. Our methodology for establishing the allowance for bad debts varies with the regions in which we operate. The allowance for bad debts is based upon specific identification of customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. If collection experience deteriorates, the estimates of collectibility could be reduced by a material amount.

	•	Our inventories are valued at the lower of cost or market. We evaluate the carrying value of our inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price we expect to obtain for our products in their respective markets compared with historical cost and the remaining shelf life of goods on hand. If actual market conditions are less favorable than those projected by us, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period the revision is made.

	•	We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider future taxable income and other expected future amounts in determining the amount of valuation allowance necessary. In the event we determine that actual taxable income will be less than expected or other future events will not occur, an adjustment to the valuation allowance would be charged to income in the period such determination was made.

	•	We periodically evaluate the carrying value of intangibles including the related amortization periods. In evaluating acquired product rights and other intangible assets, we determine whether there has been impairment by comparing the anticipated undiscounted future operating income of the product line with our carrying value. If the undiscounted operating income is less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on a discounted cash flows analysis.


	•	We evaluated the businesses included in discontinued operations by comparing the carrying value of the long-lived assets to their fair value, as determined using discounted cash flows analysis, appraisals and purchase offers.

	•	The amount expensed as acquired IPR&D represents an estimate of the fair value of purchased in-process technology for projects that, as of the acquisition date, had not yet reached technological feasibility and had no alternative future use. The data used to determine the respective fair values requires significant judgment. Differences in those judgments would have the impact of changing the allocation of purchase price to goodwill, which is an unamortizable intangible asset. The estimated fair value of these projects was based on the use of a discounted cash flow model (based on an estimate of future sales and average gross margins of 85%). For each project, the estimated after-tax cash flows were probability weighted to take account of the stage of completion and the risks surrounding the successful development and commercialization.

Certain financial information for our business segments is set forth below. This discussion should be read in conjunction with our Consolidated Condensed Financial Statements included elsewhere in this offering memorandum.

We have four reportable pharmaceutical segments comprising our pharmaceutical operations in North America, Latin America, Europe and Asia, Africa and Australia. In addition, we have a research and development division (formerly Ribapharm). The segment reporting has been reclassified to conform to discontinued operations presentation for all periods presented. See Note 3 of our Notes to Consolidated Condensed Financial Statements for a discussion of discontinued operations.

Pharmaceutical Revenues: In our North America pharmaceuticals segment, revenues for the three months ended September 30, 2003 were $29,403,000 compared to $16,757,000 for the same period of 2002, an increase of $12,646,000 (75%). The increase in 2003 is primarily due to the successful completion of our inventory reduction program. As a result of that program being completed in April 2003, and adjusting for discontinued operations, our introduction of certain new products, as well as the entry of generic competitors for certain other products, sales for North America in the third quarter 2003 have returned to the approximate level experienced in the third quarter 2001 before the implementation of the inventory reduction program that began in June 2002.

In our Latin America pharmaceuticals segment, revenues for the three months ended September 30, 2003 were $34,746,000, compared to $31,985,000 for the same period of 2002, an increase of $2,761,000 (9%). The increase is primarily due to price and volume increases of $4,142,000, partially offset by a 4% decrease in the value of currencies in the region of $1,381,000. We continue to see an impact from generic substitution in the Latin American market and are taking steps to realign and increase our sales force in this region.

In our Europe pharmaceuticals segment, revenues for the three months ended September 30, 2003 were $54,512,000 compared to $44,334,000 for the same period of 2002, an increase of $10,178,000 (23%). The increase is primarily due to an increase in the value of currencies in the region relative to the U.S. Dollar, which resulted in an increase in revenues of $4,815,000. Additionally, excluding the effect of currencies, revenues in Poland increased $2,441,000.

In our Asia, Africa and Australia, or AAA, pharmaceuticals segment, revenues for the three months ended September 30, 2003 were $12,629,000 compared to $15,208,000 for the same period of 2002, a decrease of $2,579,000 (17%). The decrease is primarily due to lower sales volume primarily related to a decrease in Reptilase sales partially offset by an increase in sales of Nyal® products in Australia.

Royalties: Royalty revenues represent amounts earned under the License and Supply Agreement with Schering-Plough and for fiscal 2003, under a license agreement with Roche. Under the License and Supply Agreement, Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C.

On January 6, 2003, we reached an agreement with Roche on a settlement of pending patent disputes over Roche’s combination antiviral product containing Roche’s version of ribavirin, known as Copegus. Under the agreement, Roche may continue to register and commercialize Copegus globally. The financial terms of this settlement agreement include a license by us of ribavirin to Roche. The license authorizes Roche to make or have made and to sell Copegus under our patents. Roche pays royalty fees to us on all sales of Copegus for use in combination with interferon alfa or pegylated interferon alfa.

Royalties earned for the three months ended September 30, 2003 from Schering-Plough and Roche were $36,217,000 compared to $63,367,000 for the same period of 2002, a decrease of $27,150,000 (43%). We believe that the decrease in royalties during the three months ended September 30, 2003, include the effects of increasing competition between Schering-Plough and Roche, Schering-Plough’s provision for estimated rebates on its U.S. sales of ribavirin and changes in trade inventory levels as reported to us by Schering-Plough. We have no information with regard to the basis for the rebate and return provision other than public statements by Schering-Plough suggesting generic competition in the last half of 2003 would have an impact on demand.

Gross Profit: Gross profit margin on product sales increased to 68% for the three months ended September 30, 2003 compared to 63% for 2002. The increase in gross profit is primarily due to a change in the geographic mix in sales primarily related to higher sales in the United States, which increased our overall margin, partially offset by costs related to our manufacturing rationalization project.

Selling Expenses: Selling expenses were $40,478,000 for the three months ended September 30, 2003, compared to $40,140,000 for the same period in 2002, an increase of $338,000 (1%). As a percentage of sales, selling expenses decreased to 31% in the third quarter of 2003 from 37% in the same period in 2002, which reflects our intention of lowering overall costs.

General and Administrative Expenses: General and administrative expenses were $25,512,000 for the three months ended September 30, 2003, compared to $54,483,000 for the same period in 2002, a decrease of $28,971,000. Included with our general and administrative expenses for the quarter ended September 30, 2002 we reported non-recurring and other unusual charges of $23,920,000, which include severance costs of $18,708,000 and environmental remediation and related expenses of $5,212,000.

The remaining decrease of $5,051,000 primarily reflects a reduction in corporate general and administrative expenses of $4,514,000 and lower general and administrative expenses in the pharmaceuticals segment related to the closing of our European headquarters in Basel, Switzerland in October 2002 of $2,023,000 and expenses related to flood damage in the Czech Republic of $1,577,000 in the third quarter of 2002. The

decrease was partially offset by an increase in Ribapharm’s general and administrative expenses related to legal and professional fees of $4,544,000 incurred by Ribapharm in connection with the Ribapharm acquisition.

Research and Development: Research and development expenses for the 2003 third quarter were $10,752,000 compared to $13,479,000 for the same period in 2002. The decrease is primarily attributable to the timing of costs associated with the clinical trials of Viramidine and Hepavir B. We expect that our research and development expenses will increase in the fourth quarter of 2003 and in 2004 as we initiate Phase 3 studies of Viramidine and continue with the clinical trials of Hepavir B.

Acquired In-Process Research and Development: In the quarter ended September 30, 2003, we incurred an expense of $117,609,000 associated with IPR&D related to the Ribapharm acquisition. The amount expensed as IPR&D represents our estimate of the fair value of purchased in-process technology for projects that, as of the acquisition date, had not yet reached technological feasibility and had no alternative future use. The data used to determine the respective fair values requires significant judgment and differences in those judgments would have the impact of changing the allocation of purchase price to other intangible assets, including goodwill. The estimated fair value of these projects was based on our use of a discounted cash flow model (based on an estimate of future sales and an average gross margin of 85%). For each project, the estimated after-tax cash flows (using a rate of 25%) were probability weighted to take account of the stage of completion and the risks surrounding the successful development and commercialization. These cash flows were then discounted to a present value using a discount rate of 15%. In addition, solely for the purposes of estimating the fair value of these IPR&D projects as of August 25, 2003, we made the following assumptions:


	•	Future research and development costs of approximately $150,000,000 would be incurred to complete the IPR&D projects.

	•	The IPR&D projects, which are in various stages of development from Phase 1 to Phase 2 clinical trials, are expected to reach completion by the end of 2006.

The major risks and uncertainties associated with the timely and successful completion of these projects consist of our ability to confirm the safety and efficacy of the technology based on the data from clinical trials and obtaining necessary regulatory approvals. In addition, no assurance can be given that the underlying assumptions we used to forecast the cash flows or the timely and successful completion of such projects will materialize, as estimated. For these reasons, among others, actual results may vary significantly from the estimated results. For example, in October 2003, Roche notified us that they are abandoning development of Levovirin, a clinical candidate for the treatment of hepatitis C.

Other Income, Net, Including Translation and Exchange: Other income, net, including translation and exchange, was a gain of $2,208,000 for the three months ended September 30, 2003 compared to a gain of $4,253,000 for the same period in 2002, a change of $2,045,000. In the third quarter of 2003, we recorded translation and exchange gains primarily related to our dollar-denominated net assets in Europe of $1,604,000 and in Canada of $1,090,000, partially offset by translation losses in Mexico of $396,000. We are currently taking steps to mitigate the impact of foreign currency translation on our income statement.

Gain (Loss) on Early Extinguishment of Debt: In the three months ended September 30, 2002, we recorded a gain on early extinguishment of $17,538,000 related to the repurchase of $59,410,000 principal amount of our 6 1/2% Convertible Subordinated Notes due 2008. In the nine months ended September 30, 2002, we recorded a loss on early extinguishment of debt of $25,730,000. The loss was primarily related to a loss on extinguishment of debt of $43,268,000 related to the repurchase of our outstanding 8 3/4% Senior Notes due 2008, partially offset by a gain on early extinguishment of debt of $17,538,000 related to the repurchase of our 6 1/2% Convertible Subordinated Notes due 2008.

Interest Expense and Income: Interest expense during the three months ended September 30, 2003 decreased $1,318,000 compared to the same period in 2002. The decrease was the result of the repurchase of $59,410,000 principal amount of our 6 1/2% Convertible Subordinated Notes due 2008 in July and August 2002. Interest income decreased from $1,458,000 in the third quarter of 2002 to $953,000 in the same period of 2003 due to lower yields on investments partially offset by an increase in interest-bearing cash.

Income Taxes: Our effective income tax rate for the three months ended September 30, 2003 was a negative 15% compared to 26% for the same period of 2002. Our negative effective tax rate for 2003 was primarily due to the pre-tax loss resulting from the write-off of acquired IPR&D expenses in connection with the Ribapharm acquisition which is not deductible for tax purposes. Excluding the effect of the acquired IPR&D write-off, the 2003 effective tax rate would have been 38%. The effective tax rate for 2002 reflects a tax benefit of $3,861,000 recognized in the third quarter of 2002 related to costs previously incurred in connection with a joint venture in China. Excluding the effect of this benefit, we had an effective tax rate of 39% for the three months ended September 30, 2002.

Income (loss) from Discontinued Operations, Net of Taxes: Income (loss) from discontinued operations relating to our Russian pharmaceuticals segment, biomedicals segment, photonics business and raw materials businesses and manufacturing capabilities in Central Europe was recorded as income of $16,110,000 for the three months ended September 30, 2003 compared to a loss of $90,633,000 for the same period in 2002. In September 2003, we sold the remaining assets of our biomedicals segment, Dosimetry, for cash proceeds of $58,000,000 and recorded a net gain on disposal of $23,288,000, net of taxes of $15,526,000. The income in 2003 includes income from discontinued operations of $3,036,000. The loss for 2002 includes a net loss on disposal of discontinued operations of $75,291,000 due to impairments on our Russian pharmaceuticals business, photonics business and Circe and a loss from discontinued operations of $15,342,000.

Pharmaceutical Revenues: In our North America pharmaceuticals segment, revenues for the nine months ended September 30, 2003 were $70,837,000 compared to $78,151,000 for the same period of 2002, a decrease of $7,314,000 (9%). The decrease in 2003 sales is primarily due to reduced sales to wholesalers during the first four months of 2003 related to an inventory reduction program at our wholesalers, which we began in June 2002 and completed in April 2003.

In our Latin America pharmaceuticals segment, revenues for the nine months ended September 30, 2003 were $94,802,000 compared to $94,019,000 for the same period of 2002, an increase of $783,000 (1%). Revenues in Latin America were affected by a 10% decrease in the value of currencies in the region of $9,403,000, offset by price and volume increases.

In our Europe pharmaceuticals segment, revenues for the nine months ended September 30, 2003 were $169,396,000 compared to $138,632,000 for the same period of 2002, an increase of $30,764,000 (22%). The increase is primarily due to an increase in the value of currencies in the region relative to the U.S. Dollar, which resulted in an increase in revenues of $20,870,000. Additionally, excluding the effect of currencies, revenues in Poland increased $6,516,000 and revenues in Spain increased $1,632,000 primarily due to price increases and new product launches. Revenues in 2003 were affected by challenges with German health care reform, reference-pricing litigation in Spain and price controls in Italy.

In our AAA pharmaceuticals segment, revenues for the nine months ended September 30, 2003 were $37,921,000 compared to $40,298,000 for the same period of 2002, a decrease of $2,377,000 (6%). The decrease is due to lower sales volume in several products including Reptilase, partially offset by an increase in sales of Nyal products in Australia.

Royalties: Royalties earned for the nine months ended September 30, 2003 were $136,755,000 compared to $186,368,000 for the same period of 2002, a decrease of $49,613,000 (27%). We believe that the decrease in royalties during the nine months ended September 30, 2003 includes the effects of increasing competition between Schering-Plough and Roche, Schering-Plough’s provision for estimated rebates on its U.S. sales of ribavirin and changes in trade inventory levels as reported to us by Schering-Plough. We have no information with regard to the basis for the rebate and return provision other than public statements made by Schering-Plough suggesting generic competition in the last half of 2003 would have an impact on demand.

Gross Profit: Gross profit margin on product sales decreased to 65% for the nine months ended September 30, 2003 compared to 68% in 2002. The decrease in gross profit is primarily due a change in the geographic mix in sales, primarily in the United States and Europe, which lowered our overall gross profit

Selling Expenses: Selling expenses were $121,146,000 for the nine months ended September 30, 2003, compared to $119,120,000 for the same period in 2002, an increase of $2,026,000 (2%). The increase reflects our increased promotional efforts, mainly in Europe of $5,559,000, partially offset by a decrease in our selling expenses in our North America pharmaceuticals segment of $2,861,000.

General and Administrative Expenses: General and administrative expenses were $80,797,000 for the nine months ended September 30, 2003, compared to $293,112,000 for the same period in 2002, a decrease of $212,315,000. Included in selling, general and administrative expenses for the nine months ended September 30, 2002, are non-recurring and other unusual charges of $204,958,000, which primarily include: stock compensation costs related to change of control under our Option Plan ($61,400,000); executive and director bonuses paid in connection with Ribapharm’s public offering ($47,839,000); professional fees related to Ribapharm ($13,000,000); incentive compensation costs related to the accelerated vesting of restricted stock upon the change of control under our Long-Term Incentive Plan ($12,022,000); costs incurred in the 2002 proxy contest ($7,382,000); the write-down of the corporate airplane ($9,100,000); the write-off of ICN International AG capitalized offering costs ($18,295,000); and severance costs ($30,708,000).

The remaining decrease of $7,357,000 reflects a reduction in corporate general and administrative expenses of $14,635,000, which is mainly attributable to expenses incurred in the nine months ended 2002 related to severance costs of $4,343,000, a compensation charge of $2,968,000 for the exercise of stock options, the write-off of deferred acquisition costs of $2,674,000 and lower general and administrative expenses in the pharmaceutical segment of $2,606,000 due primarily to the closing of our European headquarters in Basel, Switzerland. These expenses were partially offset by an increase in Ribapharm’s general and administrative expenses of $11,175,000 related to severance costs incurred early this year and legal and professional fees incurred in connection with the Ribapharm acquisition.

Research and Development: Research and development expenses for the nine months ended September 30, 2003 were $29,701,000, compared to $35,526,000 for the same period in 2002. The $5,825,000 decrease is primarily attributable to the timing of costs associated with the clinical trials of Viramidine and Hepavir B.

Gain on Sale of Subsidiary Stock: In April 2002, we sold, through an underwritten public offering, 29,900,000 shares of common stock representing 19.93% of the total outstanding common stock of Ribapharm. In connection with the Ribapharm offering, we received net cash proceeds of $276,611,000 and recorded a gain on the sale of Ribapharm’s stock of $261,937,000, net of offering costs in the nine months ended September 30, 2002.

Other Income, Net, Including Translation and Exchange: Other income, net, including translation and exchange, resulted in a gain of $496,000 for the nine months ended September 30, 2003, compared to a gain of $8,192,000 for the same period in 2002. In 2003, translation gains principally consisted of translation and exchange gains in Europe and AAA of $4,521,000 partially offset by transaction and exchange losses related to our dollar denominated net assets in Canada of $3,949,000.

Interest Expense and Income: Interest expense during the nine months ended September 30, 2003 decreased $10,489,000 compared to the same period in 2002 due to repurchases of debt in 2002. Interest income decreased $1,368,000 due to lower yields on investments partially offset by an increase in interest-bearing cash.

Income Taxes: Our effective income tax rate for the nine months ended September 30, 2003 was a negative 203% compared to 35% for the same period of 2002. Our negative effective tax rate for 2003 was primarily due to the pre-tax loss resulting from the write-off of acquired IPR&D expenses in connection with the Ribapharm acquisition which is not deductible for tax purposes. Excluding the effect of the acquired IPR&D write-off, the 2003 effective tax rate would have been 38%. The effective tax rate for 2002 reflects a tax benefit of $3,861,000 related to costs previously incurred in connection with a joint venture in China.

Minority Interest: Minority interest was $11,667,000 and $10,670,000 for the nine months ended September 30, 2003 and 2002, respectively. Minority interest primarily relates to the minority shareholders’ portion of the net income of Ribapharm. In August 2003, Ribapharm became our wholly-owned subsidiary and we no longer record minority interest related to Ribapharm.

Income (loss) from Discontinued Operations, Net of Taxes: Income (loss) from discontinued operations relating to our Russian pharmaceuticals segment, biomedicals segment, raw materials businesses and manufacturing capabilities in Central Europe and photonics business (in 2002) and was income of $13,992,000 for the nine months ended September 30, 2003 compared to a loss of $109,742,000 for the same period in 2002. In the nine months ended September 30, 2003, we recorded income from discontinued operations of $7,514,000 primarily related to our Russian pharmaceuticals segment and the biomedicals segment. These segments were sold in 2003 for a net gain on disposal of discontinued operations of $6,478,000. The loss for 2002 includes a net loss on disposal of discontinued operations of $83,388,000 due to impairments on our Russian pharmaceuticals business, photonics business and Circe and a net loss from discontinued operations of $26,354,000.

Pharmaceutical Revenues: In our North America pharmaceuticals segment, revenues for the year ended December 31, 2002 were $90,011,000, compared to $134,580,000 for the same period of 2001, a decrease of $44,569,000 (33%). The decrease in 2002 sales was primarily due to reduced sales to wholesalers beginning in the second quarter of 2002 under our inventory reduction program with wholesalers, and our decision to reduce shipments of our Mestinon® product in anticipation of the possibility of generic competition.

In our Latin America pharmaceuticals segment, revenues for the year ended December 31, 2002 were $135,527,000, compared to $128,218,000 for the same period of 2001, an increase of $7,309,000 (6%). The increase was primarily due to an increase in sales in Mexico of $13,836,000, which included an increase in sales of Bedoyecta® and Virazole® of $6,120,000. The increase in sales was partially offset by an aggregate 13% devaluation in currencies in the region.

In our Europe pharmaceuticals segment, revenues for the year ended December 31, 2002 were $189,925,000 compared to $171,210,000 for the same period of 2001, an increase of $18,715,000 (11%). The

increase was primarily due to an increase in sales in Italy and Germany of $9,912,000, primarily due to new product acquisitions, and an increase in sales in Poland of $6,531,000.

In the Asia, Africa and Australia, or AAA pharmaceuticals segment, revenues for the year ended December 31, 2002 were $51,346,000 compared to $49,826,000 for the same period of 2001, an increase of $1,520,000 (3%). The increase was primarily due to an increase in Solcoseryl and Coraceten® product sales.

Royalties: Royalty revenues represent amounts earned under a license and supply agreement with Schering-Plough. Under the license agreement, Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C which Schering-Plough markets in combination with its alfa interferon combination therapy.

Royalties for the year ended December 31, 2002 were $270,265,000 compared to $136,989,000 for the same period of 2001, an increase of $133,276,000 (97%). Revenues for 2002 are net of approximately $9,829,000 for estimated rebates and price concessions related to current period sales of ribavirin that are projected to be paid in subsequent periods. The increase is due to the launch in the United States of pegylated interferon alfa-2b and ribavirin combination therapy by Schering-Plough in October 2001 and the launch in Japan of ribavirin and interferon alfa-2b combination therapy by Schering-Plough in December 2001.

Gross Profit: Gross profit margin on product sales from continuing operations decreased from 69% for the year ended December 31, 2001, to 66% for the same period of 2002. The decrease in gross profit was primarily due to reduced sales of higher margin products in the North America pharmaceuticals segment, which lowered our overall gross profit margin.

Selling, General and Administrative Expenses: Selling, general and administrative expenses were $530,953,000 for the year ended December 31, 2002, compared to $219,003,000 for the same period in 2001, an increase of $311,950,000. Included in selling, general and administrative expenses for the year ended December 31, 2002, were non-recurring and other unusual charges of $241,543,000, which primarily included stock compensation costs related to the change of control under our Amended and Restated 1998 Stock Option Plan ($61,400,000); severance costs related to cash severance payments to former executives, and employee severance benefits ($54,216,000); incentive compensation costs related to the acceleration of vesting of restricted stock upon the change of control ($12,022,000); executive and director bonuses paid in connection with the Ribapharm offering ($47,839,000); professional fees related to the Ribapharm offering ($13,000,000); the write-off of ICN International AG capitalized offering costs ($18,295,000); the write-down of certain assets ($15,045,000); costs incurred in the proxy contest ($9,850,000); environmental related expenses ($8,298,000); and Czech flood damages ($1,578,000). During the year ended December 31, 2001, we recorded non-recurring and other unusual charges of $4,034,000, related to the 2001 proxy contest.

The remaining increase excluding non-recurring items of $74,441,000 reflects increased selling and advertising expenses of $26,165,000 incurred throughout all regions to promote our products. General and administrative expenses increased by $48,276,000 primarily due to increased legal and professional fees of $19,784,000, a compensation charge of $2,968,000 for the exercise of stock options, severance costs of $3,664,000, the write-off of deferred acquisition costs of $2,356,000, higher general and administrative expenses at Ribapharm of $7,907,000, write-down of assets of $2,696,000 and expenses of $3,391,000 related to our headquarters in Basel, Switzerland.

Research and Development: Research and development expenses for the year ended December 31, 2002 were $49,531,000, compared to $28,706,000 for the same period in 2001, an increase of $20,825,000. The increase reflected our expanded and intensified research and development efforts, primarily in the areas of antiviral and anticancer drugs. We increased spending on the antiviral drug Viramidine, which was in Phase 1 clinical trials, and on the antiviral drug Hepavir B, which was in Phase 1 clinical trials in Europe. We commenced Phase 2 clinical trials on Viramidine during December 2002. Additionally, we increased research and development expenses on other initiatives, including work on anti-hepatitis C, anti-hepatitis B and anticancer compounds.

Other (Income) Loss, Net Including Translation and Exchange: Other (income) loss, net including translation and exchange was ($8,707,000) for the year ended December 31, 2002 compared to ($3,084,000)

for the same period in 2001. In the year ended December 31, 2002, we recorded translation gains related to our dollar denominated net assets in Latin America of $6,004,000 and $1,521,000 related to the AAA operations. In the same period of 2001, we recorded other income in connection with the licensing of Levovirin™ to Roche offset by translation and exchange losses of $1,916,000 primarily related to the AAA operations.

Gain on Sale of Subsidiary Stock: In April 2002, we sold, through an initial public offering, 29,900,000 shares of common stock representing 19.93% of the total outstanding common stock of Ribapharm. In connection with the Ribapharm offering, we received net cash proceeds of $276,611,000 and recorded a gain on the sale of Ribapharm’s stock of $261,937,000, net of offering costs.

Loss on Early Extinguishment of Debt: Loss on early extinguishment of debt for the year ended December 31, 2002 was $25,730,000 compared to $32,916,000 for the same period of 2001. In 2002, we recorded a loss on extinguishment for debt of $43,268,000 in connection with a tender offer and consent solicitation for all of the outstanding 8 3/4% Senior Notes due 2008, which was partially offset by a gain on early extinguishment of debt of $17,538,000 on the repurchase of $59,410,000 principal amount of 6 1/2% Convertible Subordinated Notes due 2008. In 2001, we recorded a loss on extinguishment of debt of $32,916,000 related to the redemption and repurchase of our 8 3/4% Senior Notes due 2008 and our 9 1/4% Senior Notes due 2005.

Interest Income and Expense: Interest expense during the year ended December 31, 2002 decreased $12,809,000 compared to the same period in 2001. The decrease was the result of the repurchase of $194,611,000 of 8 3/4% Senior Notes due 2008 in April 2002 and repurchases and redemption of our 9 1/4% Senior Notes due 2005 and 8 3/4% Senior Notes due 2008 which occurred throughout 2001, partially offset by the interest expense incurred on the 6 1/2% Convertible Subordinated Notes due 2008 issued in July 2001. Interest income decreased from $9,473,000 in 2001 to $5,644,000 in 2002, as a result of the decrease in cash balance and the decline in interest rates during 2002 as compared to the same period of 2001.

Income Taxes: Our effective income tax rate for the year ended December 31, 2002 was 42% compared to 35% for 2001. The increase in our effective tax rate was primarily from non-deductible expenses we incurred in 2002, a shift in the mix of earnings to higher tax rate jurisdictions and losses incurred by foreign subsidiaries for which we currently receive no tax benefit. In connection with the public offering of Ribapharm, we utilized our capital loss carryforwards of $72,736,000 and a portion of our net operating loss carryforwards to partially offset the tax gain.

Loss from Discontinued Operations, Net of Taxes: Loss from discontinued operations relates to our Russian pharmaceuticals segment, biomedicals segment, photonics business, raw materials businesses and manufacturing capabilities in Hungary and the Czech Republic and Circe unit and was $197,288,000 for the year ended December 31, 2002 compared to $12,417,000 for the same period in 2001. The loss for 2002 included a loss on disposal of $160,010,000, net of taxes of $48,193,000, which reflected impairment charges for the write-down of assets to their fair market values less costs of disposal. Excluding impairment charges, the loss from discontinued operations for the year ended December 31, 2002 was $37,278,000. The increase in loss on discontinued operations for 2002 was primarily due to increased losses in the photonics business and raw materials businesses and manufacturing capabilities in Hungary and the Czech Republic.

Cumulative Effect of Change in Accounting Principle: During 2002, we completed the transitional impairment test required by SFAS 142. As a result, we recorded an impairment loss of $25,332,000 which was offset by a benefit of $3,541,000 for the write-off of negative goodwill. The net amount of $21,791,000 has been recorded as a cumulative effect of change in accounting principle.

Pharmaceutical Revenues: In our North America pharmaceuticals segment, revenues for the year ended December 31, 2001 were $134,580,000, compared to $112,712,000 for 2000, an increase of $21,868,000 (19%). North American revenues benefited from an increase of $18,900,000 (37%) from sales of dermatalogical products, including Efudix/ Efudex®, Kinerase®, bleaches and Oxsoralen. The increase in sales of dermatological products included the introduction of Glyquin® in the fourth quarter of 2000, which contributed $7,270,000 to the increase.

In our Latin America pharmaceuticals segment, revenues for the year ended December 31, 2001 were $128,218,000, compared to $127,485,000 for 2000. The increase of $733,000 included sales of $2,806,000 attributable to the acquisition of New Pharma S.A. in August 2001. This increase was partially offset by a decrease in sales volume.

In our Europe pharmaceuticals segment, revenues for the year ended December 31, 2001 were $171,210,000 compared to $156,227,000 for 2000, an increase of $14,983,000 (or 10%). The increase was primarily due to new product acquisitions of $4,902,000, revenues of $7,487,000 attributable to the 2000 acquisition of Solco Basel AG and an increase in sales in Poland of $8,367,000. The increase in Poland was primarily due to stronger sales of the cardiology drugs Aclotin® and Bisocard® of $2,751,000 and price increases of other products. The increase in revenues in 2001 was partially off-set by a decrease in sales in Hungary of $4,459,000.

In our AAA pharmaceuticals segment, revenues for the year ended December 31, 2001 were $49,826,000 compared to $45,133,000 for 2000, an increase of $4,693,000 (or 10%). The increase included revenues of $5,872,000 attributable to the 2000 acquisition of Solco Basel AG, partially offset by lower sales of Ancobon® and Fluorouracil® due to interruptions in supplies of products caused by transitioning these products from third party manufacturers to in-house manufacturing.

Royalties: Royalty revenues for the year ended December 31, 2001 were $136,989,000 compared to $155,100,000 for 2000, a decrease of 12%. We believe the decrease was primarily reflective of a slowdown in sales of Rebetron™ by Schering-Plough as physicians awaited marketing authorization pending FDA review and clearance for the use of pegylated interferon with ribavirin, which occurred in August 2001. The launch of this combination therapy occurred in October 2001. Royalties for the fourth quarter of 2001 increased by $23,989,000 as compared to the similar period in 2000.

Gross Profit: Gross profit margin on product sales increased to 69% for the year ended December 31, 2001 compared to 68% for 2000. The gross profit margin for all regions was relatively consistent for 2001 and 2000.

Selling, General and Administrative Expenses: Selling, general and administrative expenses were $219,003,000 for the year ended December 31, 2001, compared to $224,651,000 for 2000, a decrease of $5,648,000 (3%). The decrease reflects a reduction in legal and professional fees, which were higher in 2000 due to the Department of Justice investigation and Securities and Exchange Commission litigation, partially off-set by an increase in selling general and administrative expenses of $5,659,000 related to the acquisitions completed in 2001 and in the third quarter of 2000.

Research and Development: Research and development expenses for the year ended December 31, 2001 were $28,706,000, compared to $16,383,000 in 2000. The increase of $12,323,000 reflected the continued expansion of research and development efforts, primarily in the areas of antiviral and anticancer drugs. Total research and development spending for 2001 and 2000 were $50,909,000 and $36,686,000, respectively, which included capital for new equipment and facilities, as well as accelerated research programs to focus on the pipeline and new product development.

Other (Income) Loss, Net, Including Translation and Exchange: Other (income) loss, net, including translation and exchange was ($3,084,000) for the year ended December 31, 2001 compared to $2,077,000 for 2000. In 2001, we recorded other income in connection with the licensing of Levovirin to Roche offset by translation and exchange losses of $1,916,000. In 2000, translation losses principally consisted of transaction losses of $1,649,000.

Interest Income and Expense: Interest expense during the year ended December 31, 2001 decreased $4,583,000 compared to 2000, primarily due to the repurchase and redemption of the 8 3/4% Senior Notes due 2008 and 9 1/4% Senior Notes due 2005 during the fourth quarter of 2000 and in the second and third quarters of 2001. Interest income decreased from $12,483,000 in 2000 to $9,473,000 in 2001 as a result of the decrease in cash balance and decline in interest rates during 2001 as compared to 2000.

Income Taxes: Our effective income tax rate for the year ended December 31, 2001 was 35% compared to 25% for 2000. The increase in our effective tax rate was primarily due to the recognition, during the second quarter of 2000, of deferred tax assets through the reduction of the related valuation allowance for capital loss carryforwards amounting to $12,250,000. Excluding this reduction in valuation allowance the effective rate in 2000 would have been 34%.

Cash and cash equivalents totaled $301,028,000 at September 30, 2003 compared to $245,184,000 at December 31, 2002. Working capital was $379,836,000 at September 30, 2003 compared to $397,070,000 at December 31, 2002. The change in working capital of $17,234,000 is primarily attributable to the use of cash in the acquisition of Ribapharm of $186,879,000, partially offset by cash generated from operations, cash proceeds of $113,000,000 received in connection with the sale of the Russian pharmaceuticals business and the Dosimetry business and the decrease in the royalty receivable from Schering-Plough.

Cash provided by operating activities is expected to continue to be our primary recurring source of funds in 2003. During the nine months ended September 30, 2003, cash provided by operating activities totaled $171,132,000, compared to cash used in operating activities of $8,384,000 in 2002. During the nine months ended 2003, we recorded a non-cash write-off of in-process research and development of $117,609,000. During the nine months ended September 30, 2002, cash flow from operating activities was negatively impacted by certain non-recurring and other unusual cash payments. Those cash payments included cash paid for the compensation costs related to the change of control under our Option Plan ($61,400,000), costs incurred in the 2002 proxy contest ($7,382,000), professional fees related to Ribapharm ($13,000,000) and executive and director bonuses paid in connection with the Ribapharm offering ($47,839,000).

Cash (used in) provided by investing activities was $(97,570,000) for the nine months ended September 30, 2003 compared to $242,230,000 for the same period of 2002. In 2003, net cash used in investing activities consisted of payments for the acquisition of license rights, product lines and businesses of $192,923,000 related to the Ribapharm acquisition and capital expenditures of $9,241,000 partially offset by investing activities in discontinued operations of $104,276,000 primarily related to net proceeds from the sale of the Russian pharmaceuticals segment and the Dosimetry business. In 2002, net cash provided by investing activities consisted of proceeds from the sale of subsidiary stock of $276,611,000 partially offset by the acquisition of license rights, product lines and businesses of $26,765,000 and payments for capital expenditures of $13,593,000.

Cash used in financing activities totaled $26,277,000 for the nine months ended September 30, 2003, including cash dividends paid on common stock of $19,501,000 and payments on notes payable of $6,797,000. In 2002, cash used in financing activities totaled $310,849,000 for the nine months ended September 30, 2002, including payments on long-term debt of $273,630,000 principally consisting of the repurchase of $194,611,000 principal of our outstanding 8 3/4% Senior Notes due 2008 and the repurchase of $59,410,000 principal of our 6 1/2% Convertible Subordinated Notes due 2008, the repurchase of an aggregate 1,146,000 shares of our common stock for $31,955,000 and cash dividends paid on common stock of $19,035,000 partially offset by proceeds from the exercise of employee stock options of $12,892,000.

Cash and cash equivalents totaled $245,184,000 at December 31, 2002 compared to $317,011,000 at December 31, 2001. Working capital was $397,070,000 at December 31, 2002 compared to $509,601,000 at December 31, 2001. The decrease in working capital of $112,531,000 is primarily due to a $71,827,000

decrease in cash and cash equivalents and an increase in accrued liabilities of $61,606,000 resulting from severance, legal and environmental reserves established in 2002, which were offset by an increase in taxes receivable of $15,669,000, and prepaid expenses of $6,885,000.

During the year ended December 31, 2002, cash provided by operating activities totaled $22,530,000, compared to cash provided by operating activities of $138,112,000 in 2001. During the year ended December 31, 2002, cash flow from operating activities was negatively impacted by non-recurring and other unusual cash payments. Those cash payments included cash paid for the compensation costs related to the change of control under our Stock Option Plan of approximately $61,400,000, costs incurred in our proxy contest of $9,850,000, professional fees related to the public offering of Ribapharm of $13,000,000 and executive and director bonuses paid in connection with the public offering of Ribapharm of $47,839,000.

Cash provided by investing activities was $222,053,000 for the year ended December 31, 2002 compared to cash used in investing activities in the amount of $119,065,000 for the same period of 2001. In 2002, net cash provided by investing activities principally consisted of proceeds from the public offering of Ribapharm of $276,611,000, offset by payments for capital expenditures of $19,420,000 and acquisitions of license rights, product lines and businesses primarily in Europe and Latin America of $37,164,000. In 2001, net cash used in investing activities principally consisted of acquisitions of license rights, product lines and businesses totaling $49,981,000 and payments for capital expenditures of $47,689,000, principally representing an increase in the investment in research and development facilities in North America and distribution facilities in Europe.

Cash used in financing activities totaled $318,074,000 for the year ended December 31, 2002, including payments on long-term debt of $271,154,000 principally consisting of the repurchase of $194,611,000 principal of our outstanding 8 3/4% Senior Notes due 2008, the repurchase of $59,410,000 principal of our 6 1/2% Convertible Subordinated Notes due 2008, the repurchase of an aggregate 1,146,000 shares of our common stock for $31,955,000 and cash dividends paid on common stock of $25,520,000. During 2001, cash provided by financing activities totaled $150,722,000. Proceeds from issuance of long-term debt totaled $507,430,000 including net proceeds from an offering of $525,000,000 of 6 1/2% Convertible Subordinated Notes due 2008, which we completed in July 2001. We used cash for payments on long-term debt of $344,712,000 principally consisting of the repurchase of $190,645,000 principal of our outstanding 9 1/4% Senior Notes due 2005 and $117,559,000 principal of our outstanding 8 3/4% Senior Notes due 2008. Cash dividends paid on common stock totaled $24,002,000.

On November 19, 2003, we completed an offering of $240,000,000 aggregate principal amount of 3.0% Convertible Subordinated Notes due 2010 and $240,000,000 aggregate principal amount of our 4.0% Convertible Subordinated Notes due 2013. The notes are convertible into our common stock at a conversion rate of 31.6336 shares per $1,000 principal amount of notes or approximately $31.61 per share, subject to anti-dilution adjustments. Upon conversion we will have the right to satisfy our conversion obligations by delivering, at our option, either shares of our common stock, cash or a combination thereof.

We used $42.9 million of the net proceeds of the offering of the 3.0% Convertible Notes due 2010 and the 4.0% Convertible Subordinated Notes due 2013 to enter into convertible note hedge and written call option transactions with respect to its common stock. The written call options have a strike price per share of $39.515. The convertible note hedge is expected to reduce the potential dilution from conversion of the notes; the written call option is expected to offset, to some extent, the cost of the convertible note hedge. On November 24, 2003, we used proceeds from the offering to retire approximately $139.6 million aggregate principal amount of our 6 1/2% Convertible Subordinated Notes due 2008. See “Use of Proceeds.”

We believe that our existing cash and cash equivalents and funds generated from operations will be sufficient to meet our operating requirements at least through September 30, 2004 and to fund anticipated acquisitions and capital expenditures and our research and development program. While we have no current intent to issue additional debt or equity securities, we may also seek additional debt financing or issue additional equity securities to finance future acquisitions. We fund our cash requirements primarily from cash provided by our operating activities. Our sources of liquidity are our cash and cash equivalent balances and our cash flow from operations.

Competition from generic pharmaceutical companies could have a material negative impact on our future royalty revenue. With respect to Schering-Plough, royalties will be affected by the likelihood of reduced sales by Schering-Plough as well as a reduction in the royalty rate per the license agreement. With respect to Roche, under the license agreement, introduction of generics in any market will eliminate the obligation of Roche to pay royalties for sales in that market. See Note 9 of our Notes to Consolidated Condensed Financial Statements regarding “Commitments and Contingencies — Generic Litigation.”

While we have historically paid quarterly cash dividends, there can be no assurance that we will continue to do so in the future.

We evaluate the carrying value of our inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price we expect to obtain for our products in their respective markets compared with historical cost, and the remaining shelf life of goods on hand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. We also evaluate the collectibility of our receivables on a regular basis. Our methodology for establishing the allowance for bad debts varies with the regions in which we operate. The allowance for bad debts is based upon specific identification of customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. As of September 30, 2003, we believe that adequate provision has been made for inventory obsolescence and for anticipated losses on uncollectible accounts receivable.

We currently have no insurance with respect to product liability claims arising in the United States. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against us, a substantial claim, if successful, could have a negative impact on our liquidity and financial performance.

The following table sets forth our contractual obligations as of December 31, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.


(1)	On November 24, 2003, we repurchased $139.6 million aggregate principal amount of the 6 1/2% Convertible Subordinated Notes due 2008.

(2)	On November 19, 2013, we issued $240 million aggregate principal amount of 3.0% Convertible Subordinated Notes due 2010 and $240 million aggregate principal amount of 4.0% Convertible Subordinated Notes due 2013. See “Description of Other Indebtedness.”

Approximately 54% and 63% of our revenues from continuing operations for the nine months ended September 30, 2002 and 2003, respectively, were generated from operations outside the United States. All our foreign operations are subject to risks inherent in conducting business abroad, including possible nationalization or expropriation, price and currency exchange controls, fluctuations in the relative values of currencies, political instability and restrictive governmental actions. Changes in the relative values of currencies occur

We experience the effects of inflation through increases in the costs of labor, services and raw materials. We are subject to price control restrictions on our pharmaceutical products in the majority of countries in which we operate. While we attempt to raise selling prices in anticipation of inflation, we operate in some markets which have price controls that may limit our ability to raise prices in a timely fashion. Future sales and gross profit will be reduced if we are unable to obtain price increases commensurate with the levels of inflation.

Our business and financial results are affected by fluctuations in world financial markets. We evaluate our exposure to such risks on an ongoing basis, and review our risk management policy to manage these risks to an acceptable level, based on our judgment of the appropriate trade-off between risk, opportunity and costs. We do not hold any significant amount of market risk sensitive instruments whose value is subject to market price risk. We seek to manage our foreign currency exposure by maintaining the majority of cash balances at foreign subsidiaries in the U.S. Dollar and through operational means by managing local currency revenues in relation to local currency costs. We are currently taking steps to mitigate the impact of foreign currency on the income statement, which include hedging our foreign currency exposure through net investment hedges.

In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the following analysis.

Interest Rate and Currency Risks: We currently do not hold financial instruments for trading or speculative purposes. Our financial assets are not subject to significant interest rate risk due to their short duration. At September 30, 2003, we had $12,742,000 of foreign denominated variable rate debt that would subject us to both interest rate and currency risks. At the present time, we do not use any derivatives or similar instruments to manage our interest rate or currency risk. A 100 basis-point increase in interest rates affecting our financial instruments would have an immaterial effect on our nine month and third quarter 2003 pretax earnings. In addition, we currently have approximately $806 million of liabilities that require U.S. Dollar repayment. To the extent that we require, as a source of debt repayment, earnings and cash flow from some of our units located in foreign countries, we are subject to the risk of changes in the value of certain currencies relative to the U.S. Dollar. However, the change of a 100 basis-point in interest rates would reduce the fair value of our fixed-rate debt instruments by approximately $16.7 million as of September 30, 2003 and $47.7 million if the above new issuances and repurchases were included.

We are a global, publicly-traded, research-based specialty pharmaceutical company that discovers, develops, manufactures and markets a broad range of pharmaceutical products. Our products are currently sold in 128 markets around the world, and encompass a broad range of therapeutic areas, with a primary focus upon our three targeted areas: infectious disease, neurology and dermatology. Our research and new product development initiatives focus on innovative treatments for infectious diseases and are primarily conducted by our wholly-owned subsidiary, Ribapharm. We believe that this research and development capability, in conjunction with our worldwide capacity to commercialize our products, positions us as a leading, fully integrated specialty pharmaceutical company. For the twelve months ended September 30, 2003, we generated revenue of $709.3 million and Adjusted EBITDA, as defined in footnote 5 under “Summary Consolidated Financial and Other Data,” of $230.6 million.

Global distribution network. We currently generate sales in 128 markets throughout the world and approximately 76% of our product revenues during the nine months ended September 30, 2003, were generated by our 10 targeted markets. We believe that our global operational network allows us to develop and register multi-regional products that smaller pharmaceutical companies are unable to effectively distribute and market.

Product and geographic diversity. Our specialty pharmaceuticals portfolio is highly diversified, both from a product and geographic standpoint. We currently manufacture, market and distribute more than 575 branded products on a regional and global basis. For the nine months ended September 30, 2003, our top 10 products contributed 34% of total product revenues. During the same period we derived 19% of our specialty pharmaceutical revenues from North America, 25% from Latin America, 46% from Europe and 10% from Asia, Africa and Australia. Furthermore, we believe that our local and regional sales and marketing presence enables us to generate higher profitability on our smaller, niche products that cannot be achieved by the larger pharmaceutical companies.

Substantial cash flow from ribavirin royalty. We license the right to manufacture and sell our intellectual property relating to ribavirin to Schering-Plough and Roche pursuant to individual licensing agreements. For the nine months ended September 30, 2003, royalty revenues from the sale of ribavirin by Schering-Plough and Roche amounted to $136.8 million. Our royalty revenues provide us with a high margin source of cash flow that we intend to use towards the funding of research and development efforts, and other investments to grow our business. Although we anticipate that ribavirin may begin to face generic competition in the United States as early as the fourth quarter of 2003, we generated royalty revenues in the European Union and the rest of the world of $69.7 million for the nine months ended September 30, 2003. The use of ribavirin by Schering-Plough and Roche to treat hepatitis C in the European Union is protected by various patents expiring 2005 and data exclusivity through 2009. Furthermore, data exclusivity makes it more difficult for competitors to enter these markets with competing forms of ribavirin because they are required to conduct their own clinical studies of their generic replications prior to commercializing their generic versions.

Research capabilities and product library. Ribavirin and Viramidine were developed from our library of nucleoside analog chemical compounds. Nucleoside analogs are small-molecule chemicals that resemble the natural building blocks of human and viral genetic material, commonly known as DNA and RNA. In total, we currently have over 10,300 nucleoside analogs in our library. We believe that our library contains one of the largest collections of nucleoside analogs in the world, and intend to combine our scientific expertise with advanced drug screening techniques in an effort to discover and develop new product candidates using our nucleoside analog library. In addition, during 2002, we acquired more than 113,000 diverse non-nucleoside analog compounds from third parties to complement our nucleoside analog library. These non-nucleoside compounds also target the areas of infectious disease and cancer and we intend to use these non-nucleoside compounds to facilitate our development of new products.

Seasoned management team. Since June 2002, we have put in place a substantially new management team with significant experience in the pharmaceutical and healthcare industries. Robert W. O’Leary was named our Chairman and Chief Executive Officer in June 2002 and has extensive healthcare industry experience, with specialization in corporate turnarounds and reorganizations. In November 2002, Timothy C. Tyson was named our President and Chief Operating Officer after spending over 14 years at GlaxoSmithKline plc, most recently as President of Global Manufacturing and Supply. In December 2002, Bary G. Bailey was named our Executive Vice President and Chief Financial Officer. Mr. Bailey was most recently an Executive Vice President, Pharmacy and Technology for PacifiCare Health Systems, Inc. Our top three executives have more than 80 years of cumulative experience in the pharmaceutical and healthcare industries.

During 2002, we conducted a strategic review of our operations. As a result of that review, we decided to emphasize our specialty pharmaceuticals business, divest businesses that do not fit our strategic growth plans, build our pipeline of new products and bring our overall cost structure in line with industry averages. Some of the key initiatives that we have implemented to date include:


	•	Hiring of new management team. We have put in place new leadership, with extensive experience in the pharmaceuticals and healthcare sectors. Since June 2002, we have replaced, or hired new individuals for, 28 of the top 52 management positions.

	•	Divestiture of non-core businesses. Since we announced our repositioning program in October 2002, we have substantially completed our planned divestitures of businesses that do not fit our strategic growth plans. Over the past 14 months, we have sold seven businesses which generated gross cash proceeds of $113.5 million.

	•	Ribapharm acquisition. In August 2003 we repurchased the approximately 20% minority interest in our Ribapharm subsidiary, thereby increasing our ownership interest to 100%. Through this transaction we have secured full control over Ribapharm’s new product pipeline and royalty revenue stream.

	•	Cost rationalization. We have lowered costs by controlling expenses in our corporate headquarters, closing our European headquarters and eliminating excess administrative expenses worldwide, which we believe has produced substantial savings.

We have developed, and have begun to implement, the following four-part strategy to guide us through the global repositioning of our business.

Targeted growth of existing products. In order to drive specialty pharmaceuticals sales growth, we will focus our business on specific markets, brands and therapeutic areas, as discussed below:


	Focus on 10 key geographic regions. We will focus on 10 key geographic regions: The United States, United Kingdom, France, Canada, China, Italy, Poland, Germany, Spain and Mexico. These 10 markets, which include nine of the world’s 10 largest pharmaceutical markets, accounted for approximately 76% of our product sales for the nine months ended September 30, 2003. In particular, we plan to focus on North America, which is the largest pharmaceutical market worldwide, and our biggest growth opportunity. Revenues from North America have been historically underrepresented in our business. For the nine months ended September 30, 2003, our North American sales accounted for 19%, as compared to an industry average of 51%, of our pharmaceutical sales.

	Focus on three core therapeutic classes. We will focus on infectious disease, neurology and dermatology. Historically, we have had significant revenue in these areas, especially in infectious disease,


	where the ribavirin royalty is derived. We believe that these three therapeutic classes are positioned for further growth, and that it is possible for a mid-sized company such as ourselves to attain a leadership position within these categories.

	Focus on nine global brands. We will focus on nine global brands, seven of which are currently being marketed and accounted for 22% of our product sales for the nine months ended September 30, 2003, and two of which are in clinical development. All these brands are within our three core therapeutic classes. We believe that these global brands have the potential for global penetration and growth rates above industry averages. We intend to actively pursue life cycle management strategies for our global brands and selectively for our other brands.

Development of new products via internal research and development activities. Through Ribapharm, we seek to discover, develop and commercialize innovative products for the treatment of significant unmet medical needs, principally in the areas of infectious diseases and cancer. We intend to combine our scientific expertise with advanced drug screening techniques in order to discover and develop new antiviral candidates from our nucleoside analog and non-nucleoside libraries. Except as otherwise required by the terms of our agreement with Schering-Plough, we intend to retain control of our product candidates in order to obtain the maximum value from our research efforts.

Product acquisitions. In addition to our in-house development efforts, we plan to selectively license or acquire product candidates, technologies and businesses from third parties which complement our existing business and provide for effective life cycle management of key products. We believe that our drug development expertise may allow us to recognize licensing opportunities and to capitalize on research initially conducted and funded by others.

Efficient manufacturing and supply chain organization. We currently operate 15 manufacturing facilities. Under our global manufacturing strategy announced in October 2003, we plan to reduce the number of manufacturing facilities to five by 2006, thereby substantially increasing capacity utilization rates and improving efficiency levels. In conjunction with the rationalization of our manufacturing facilities, we have undertaken a major process improvement initiative, affecting all phases of our operations, from raw material and supply logistics, to manufacturing, warehousing and distribution. In addition, procurement efforts have been centralized to assure that all available economies of scale are realized.

We develop, manufacture and distribute a broad range of prescription and non-prescription pharmaceuticals. Our prescription pharmaceutical products treat, among other things, infectious diseases, diseases of the skin, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. Our current product portfolio comprises more than 575 branded products, with over 2,500 stock-keeping units. We market our products globally through sales force of over 1,250 representatives. Our products are sold globally, through four reportable pharmaceutical segments comprising: North America, Latin America, Europe and Asia, Africa and Australia.

During the twelve months ended December 31, 2002, and the nine months ended September 30, 2003, our 10 highest revenue generating pharmaceutical products represented approximately 36% and 34%, respectively, of our worldwide pharmaceutical sales. The following table summarizes our 10 largest pharma-

As part of our repositioning efforts, we intend to drive specialty pharmaceuticals sales growth by focusing our business on specific markets, brands and therapeutic areas. We plan to focus on nine global brands, seven of which are currently being marketed, across three therapeutic classes, as further discussed below.

Kinerase: Kinerase is used to help improve the unwanted visual effects of skin aging and photodamage. It is made with the natural plant growth factor, 0.1% furfuryladenine, that slows the changes that naturally occur in the cell-aging process in plants. It is available in cream or lotion formulations and is both noncomedogenic and hypoallergenic.

Efudex/ Efudix: Efudex/ Efudix is used for the treatment of multiple actinic or solar keratoses and superficial basal cell carcinoma. It is sold as a topical solution and cream, and provides effective therapy for multiple lesions. The key active ingredient in Efudex/ Efudix is fluorinated pyrimidine 5-fluorouracil, an antineoplastic antimetabolite.

Dermatix®: Dermatix is used to flatten, soften and reduce scar-associated discoloration in old or new scars and is used to prevent abnormal scar formation. It is sold in a patented gel formulation that contains bio-inert and biocompatible silicone compounds, namely polysiloxane, silicon dioxide and non-volatile silicone components.

Oxsoralen-Ultra®: Oxsoralen-Ultra is indicated for the treatment of severe psoriasis and mycosis fungoides and is used along with ultraviolet light radiation. Oxsoralen-Ultra capsules contain methoxsalen as the active ingredient.

The total sales from Kinerase, Efudex/ Efudix, Dermatix and Oxsoralen-Ultra accounted for approximately 8% and 9% of our product sales from continuing operations, for the twelve months ended December 31, 2002, and the nine months ended September 30, 2003, respectively.

Virazole: Virazole is a brand name for ribavirin, a synthetic nucleoside with antiviral activity. It is indicated for the treatment of hospitalized infants and young children with severe lower respiratory tract infections due to respiratory syncytial virus. Virazole has also been approved for various other indications in countries outside the United States including herpes zoster, genital herpes, chickenpox, hemorrhagic fever with renal syndrome, measles and influenza.

Ancotil®/ Ancobon®: Ancotil/ Ancobon is used for the treatment of systemic fungal infections. Ancotil/ Ancobon has been shown to have a complementary mode of action to other antifungal agents, including amphotericin B. The active ingredient in Ancotil/ Ancobon is flucytosine.

The total sales from Virazole and Ancotil/ Ancobon accounted for approximately 5% of our product sales from continuing operations both during the twelve months ended December 31, 2002, and the nine months ended September 30, 2003.

Mestinon: Mestinon is an orally active cholinesterase inhibitor, used in the treatment of myasthenia gravis, a chronic neuromuscular, autoimmune disorder that causes varying degrees of fatigable weakness involving the voluntary muscles of the body. Its active ingredient is pyridostigmine bromide.

The total sales from Mestinon accounted for approximately 7% and 8% of our product sales from continuing operations, for the twelve months ended December 31, 2002, and the nine months ended September 30, 2003.

Our royalty revenues are derived from sales of ribavirin. Ribavirin is a nucleoside analog that we discovered from our library of nucleoside analog compounds. Ribavirin was one of the first antiviral drugs ever discovered and was first approved by the FDA in 1985 for the treatment of respiratory syncytical virus infection in children with respiratory distress via aerosol administration, which we market under the tradename Virazole.

In 1995 we entered into an exclusive license and supply agreement with Schering-Plough whereby Schering-Plough licensed from us all oral forms of ribavirin for the treatment of chronic hepatitis C, which they market in combination with Schering-Plough’s alfa interferon, or the Combination Therapy. In 1998, Schering-Plough received approval from the FDA to market Rebetron® Combination Therapy. Rebetron combines Rebetol® (ribavirin) capsules and Intron® A (interferon alfa-2b) injection, for the treatment of hepatitis C in patients with compensated liver disease. In July 2001, the FDA granted Schering-Plough marketing approval for Rebetol capsules as a separately marketed product for use only in combination with Intron A injection for the treatment of hepatitis C in patients with compensated liver disease previously untreated with alfa interferon (commonly referred to as treatment-naive patients) or who have relapsed following alfa interferon therapy. In August 2001, the FDA also granted Schering-Plough approval for Peg-Intron^TM (peginterferon alfa-2b), a longer lasting form of Intron A, for use in Combination Therapy with Rebetol for the treatment of hepatitis C in treatment-naive patients with compensated liver disease who are at least 18 years of age.

In March 2001, the European Commission of the European Union, granted Schering-Plough centralized marketing authorization for Peg-Intron^TM and Rebetol as Combination Therapy for the treatment of both relapsed and treatment-naive adult patients with histologically proven hepatitis C. European Union approval resulted in unified labeling that was immediately valid in all 15 European Union Member States.

In November 2001, Schering-Plough received marketing approval from the Ministry of Health, Labor and Welfare of Japan for ribavirin in combination with interferon alfa-2b for the treatment of hepatitis C. The Combination Therapy is the first combination therapy approved in Japan for treating patients with hepatitis C. In December 2001, Schering-Plough received pricing approval for this Combination Therapy in Japan.

Schering-Plough also markets the Combination Therapy in many other countries around the world based on the United States and European Union regulatory approvals.

On January 6, 2003, we reached an agreement with Schering-Plough and Roche on a settlement of pending patent and other disputes over Roche’s combination antiviral product containing Roche’s version of ribavirin, known as Copegus. Under the agreement, Roche may continue to register and commercialize Copegus globally. The financial terms of this settlement agreement include a license by Ribapharm of ribavirin to Roche. The license authorizes Roche to make, or have made, and to sell Copegus under Ribapharm’s patents. Roche pays royalty fees to us on all sales of Copegus for use in combination with interferon alfa or pegylated interferon alfa.

Royalty revenues under the License Agreements were $155.1 million, $137.0 million and $270.3 million for 2000, 2001, and 2002, respectively, and $186.4 million and $136.8 million for the nine months ended September 30, 2002 and 2003, respectively.

Viramidine: In November 2003, we announced that we decided, following a meeting with the FDA, to initiate Phase 3 studies of our antiviral compound, Viramidine. At the meeting with the FDA, which was held in September 2003, we presented interim analyses of 12 weeks of clinical data in a Phase 2 trial. Viramidine is a nucleoside (guanisine) analog that we intend to develop in oral form for the treatment of hepatitis C. Viramidine is converted into ribavirin by adenosine deaminase in the liver. We expect to test Viramidine’s effect on the hepatitis C virus in combination with one or more pegylated interferon alfas.

Preclinical studies indicated that Viramidine, a liver-targeting analog of ribavirin, has antiviral and immunological activities (properties) similar to ribavirin. In an animal model of acute hepatitis, Viramidine showed biologic activity similar to ribavirin. The liver-targeting properties of Viramidine were also confirmed in two animal models. Short-term toxicology studies also show that Viramidine may be safer than ribavirin at the same dosage levels. This data suggests that Viramidine, as a liver-targeting analog of ribavirin, may potentially be as effective and have less side effects than ribavirin.

The Phase 2 study enrolled a total of 180 patients. It was designed to treat patients for 48 weeks, remove the patients from therapy for an additional 24 weeks and then determine the percentage of patients with undetectable virus in their blood as well as the incidence of hemolytic anemia at the end of the entire 72-week study period. The study also included an interim analysis performed on the first 160 patients who received at least 12 weeks therapy. Analysis of the 12-week data showed that Viramidine, in combination with a pegylated interferon, produced a clinically significant reduction in viral load. In addition, Viramidine, when compared with ribavirin, produced approximately half the drop in hemoglobin levels at treatment week four, which was maintained through week 12.

The Phase 3 program will consist of two global studies in 80 sites with approximately 1,000 patients in each study. The studies will compare Viramidine and ribavirin, each in conjunction with a pegylated interferon.

Hepavir B: Hepavir B is a nucleoside analog we licensed from Metabasis Therapeutics, Inc., or Metabasis, in October 2001. We are exploring the possibilities of developing this compound into an oral once a day monotherapy for patients with chronic hepatitis B infection. The active molecule in this compound exhibits anti-hepatitis B activity against both the wild type and Lamivudine drug-resistant hepatitis B. Based on biologic and molecular modeling data, this compound binds to the active site of the hepatitis B replication enzyme so that the virus is prevented from utilizing the natural substrate from the host to replicate. A prodrug modification developed by Metabasis significantly improved the compound’s physiochemical properties and ability to target the liver. In preliminary experiments in rodents, the active molecule was delivered in significantly greater proportion to the targeted organ, the liver, as compared to the non-targeted organ, the kidney. The kidney is the organ responsible for the dose-limiting toxicity. In these experiments, the amount of Metabasis-modified compound delivered to the liver versus kidneys was approximately 10 times greater than the amount of compound delivered by another well established process. We are working on large-scale

synthesis of this compound and have commenced formulation studies. Ribapharm has also initiated additional biology, drug metabolism, pharmacokinetic and toxicology studies. We initiated a Phase 1 clinical trial of Hepavir B in Europe in August 2002 and filed an Investigational New Drug Application, or IND, with the FDA in October 2002.

Through Ribapharm, we seek to discover and develop and, through our specialty pharmaceutical sales force, commercialize, innovative products for the treatment of significant unmet medical needs, principally in the areas of infectious diseases and cancer. These efforts led to the discovery and development of ribavirin, our antiviral drug for the treatment of hepatitis C that Schering-Plough and Roche market under separate licenses from us, and is the source of our royalty income. Ribapharm’s current program areas focus on hepatitis C, hepatitis B, HIV/ AIDS, and cancer, each of which affects a large number of patients. Through Ribapharm we are also developing a pipeline of product candidates, including two clinical stage programs that target large market opportunities. Ribapharm’s research and development activities are based upon the expertise accumulated in over 30 years of nucleic acids research focusing on the internal generation of novel molecules.

We believe that our nucleoside analog library is among the largest such collections in the world. In total, we presently have over 10,300 nucleoside analog compounds in our library. During 2002 we acquired more that 113,000 diverse non-nucleoside analogs from third parties to complement our nucleoside analog library.

Our research and development function works closely with corporate marketing on a global and regional basis and, historically, has entered into licensing arrangements with other larger pharmaceutical companies, as well as strategic partnerships to develop proprietary products, as discussed below. In addition, we seek to develop innovative products targeted to address the specific needs of the local markets in which we operate.

Since 2000, we have spent $43.0 million to update and modernize our research laboratories and equipment. This modernization has enabled us to accelerate our drug discovery and development process by utilizing advanced screening techniques and equipment, biological assays and sophisticated computer-assisted drug design. We currently have approximately 210 employees devoted to research and development activities.

We market our pharmaceutical products in some of the most developed pharmaceutical markets, as well as many developing markets. We adjust our marketing strategies according to the individual markets in which we operate. We believe our marketing strategy is distinguished by flexibility, allowing us to successfully market a wide array of pharmaceutical products within diverse regional markets, as well as certain drugs on a worldwide basis.

We plan to focus on the major markets that represent approximately 85% of the worldwide pharmaceutical market share, namely the United States, the United Kingdom, France, Canada, China, Italy, Poland, Germany, Spain and Mexico. During the nine months ended September 30, 2003, we derived approximately 76% of our specialty pharmaceutical sales from these 10 markets.

We have a marketing and sales staff of approximately 1,434 persons who promote our pharmaceutical products. As part of our marketing program for pharmaceuticals, we use direct mailings, advertise in trade and medical periodicals, exhibit products at medical conventions, sponsor medical education symposia and sell through distributors in countries where we do not have our own sales staff.

In the United States, we currently promote our pharmaceutical products to physicians through our own sales force. These products are distributed to drug stores and hospitals through wholesalers. In Canada, we have our own sales force and promote and sell directly to physicians, hospitals, wholesalers and large drug store chains. In Latin America, principally in Mexico, Argentina and Brazil, we promote to physicians and distribute products either directly or indirectly to hospitals and pharmacies. In Europe we promote and sell pharmaceutical products through our own sales forces to physicians, hospitals, retail outlets, pharmacies and wholesalers.

We operate in a highly competitive environment. Our competitors, many of whom have substantially greater capital resources and marketing capabilities and larger research and development staffs and facilities, are actively engaged in marketing similar products and developing new products similar to those we propose to develop. We believe that many of our competitors spend significantly more on research and development related activities. Competitive factors vary by product line and customer and include service, product availability and performance, price and technical capabilities. Others may succeed in developing products that are more effective than those we presently market or propose for development. Progress by other researchers in areas similar to those explored by us may result in further competitive challenges.

We also face increased competition from manufacturers of generic pharmaceutical products when patents covering certain of our currently marketed products expire or are successfully challenged. An adverse result in a patent dispute may preclude commercialization of our products, or negatively impact sales of existing products. See “Risk Factors — Likelihood of imminent introduction of generic products puts ribavirin royalties at risk and may impact our ability to finance research and development activities.”

We manufacture most of our pharmaceutical products at our manufacturing plants around the world. We believe that we have sufficient manufacturing facilities to meet our needs for the foreseeable future. As a part of our strategy to improve operational performance, all manufacturing operations not otherwise included in discontinued operations are being assessed for potential consolidation with our other operated facilities. All the manufacturing facilities that require certification from the FDA or foreign agencies have obtained such approval.

In order to meet the demand for some of our markets, we subcontract the manufacturing of some of our products, including products 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.

We rely on a combination of regulatory and patent rights to protect the value of our investment in the discovery and 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 both the United States and the European Union, patents expire 20 years from the date of application.

In the United States, for five years from the date of the first United States regulatory FDA approval of a new drug compound, only the pioneer drug company can use the data obtained at the pioneer’s expense. No generic drug company may submit an application for approval of a generic drug relying on the data used by the pioneer for approval during this five year period.

A similar data exclusivity scheme exists in the European Union, whereby only the pioneer drug company can use data obtained at the pioneer’s expense for 10 years from the date of the approval of the first approval of a drug by the European Agency for the Evaluation of Medicinal Products, or EMEA. In both the United States and the European Union, products without patent protection can be marketed by others so long as they repeat the clinical trials necessary to show safety and efficacy.

Our patent rights with respect to ribavirin are currently the subject of litigation in the United States. A judgment adverse to us has been entered by a federal district court, which ruled that generic drug manufacturers would not necessarily infringe our patents by manufacturing and selling generic ribavirin. Our appeal of that judgment is pending. However, our financial planning models have assumed that generic ribavirin will enter the United States market as soon as the fourth quarter of 2003. The United States data exclusivity period for ribavirin has expired.

Our patent rights with respect to ribavirin are also being challenged in the European Union. We are vigorously defending our position. However, the European Union data exclusivity for Schering-Plough’s ribavirin product, Rebetol®, does not expire until May 2009.

We expect to obtain five years of data exclusivity in the United States for both Viramidine and Hepavir B upon regulatory approval.

We have, and rely on, exclusive rights in a United States patent that claims Hepavir B and related compounds that expires in 2019.

The structure of Viramidine was disclosed many years ago and thus we do not rely on “composition of matter” claims. However, we own a United States patent that claims Viramidine and rely on a second United States patent that covers a mechanism of action of Viramidine’s treatment of viral infection; those patents expire in 2018. We are also pursuing patent claims that specifically cover the use of Viramidine to treat hepatitis C infection, which are expected to issue in due course in the United States, and are pursuing the foreign patent rights that are counterparts of our United States patents to the extent permitted in foreign jurisdictions.

As of September 30, 2003, we had 5,205 employees. These employees include 2,933 in production, 1,434 persons in sales and marketing, 210 in research and development, and 628 in general and administrative positions. The majority of our employees in Mexico, Spain, Poland and Hungary are covered by collective bargaining or similar agreements. Substantially all the employees in the Czech Republic, Poland and Hungary are covered by national labor laws which establish the rights of employees, including the amount of wages and benefits paid and, in certain cases, severance and similar benefits. We currently consider our relations with our employees to be satisfactory and have not experienced any work stoppages, slowdowns or other serious labor problems that have materially impeded our business operations.

We are subject to licensing and other regulatory control by the FDA, the Nuclear Regulatory Commission, other federal and state agencies, and comparable foreign governmental agencies.

Obtaining FDA approval for new products and manufacturing processes can take a number of years and involve the expenditure of substantial resources. To obtain FDA approval for the commercial sale of a therapeutic agent, the potential product must undergo testing programs on animals, the data from which is used to file an IND with the FDA. In addition, there are three phases of human testing: Phase 1 consists of safety tests for human clinical experiments, generally in normal, healthy people; Phase 2 programs expand safety tests and are conducted in people who are sick with the particular disease condition that the drug is designed to treat; and Phase 3 programs are greatly expanded clinical trials to determine the effectiveness of the drug at a particular dosage level in the affected patient population. The data from these tests is combined

with data regarding chemistry, manufacturing and animal toxicology and is then submitted in the form of a NDA to the FDA. The preparation of a NDA requires the expenditure of substantial funds and the commitment of substantial resources. The review by the FDA can take up to several years. If the FDA determines that the drug is safe and effective, the NDA is approved. No assurance can be given that authorization for commercial sale by us of any new drugs or compounds for any application will be secured in the United States or any other country, or that, if such authorization is secured, those drugs or compounds will be commercially successful. The FDA in the United States and other regulatory agencies in other countries also periodically review approved drugs and inspect manufacturing facilities.

We are subject to price control restrictions on our pharmaceutical products in many countries in which we operate. We have been affected in the past by pricing adjustments in Spain and by the lag in allowed price increases in Russia and Mexico, which have created lower sales in U.S. Dollars and reductions in gross profit. Future sales and gross profit could be materially affected if we are unable to obtain price increases commensurate with the levels of inflation.

See Note 9 of Notes to Consolidated Financial Statements for the three months and nine months ended September 30, 2002 and 2003 and Note 13 of Notes to Consolidated Financial Statements for the three years ended December 31, 2002, included elsewhere herein.

We do not currently have insurance with respect to product liability claims arising in the United States. We could be exposed to possible claims for personal injury resulting from allegedly defective products. While to date, no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against us, a substantial claim, if successful, could have a negative impact on our results of operations and cash flows. We have in place clinical trial insurance worldwide.

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Delaware	1-11397	33-0628076
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)


	Item 7. Financial Statements and Exhibits.
	Item 9. Regulation FD Disclosure.
SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2
EXHIBIT 99.3
EXHIBIT 99.4
EXHIBIT 99.5


Date: November 25, 2003	VALEANT PHARMACEUTICALS INTERNATIONAL

	By	/s/ BARY G. BAILEY

		Bary G. Bailey,
		Executive Vice President and Chief
		Financial Officer



																		Nine Months Ended
			Year Ended December 31,															September 30,

			1998			1999			2000			2001			2002			2002			2003


			($ in thousands)															(Unaudited)
Statement of Operations — Consolidated
Product sales			$	539,345		$	433,105		$	441,557		$	483,834		$	466,809		$	351,100		$	372,956
Royalties				37,425			108,885			155,100			136,989			270,265			186,368			136,755

		Total revenue		576,770			541,990			596,657			620,823			737,074			537,468			509,711
Cost of product sales				204,814			128,390			143,303			149,554			157,013			113,360			131,295

	Gross profit — product sales			334,531			304,715			298,254			334,280			309,796			237,740			241,661
Selling, general & administrative expenses(1)				205,056			183,307			217,894			219,003			530,953			412,232			201,943
Research & development costs				16,479			8,212			16,383			28,706			49,531			35,526			29,701
Amortization expense				18,636			25,663			27,590			28,733			30,341			23,960			27,371
Eastern European charges(2)				428,403			—			—			—			—			—			—
Acquired in-process research and development(3)				—			—			—			—			—			—			117,609

	Income (loss) from operations			(296,618	)		196,418			191,487			194,827			(30,764	)		(47,610	)		1,792
Other income (loss), net including translation and exchange				(23,745	)		(2,739	)		(2,077	)		3,084			8,707			8,192			496
Gain on sale of subsidiary stock(4)				—			—			—			—			261,937			261,937			—
Loss on early extinguishment of debt(5)				—			—			(4,962	)		(32,916	)		(25,730	)		(25,730	)		—
Interest income				15,311			8,865			12,483			9,473			5,644			4,434			3,066
Interest expense				(37,757	)		(55,439	)		(60,248	)		(55,665	)		(42,856	)		(34,381	)		(23,892	)

	Income (loss) from continuing operations before income taxes and minority interest			(342,809	)		147,105			136,683			118,803			176,938			166,842			(18,538	)
Provision for income taxes				5,393			26,703			34,408			42,078			74,963			58,811			37,647
Minority interest				(41,300	)		(2,927	)		(509	)		174			17,730			10,670			11,667

	Income (loss) from continuing operations			(306,902	)		123,329			102,784			76,551			84,245			97,361			(67,852	)
Income (loss) from discontinued operations(6)				(45,172	)		(4,703	)		(12,604	)		(12,417	)		(197,288	)		(109,742	)		13,992
Cumulative effect of change in accounting principle(7)				—			—			—			—			(21,791	)		(21,791	)		—

	Net income (loss)		$	(352,074	)	$	118,626		$	90,180		$	64,134		$	(134,834	)	$	(34,172	)	$	(53,860	)



																	Nine Months Ended
		Year Ended December 31,															September 30,

		1998			1999			2000			2001			2002			2002			2003


		($ in thousands)															(Unaudited)
Other Data — Consolidated
Adjusted EBITDA(8)		$	170,218		$	244,760		$	240,920		$	252,345		$	267,021		$	201,684		$	165,228
Depreciation & amortization			38,433			48,342			49,433			53,484			56,242			42,758			45,827
Capital expenditures			34,635			28,379			37,582			47,689			19,420			13,593			9,241
Gross profit margin — product sales(9)			62.0	%		70.4	%		67.5	%		69.1	%		66.4	%		67.7	%		64.8	%
Adjusted EBITDA margin			29.5	%		45.2	%		40.4	%		40.6	%		36.2	%		37.5	%		32.4	%
Cash flow provided by (used in):
	Operating activities	$	9,624		$	87,123		$	181,684		$	138,112		$	22,530		$	(8,384	)	$	171,132
	Investing activities		(295,046	)		(50,360	)		(90,795	)		(119,065	)		222,053			242,230			(97,570	)
	Financing activities		186,019			36,399			(112,765	)		150,722			(318,074	)		(310,849	)		(26,277	)
Total debt/Adjusted EBITDA(10)			3.0	x		2.5	x		2.1	x		2.9	x		1.8	x		1.7	x		2.1	x
Net debt/Adjusted EBITDA(10)			2.3	x		1.8	x		1.5	x		1.7	x		0.9	x		0.9	x		0.8	x
Adjusted EBITDA/interest expense			4.5	x		4.4	x		4.0	x		4.5	x		6.2	x		5.9	x		6.9	x
Ratio of earnings to fixed charges(11)			3.5	x		3.7	x		3.3	x		3.1	x		5.1	x		5.9	x		5.1	x
Balance Sheet Data (at period end)
Cash		$	116,204		$	171,500		$	147,797		$	317,011		$	245,184		$	236,663		$	301,028
Working capital			162,177			318,533			317,356			509,601			397,070			365,046			379,836
Net assets of discontinued operations(2), (6)			216,587			265,146			240,939			267,482			153,762			215,423			7,956
Total assets(2), (6), (7)			1,356,396			1,472,261			1,477,072			1,754,365			1,488,549			1,509,570			1,404,997
Total debt(5)			508,463			604,435			511,106			739,377			485,471			492,149			479,955
Stockholders’ equity(1), (2), (3), (4), (5), (6), (7)			586,164			683,572			757,194			810,717			703,690			778,837			644,081

Table of Contents

Table of Contents

Table of Contents

Table of Contents



			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2002			2003			2002			2003


			($ in thousands)
Pharmaceuticals:
	North America		$	16,757		$	29,403		$	78,151		$	70,837
	Latin America			31,985			34,746			94,019			94,802
	Europe			44,334			54,512			138,632			169,396
	Asia, Africa, Australia			15,208			12,629			40,298			37,921

		Total pharmaceuticals		108,284			131,290			351,100			372,956
Royalties				63,367			36,217			186,368			136,755

		Total revenues	$	171,651		$	167,507		$	537,468		$	509,711

Cost of product sales			$	39,769		$	42,128		$	113,360		$	131,295
Gross profit margin on product sales				63	%		68	%		68	%		65	%


	*Cash Flow for the Nine Months ended September 30, 2003*



				Payments due by Period

				Less than		1-3		After
		Total		1 Year		Years		3 Years


		(in thousands)
Contractual obligations:
6 1/2% Convertible Subordinated Notes due 2008(1)		$	465,590	$	—	$	—	$	465,590
Other long-term debt			15,397		709		4,206		10,482
Notes payable			4,484		3,214		1,270		—
Lease obligations			7,361		1,662		3,505		2,194

	Total cash obligations(2)	$	492,832	$	5,585	$	8,981	$	478,266


								Nine Months
			Year Ended		Percent of			Ended		Percent of
	Geographic	Therapeutic	December 31,		Product			September 30,		Product
Product	Distribution	Class/ Indication	2002		Sales			2003		Sales

			(In					(In millions)
			millions)
Mestinon®	Global	Anticholinesterase/ myasthenia gravis	$	31.4		7	%	$	28.6		8	%
Bedoyecta®	Regional	Vitamin supplement		29.8		6			19.3		5
Efudex®/ Efudix®	Global	Antineoplastic/ Actinic Keratosis		23.3		5			17.9		5
Librax®	Regional	Antispasmotic calcium regulator		18.5		4			7.3		2
Virazole®	Global	Antiviral		17.3		4			14.3		4
Nuclosina®	Regional	Gastrointestinal		11.1		2			8.7		2
Dalmane®/ Dalmadorm®	Regional	Sedative/sleep disorders		10.8		2			7.2		2
Kinerase®	Global	Dermatological		9.7		2			8.4		2
Calcitonin	Regional	Calcium regulator		9.5		2			9.5		3
Reptilase	Regional	Hemostatic		7.2		2			4.4		1

Sub-total				168.6		36			125.6		34
All others				298.2		64			247.4		66

Total pharmaceutical product sales from continuing operations			$	466.8		100	%	$	373.0		100	%


	*Exclusivity Rights with Respect to Viramidine and Hepavir B*


	*Securities Class Actions*


	*Settlement with the Commission*


	*Export Control Matters*


	*Discontinued Operations*