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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 001-14956

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

(905) 286-3000
(Registrant's telephone number, including area code)

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

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

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

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

        Common shares, no par value — 299,988,521 shares issued and outstanding at November 2, 2010

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
INDEX

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
INTRODUCTORY NOTE

        On September 28, 2010, Biovail Corporation completed the acquisition of Valeant Pharmaceuticals International through a wholly-owned subsidiary, pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant Pharmaceuticals International surviving as a wholly-owned subsidiary of Biovail Corporation (the "Merger"). In connection with the Merger, Biovail Corporation was renamed "Valeant Pharmaceuticals International, Inc."

        Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this "Form 10-Q") to the "Company", "we", "us", "our" or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries, taken together, after giving effect to completion of the Merger; references to "Biovail" are to Biovail Corporation prior to the completion of the Merger and "Valeant" are to Valeant Pharmaceuticals International.

        All dollar amounts in this report are expressed in United States ("U.S.") dollars.

FORWARD-LOOKING STATEMENTS

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

        To the extent any statements made in this Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, "forward-looking statements").

        These forward looking statements relate to, among other things: the expected benefits of the Merger, such as cost savings, operating synergies and growth potential of the Company; business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products; the impact of healthcare reform; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as certain litigation and regulatory proceedings; general market conditions; and financial results.

        Forward-looking statements can generally be identified by the use of words such as "believe", "anticipate", "expect", "intend", "plan", "continue", "will", "may", "could", "would", "target", "potential" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-Q that contain forward-looking statements are qualified by these cautionary statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:

•

our ability to compete against companies that are larger and have greater financial, technical and human resources than we do;



•

our ability to integrate the businesses of Valeant and Biovail in the expected time frame, including the integration of the research and development, manufacturing, distribution, sales, marketing and promotion activities and financial and information technology systems of Valeant and Biovail;

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•

the difficulties of integrating personnel from Valeant and Biovail while maintaining focus on developing, producing and delivering consistent, high quality products and retaining existing customers and attracting new customers;



•

the realization of the anticipated benefits, including cost savings, from combining the businesses of Valeant and Biovail;



•

the challenges and difficulties associated with managing a larger, more complex, combined business;



•

our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of our significant operating subsidiary in Barbados;



•

our ability to retain, motivate and recruit executives and other key employees;



•

our ability to generate sufficient cash flows to service our significant indebtedness;



•

our ability to identify, acquire and integrate acquisition targets and to secure and maintain third-party research, development, manufacturing, marketing or distribution arrangements;



•

the risks associated with the international scope of our operations;  



•

the impacts of the Patient Protection and Affordable Care Act and other legislative and regulatory reforms;



•

the uncertainties associated with the development, acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing;



•

the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, the Canadian Therapeutic Products Directorate and European regulatory approvals, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful challenges to our generic products and infringement or alleged infringement of the intellectual property of others;



•

the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products;



•

the results of continuing safety and efficacy studies by industry and government agencies;



•

the risk that our products could cause, or be alleged to cause, personal injury, leading to withdrawals of products from the market;



•

our ability to obtain components, raw materials or other products supplied by third-parties;



•

the outcome of legal proceedings and investigations;  



•

the continuation of the recent market turmoil, which could result in fluctuations in currency exchange rates and interest rates;



•

the disruption of delivery of our products and the routine flow of manufactured goods across the U.S. border; and  



•

other risks detailed from time to time in our filings with the Securities and Exchange Commission (the "SEC") and the Canadian Securities Administrators (the "CSA"), as well as our ability to anticipate and manage the risks associated with the foregoing.

        Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this Form 10-Q, under Item 1A. "Risk Factors" of Biovail's Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the "Biovail 2009 Form 10-K"), and in the Company's other filings with the SEC and CSA. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to our Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We undertake no obligation to update or revise any forward-looking statement, except as may be required by law.

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

In accordance with United States Generally Accepted Accounting Principles
(All dollar amounts are expressed in thousands of U.S. dollars)
(Unaudited)

Commitments and contingencies (note 14)

The accompanying notes are an integral part of the consolidated financial statements.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

In accordance with United States Generally Accepted Accounting Principles
(All dollar amounts are expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICIT

In accordance with United States Generally Accepted Accounting Principles
(All dollar amounts are expressed in thousands of U.S. dollars)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In accordance with United States Generally Accepted Accounting Principles
(All dollar amounts are expressed in thousands of U.S. dollars)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

1.     DESCRIPTION OF BUSINESS

On September 28, 2010 (the "Merger Date"), Biovail Corporation ("Biovail") completed the acquisition of Valeant Pharmaceuticals International ("Valeant") through a wholly-owned subsidiary pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the "Merger"). In connection with the Merger, Biovail was renamed "Valeant Pharmaceuticals International, Inc." (the "Company"). The Company is a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of neurology, dermatology and branded generics.

2.     SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these condensed notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in Biovail's Annual Report on Form 10-K for the fiscal year ended December 31, 2009. These interim consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing Biovail's audited consolidated financial statements for the year ended December 31, 2009. There have been no material changes to the Company's significant accounting policies since December 31, 2009, except as described below under "Adoption of New Accounting Guidance". The consolidated financial statements reflect all normal and recurring adjustments necessary for the fair presentation of the Company's financial position and results of operations for the interim periods presented.

Certain prior year amounts have been reclassified to conform to the presentation adopted in the current year.

As described in note 3, the Merger has been accounted for as a business combination under the acquisition method of accounting. Biovail was both the legal and accounting acquirer in the Merger. Accordingly, the Company's consolidated financial statements reflect the assets, liabilities and results of operations of Valeant from the date of acquisition. The revenue and earnings of Valeant for the period from the Merger Date to September 30, 2010 were not material to the Company's consolidated results of operations.

Use of Estimates

In preparing the Company's consolidated financial statements, management is required 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company's business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company's results of operations and financial position could be materially impacted.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

2.     SIGNIFICANT ACCOUNTING POLICIES (Continued)

Adoption of New Accounting Guidance

Effective January 1, 2010, Biovail adopted the following new accounting guidance:

•

Authoritative guidance requiring additional disclosure about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements. This guidance also clarifies existing disclosure requirements related to the level of disaggregation of fair value measurements for each class of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 measurements. As the guidance only requires new disclosures, the adoption of this guidance did not impact Biovail's financial position or results of operations. In addition, effective for interim and annual periods beginning after December 15, 2010, this guidance will require additional disclosure and require an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis.



•

Authoritative guidance for determining whether an entity is a variable interest entity ("VIE"). Under this guidance, an enterprise has a controlling financial interest when it has the power to direct the activities of a VIE that most significantly impact the entity's economic performance, and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Upon adoption of this guidance, Biovail determined that none of its existing collaboration and license arrangements with other entities for various products under development represented arrangements with VIEs. Accordingly, the adoption of this guidance did not have any impact on the Company's consolidated financial statements.

Recently Issued Accounting Guidance, Not Adopted as of September 30, 2010

In March 2010, new authoritative guidance was issued recognizing the milestone method of revenue recognition as a valid application of the proportional performance model when applied to research and development arrangements. An entity may make an accounting policy election to recognize the receipt of a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The Company is currently evaluating the effect that the adoption of this guidance will have on its consolidated financial statements.

3.     BIOVAIL MERGER WITH VALEANT

Description of the Transaction

On September 28, 2010, a wholly-owned subsidiary of Biovail acquired all of the outstanding equity of Valeant in a share transaction, in which each share of Valeant common stock was cancelled and converted into the right to receive 1.7809 Biovail common shares. The share consideration was valued at $26.35 per share based on the market price of Biovail's common shares as of the Merger Date. In addition, immediately preceding the effective time of the Merger, Valeant paid its stockholders a special dividend of $16.77 per share of Valeant common stock. As a result of the Merger, Valeant became a wholly-owned subsidiary of the Company.

Valeant is a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Valeant's specialty pharmaceutical and over-the-counter ("OTC")

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

products are marketed under brand names and are sold in the U.S., Canada, Australia and New Zealand, where Valeant focuses most of its efforts on the dermatology and neurology therapeutic classes. Valeant also has branded generic and OTC operations in Europe and Latin America, which focus on pharmaceutical products that are bioequivalent to original products and are marketed under company brand names.

The Merger is expected to result in significant strategic benefits to the Company by creating a larger, more globally diversified company with a broader and better diversified array of products and an expanded presence in North America and internationally. In addition, the anticipated market capitalization, strong balance sheet, free cash flow, liquidity and capital structure of the Company are expected to be stronger relative to either Biovail or Valeant on a stand-alone basis. The Company also expects to achieve significant operational cost savings, coming from, among other things, reductions in research and development, general and administrative expenses and sales and marketing.

Basis of Presentation

The transaction has been accounted for as a business combination under the acquisition method of accounting, which requires, among other things, the share consideration transferred be measured at the acquisition date based on the then-current market price and that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Acquisition-related transaction costs of Biovail and certain acquisition-related restructuring charges are not included as a component of the acquisition accounting, but are accounted for as expenses in the periods in which the costs are incurred.

Fair Value of Consideration Transferred

The following table indicates the consideration transferred to effect the acquisition of Valeant:

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

Assets Acquired and Liabilities Assumed

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:

•

amounts and useful lives for identifiable intangible assets and property, plant and equipment, pending the finalization of valuation efforts;



•

amounts for inventories, pending completion of physical inventory counts;



•

amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction, and the filing of Valeant's pre-Merger tax returns; and



•

the allocation of goodwill among reporting units.

The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

These changes could be significant. The Company expects to finalize these amounts no later than one year from the acquisition date.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

(f)

Includes accounts payable, accrued liabilities and income taxes payable.

(g)

As described in note 10, in connection with the Merger, Valeant secured financing of $125,000,000 under a senior secured revolving credit facility (the "Revolving Credit Facility"), $1,000,000,000 under a senior secured term loan A facility (the "Term Loan A Facility"), and $1,625,000,000 under a senior secured term loan B facility (the "Term Loan B Facility"), and used a portion of the proceeds to undertake the following transactions prior to the Merger Date:

•

fund the payment of the special dividend of $16.77 per share of Valeant common stock to Valeant stockholders of record;

•

fund the legal defeasance of Valeant's existing 8.375% and 7.625% senior unsecured notes, by depositing with the trustees amounts sufficient to pay 100% of the outstanding aggregate principal amount of the notes, plus applicable premium and accrued and unpaid interest, on October 27, 2010; and

•

fund the repayment in full of indebtedness under Valeant's existing senior secured term loan.

Concurrent with the closing of the Merger, Valeant issued $500,000,000 aggregate principal amount of 6.75% senior notes due October 1, 2017 (the "6.75% Senior Notes"), and $700,000,000 aggregate principal amount of 7.00% senior notes due October 1, 2020 (the "7.00% Senior Notes" and, together with the 6.75% Senior Notes, the "Senior Notes"). A portion of the proceeds of the Senior Notes offering was used to pay down $1,000,000,000 of the Term Loan B Facility.

Valeant incurred $118,432,000 of debt issuance costs in connection with the above financings that were ascribed a fair value of nil in the acquisition accounting.

In addition, as of the Merger Date, Valeant had $224,960,000 outstanding principal amount of 4.0% convertible subordinated notes due 2013 (the "4.0% Convertible Notes"). The Company is required to separately account for the liability component and equity component of the 4.0% Convertible Notes, as these notes have cash settlement features. The fair value of the 4.0% Convertible Notes and related call option agreements (described below) was determined to be $474,460,000. A fair value of $220,489,000 has been allocated to the liability component in a manner reflecting the Company's interest rate for a similar debt instrument without a conversion feature. The residual of the fair value of $253,971,000 comprises (1) the carrying amount of the equity component, and (2) the fair value of the call options, which has been recorded as additional paid-in capital in the Company's consolidated shareholders' equity.

The Company also assumed Valeant's existing call option agreements in respect of the shares underlying the conversion of $200,000,000 principal amount of the 4.0% Convertible Notes. These agreements consist of a purchased call option on 15,218,960 common shares of the Company and a written call option on the identical number of shares. These agreements are expected to reduce the potential dilution from conversion of the 4.0% Convertible Notes. The written call options offset, to some extent, the cost of the purchased call options. The Company further assumed an outstanding written call option on 3,718,445 common shares of the Company in respect of Valeant's 3.0% convertible subordinated notes that matured in August 2010. The written call option on the 3.0% convertible subordinated notes expires in November 2010.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

The following table summarizes the fair value of long-term debt assumed as of the Merger Date:

Acquisition-Related Costs

Biovail has incurred to date $35,614,000 of transaction costs directly related to the Merger, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs in the Company's consolidated statements of income (loss) as of the Merger Date.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

Actual and Pro Forma Impact of Merger

The revenue and earnings of Valeant for the period from the Merger Date to September 30, 2010 were not material to the Company's consolidated results of operations. The Company recorded the following acquisition accounting charges in the three-day period ended September 30, 2010:

The following table presents pro forma consolidated results of operations as if the transaction had occurred as of January 1, 2009:

The pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of Biovail and Valeant. The pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of the Merger, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, the pro forma information does not reflect the costs to integrate the operations of Biovail and Valeant.

The pro forma information is not necessarily indicative of what the Company's consolidated results of operations actually would have been had the transaction been completed on January 1, 2009. In addition, the pro forma information does not purport to project the future results of operations of the Company. The pro forma information reflects primarily the following pro forma adjustments:

•

elimination of Valeant's historical intangible asset amortization expense;



•

additional amortization expense related to the fair value of identifiable intangible assets acquired;



•

additional depreciation expense related to the fair value adjustment to property, plant and equipment acquired;



•

elimination of interest expense related to Valeant's legacy 8.375% and 7.625% senior unsecured notes and senior secured term loan that were repaid as part of the Merger transaction;



•

additional interest expense associated with the Term Loan A Facility, Term Loan B Facility and Senior Notes financing obtained by Valeant in connection with the Merger;



•

reduced non-cash interest expense related to the accretion of the principal amount of the 4.0% Convertible Notes as a result of the fair value adjustment;

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

3.     BIOVAIL MERGER WITH VALEANT (Continued)

•

elimination of the amortization of deferred financing costs recorded by Biovail related to its senior secured credit facility, which was terminated in connection with the Merger (as described in note 10);



•

additional share-based compensation expense related to unvested stock options and RSUs to be issued by Biovail to replace Valeant's stock options and RSUs; and



•

elimination of acquisition-related costs and Merger-related restructuring charges.

In addition, all of the above adjustments were adjusted for the applicable tax impact. A combined U.S. federal and state estimated tax rate of 38% has been used in accordance with Valeant's intention to repatriate to the U.S. the earnings of non-U.S. subsidiaries owned by the U.S. corporation.

4.     ASSET ACQUISITIONS

Istradefylline

On June 2, 2010, Biovail entered into a license agreement with Kyowa Hakko Kirin Co., Ltd. ("Kyowa Hakko Kirin") to acquire the U.S. and Canadian rights to develop and commercialize products containing istradefylline — a new chemical entity targeted for the treatment of Parkinson's disease.

Under the terms of the license agreement, Biovail paid an upfront fee of $10,000,000, and the Company could pay up to $20,000,000 in potential development milestones through U.S. Food and Drug Administration ("FDA") approval and up to an additional $35,000,000 if certain sales-based milestones are met. The Company will also make tiered royalty payments of up to 30% on net commercial sales of products containing istradefylline. In connection with this acquisition, Biovail also entered into an agreement with Kyowa Hakko Kirin for the supply of the istradefylline compound.

This acquisition was accounted for as a purchase of IPR&D intangible assets with no alternative future use. Accordingly, the $10,000,000 upfront payment, together with $242,000 of acquisition costs, was charged to research and development expenses at the acquisition date.

AMPAKINE®

On March 25, 2010, Biovail acquired certain AMPAKINE® compounds, including associated intellectual property, from Cortex Pharmaceuticals, Inc. ("Cortex") for use in the field of respiratory depression, a brain-mediated breathing disorder. The acquired compounds include the Phase 2 compound CX717 in an oral formulation, the pre-clinical compounds CX1763 and CX1942, and the injectable dosage form of CX1739. This acquisition was accounted for as a purchase of IPR&D intangible assets with no alternative future use. Accordingly, the $9,000,000 upfront payment and the $1,000,000 transition payment made by Biovail to Cortex, together with $686,000 of acquisition costs, were charged to research and development expenses at the acquisition date.

As described in note 5, the Company suspended development of the AMPAKINE® compounds and is reviewing its options with Cortex and other potential parties.

Staccato® Loxapine

On February 9, 2010, Biovail entered into a collaboration and license agreement with Alexza Pharmaceuticals, Inc. ("Alexza") to acquire the U.S. and Canadian development and commercialization rights to AZ-004 for the treatment of psychiatric and/or neurological indications and the symptoms

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

4.     ASSET ACQUISITIONS (Continued)

associated with these indications, including the initial indication of treating agitation in schizophrenia and bipolar patients. AZ-004 combines Alexza's proprietary Staccato® drug-delivery system with the antipsychotic drug loxapine. This acquisition was accounted for as a purchase of IPR&D intangible assets with no alternative future use. Accordingly, the $40,000,000 upfront payment made by Biovail to Alexza, together with $317,000 of acquisition costs, was charged to research and development expenses at the acquisition date.

On October 8, 2010, Alexza received a Complete Response Letter from the FDA regarding the NDA for AZ-004, in which the FDA indicated that the NDA was not ready for approval.

As described in note 5, the Company has determined to terminate the agreement with Alexza.

5.     RESTRUCTURING AND INTEGRATION

Merger-Related Cost-Rationalization and Integration Initiatives

The Company has initiated measures to integrate the operations of Biovail and Valeant, capture operating synergies and generate cost savings across the Company. These measures include:

•

workforce reductions across the Company and other organizational changes;



•

closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities;



•

leveraging research and development spend;



•

increased use of shared services; and



•

procurement savings.

The Company estimates that it will incur costs between $135,000,000 and $180,000,000 (of which the non-cash component, including share-based compensation, is expected to be approximately $55,000,000) in connection with these cost-rationalization and integration initiatives. These costs include employee termination costs (including related share-based payments), costs to consolidate or close facilities and relocate employees, asset impairments, and contract termination and lease cancellation costs. The following costs were incurred in connection with these initiatives through September 30, 2010:

The Company recognized employee termination costs of $46,326,000 for severance and related benefits payable to approximately 500 employees of Biovail and Valeant who have been, or will be, terminated as a result of the Merger. These reductions primarily reflect the elimination of redundancies and consolidation of staff in the sales and marketing, research and development, and general and administrative functions. As

14

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

5.     RESTRUCTURING AND INTEGRATION (Continued)

of September 30, 2010, $2,188,000 of the termination costs had been paid, and the Company expects that a significant portion of the remaining costs will be paid prior to April 1, 2011, with the balance payable through to the first quarter of 2012.

In addition, as described in note 11, the Company recognized incremental share-based compensation expense of $45,665,000, related to stock options and RSUs held by terminated employees of Biovail and Valeant.

Biovail Research and Development Pipeline Rationalization

Prior to the Merger, Biovail's product development and business development efforts were focused on unmet medical needs in specialty central nervous system ("CNS") disorders. Following the Merger, the Company intends to employ a leveraged research and development model that will allow it to progress development programs, while minimizing research and development expense, through partnerships and other means. In consideration of this model, subsequent to September 30, 2010, the Company conducted a strategic and financial review of the Biovail product development pipeline and identified the programs that did not satisfy the Company's hurdle rate, as outlined in the table below. In respect of the Staccato® loxapine, GDNF, fipamezole and pimavanserin programs, the Company provided notices of termination to, or entered into termination agreements with, the counterparties to the agreements. Regarding the AMPAKINE® program, the Company has suspended development of these compounds and is reviewing its options with Cortex and other potential parties.

15

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

5.     RESTRUCTURING AND INTEGRATION (Continued)

Biovail Pre-Merger Cost-Rationalization Initiatives

In May 2008, Biovail initiated restructuring measures that were intended to rationalize its manufacturing operations, pharmaceutical sciences operations, and general and administrative expenses. The following costs were incurred in connection with these initiatives through September 30, 2010:

Manufacturing Operations

On January 15, 2010, Biovail completed the sale of its Dorado, Puerto Rico manufacturing facility for net cash proceeds of $8,542,000. The related property, plant and equipment was classified as assets held for sale on the consolidated balance sheet at December 31, 2009. Biovail occupied the Dorado facility until March 31, 2010, pursuant to a short-term lease agreement with the buyer.

16

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

5.     RESTRUCTURING AND INTEGRATION (Continued)

As of September 30, 2010, the Company completed the transfer of remaining manufacturing processes from its Carolina, Puerto Rico manufacturing facility to its plant in Steinbach, Manitoba. The Company recorded an impairment charge of $400,000 in the three-month period ended September 30, 2010, to write off the remaining carrying value of the Carolina facility after unsuccessful efforts to locate a buyer for the facility.

Biovail expected to incur employee termination costs of approximately $9,800,000 in total for severance and related benefits payable to the approximately 240 employees who have been, or will be, terminated as a result of the closure of the Dorado and Carolina facilities. As these employees were required to provide service during the shutdown period in order to be eligible for termination benefits, Biovail was recognizing the cost of those termination benefits ratably over the estimated future service period. On a cumulative basis to September 30, 2010, the Company recognized $9,684,000 of these costs, of which $6,804,000 have been paid. The Company will pay the remaining termination benefits prior to December 31, 2010.

Pharmaceutical Sciences Operations

On April 30, 2010, Biovail entered into an asset purchase agreement to sell its contract research division ("CRD") to Lambda Therapeutic Research Inc. ("Lambda"). Biovail no longer considered CRD a strategic fit as a result of Biovail's pre-Merger transition from reformulation programs to the in-licensing, acquisition and development of specialty CNS products. CRD has not been treated as a discontinued operation for accounting purposes, on the basis that its operations were immaterial and incidental to Biovail's core specialty pharmaceutical business.

On July 23, 2010, Biovail completed the sale of CRD to Lambda for net cash proceeds of $6,422,000. The carrying value of net assets of CRD at the date of disposal amounted to $6,387,000, which comprised net current assets and liabilities of $1,636,000 and property, plant and equipment of $4,751,000.

Biovail recognized employee termination costs of $1,924,000 for the approximately 70 CRD employees not offered employment by Lambda.

In the three-month and nine-month periods ended September 30, 2010 and 2009, the consolidated statements of income (loss) included the following revenue and expenses of CRD, which, as described above, have not been segregated from continuing operations:

Prior to December 31, 2009, Biovail completed the closure of its research and development facilities in Dublin, Ireland and Mississauga, Ontario, and the consolidation of its research and development operations in Chantilly, Virginia.

17

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

6.     FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

The following fair value hierarchy table presents the components and classification of the Company's financial assets measured at fair value:

 

Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:

•

Level 1 — Quoted prices (unadjusted) for identical securities in active markets.



•

Level 2 — Quoted prices (unadjusted) for identical securities in markets that are not active.



•

Level 3 — Discounted cash flow method (income approach) using significant inputs not observable in the market.

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

6.     FAIR VALUE MEASUREMENTS (Continued)

At September 30, 2010 and December 31, 2009, the Company did not have any financial liabilities that were subject to fair value measurements.

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

At December 31, 2009, Biovail's marketable securities portfolio included $26,775,000 of principal invested in nine individual auction rate securities, which had an estimated fair value of $6,009,000 at that date. In May 2009, Biovail had received $22,000,000 in a settlement with an investment bank in respect of these securities, and retained ownership of the securities under the terms of the settlement. In August 2010, Biovail disposed of these securities for cash proceeds of $1,400,000.

The following table presents a reconciliation of the auction rate securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

At September 30, 2010 and December 31, 2009, the Company did not have any assets or liabilities that were measured at fair value on non-recurring basis subsequent to initial recognition.

19

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

7.     FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the estimated fair values of the Company's financial instruments:

 

The following table summarizes the Company's marketable securities by major security type:

 

The contractual maturities of marketable securities held at September 30, 2010 were as follows:

20

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VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with United States Generally Accepted Accounting Principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)
(Unaudited)

7.     FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)