Biovail corporation case study answers

Jason Arnold, Kari Froehlich, Mat McBride, Stanley Parker, Ann Utterback, Robin Chapman, Gail Christian

Arizona State Unive rsity

Introduction Valeant Pharmaceut icals International, Inc. pro - motes itself as a multinational specialty pharmaceuti- cal company with a diverse product portfolio focusing on branded pharmaceuticals , branded and unbranded generics, and over-the- counter (OTC) products special- izing in neurology and dermatology.1 Product sales focus on North America, Central Europe, Mexico, Brazil, and Australia, with manufacturing sites in Canada, Brazil, Poland, and Mexico. 2

In his 2006 me ssa ge to shareholders, Timothy C. Tyson, then president and CEO, reflected , "In many ways, 2006 was a life-changing year for Valeant Pharmaceuticals. It was a challenging year-one that certainly stretched us and tested our resolve. "3 That was the year that Valeant lost its chairman, Robert W. O'Leary, to cancer. Valeant would face a new set of challenges in the fall of 2010, when it merged with Canada's Biovail Corporation. Although Valeant even - tually recovered fro m the loss of chairman Robert W. O'Leary, would it be able to overcome the challenges of the merger and strategically position itself to capture a significant portion of the global pharmaceutical market that was expected to reach $1.1 trillion by 2014?4

Although we give a brief history of Valeant here, this case focuses on the Biovail merger and Valeant's neurology division . This division manufactures and markets products to treat Parkinson's disease (PD), epilepsy, migraines, depression , chronic pain, Huntington's disease , and myasthenia gravis. A central question is whether Valeant will be able to capitalize on an aging population's growing demand for its new epilepsy drug, retigabine, and its other products. Also , due to significant restructuring efforts occurring before

and resulting from the merger, an important question is whether the changes will yield the benefits promised to sha~eholders ·and enable the firm to compete more effectively. The answers to these questions and others will influence Valeant's future success.

History Valeant Pharmaceuticals was founded in 1960 by Milan Panic, a Yugoslav defector. The company started in California and was originally called Intern ational Chemical & Nuclear Corp. (ICN) . Panic ran the company for 43 years. 5 Initially, the company's primary business involved chemical and drug sales, but it grew through acquisitions of small drug companies. In 1963, the company launched its IP0 .6

In 1970, ICN scientists discovered ribavirin, and in 1985, it received US Food and Drug Administration (FDA) approval for the drug to be used as a treatment for lung infections in children. As a blockbuster drug, ribavirin powered ICN's growth and reputation for decades .7 In later years, Panic directed ICN to promote ribavirin as a treatment for AIDS and hepatitis C.8 During the 70s, ribavirin failed to qualify for FDA approval as a stand- alone hepatitis C drug. However, in the 90s, ribavirin did receive FDA approval to be used in combination with Schering-Plough's interferon drug to treat hepatitis C. The licensing of ribavirin' s patent to Schering-Plough was lucrative and led to a similar interferon/ribavirin royalty- generating agreement with Roche Pharmaceuticals.9

The year 2002 was a watershed one in ICN's history. That year, Panic was paid $63.5 million, which included $33 million in bonuses, and other senior executives received bonuses of $15 million. 10 A shareholder proxy fight over excessive executive compensation resulted in

The authors tha nk Professors Robert E. White and Robert E. Hoskisson for their support and under whose direction t he case was devel oped. The authors do not

intend to illustrate either effective or ineffective handling of a managerial situ ation. The case solely provides material for class discussion. Reprinted by perm ission.

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the replacement of Panic, the entire board of directors, and most senior management.II In the summer of 2006, Panic reached a settlement with the company to return $20 million of his 2002 annual bonus. I2

In 2003, ICN changed its name to Valeant Pharmaceuticals International and relisted its stock symbol on the New York Stock Exchange as VRX. The name change signified Valeant's new strategic focus and emphasized its core principles and values. This change was made in conjunction with restructuring. Valeant's restructuring efforts focused on the following activities: centralization of global purchasing activities to leverage buying power on a global basis; 13 rationalization of Valeant' s manufacturing network; and restructuring of debt, resulting in a longer maturity structure and decreasing the effective interest rate. I4 These activities allowed Valeant to raise cash for its 2004 and 2005 acquisitions. 15 V aleant expanded its specialty neurology platform by acquiring Amarin Pharmaceuticals, Inc., Xcel Pharmaceuticals, and Tasmar (a neurology drug) .16

In 2004, Valeant improved its financial outlook by purchasing and redeeming its 6.5 percent convertible subordinated notes. 17 However, it experienced a financial reversal when the FDA approved a generic version of ribavirin. At its peak, ribavirin royalties comprised a quarter of all sales; but in 2009, after the generic version appeared on the market, it only accounted for 6 percent of revenues (see Exhibit 1). In 2010, this revenue stream would diminish further when generic drug competition entered the Japanese and European markets.18

In 2006, Valeant announced another strategic restructuring program intended to reduce costs, grow earnings, and focus research and development (R&D) resources on late-stage pipeline drugs . To accomplish these goals, Valeant reduced headcount I9 and sold its manufacturing facility in Poland, its discovery and preclinical assets, and its cancer and HIV drug development programs.20 These actions produced cost savings of $30 million during 2006, and an estimated $50 million annually thereafter.

Also in 2006, Valeant obtained FDA permission to market and launch two drugs in the US: the cannabinoid drug Cesamet• (used to treat nausea and vomiting associated

Exhibit 1 Ribavirin Royalty Revenues

Percent of Total Revenue ($ millions) Revenue

2009 46.7 6

2008 59.4 9

2007 67.2 10

2006 81.2 9

2005 91 .6 11

Source: Valeant 2007 Annual Report and Valeant 2009 Annual Report, http :// www.valeant.com .

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with cancer chemotherapy) and Zelapar• to treat PD. It also acquired the hepatitis C drug Infergen• from Intermune.

In the beginning of 2007 , Valeant sold its manufacturing plants in Switzerland and Puerto Rico . Then, in late 2007, it sold Infergen• because it had not met growth and profitability expectations. 21 Also in 2007, Valeant initiated a study of retigabine for pain associated with postherpetic neuralgia, and a Phase 2b clinical study of taribavirin for treatment of chronic hepatitis C. 22

In 2008, the company experienced some significant changes in structure and strategic direction as it went through another change in leadership; J. Michael Pearson became the new chairman and CEO. In March 2008, Valeant announced a companywide restructuring plan to reduce the company's focus to two therapeutic classes (dermatology and neurology) and five geographic areas (the US, Canada, Australia/New Zealand, Mexico/Brazil, and Central Europe) . The business infrastructure was adjusted to support this strategy. Nonstrategic products and regional operations that did not meet growth and profitability expectations were divested or discontinued. Infergen• rights, Asian assets (including subsidiaries, branch offices, and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia, and Macau), product rights in Japan, subsidiaries in Argentina and Uruguay, and business operations located in Wes tern and Eastern Europe, the Middle East, and Africa (known as the "WEEMEA" business) were sold. 23 Under Pearson, Valeant's growth strategy focused on "small buys and diversified drugs, avoiding too much reliance on a single drug. "24 Valeant continued its strategy of growth through acquisitions with Coria Laboratories, Ltd. (a privately held US specialty pharmaceutical company focused on dermatology products), DermaTech Pty Ltd (an Australian specialty pharmaceutical company focused on dermatology products marketed in Australia), and Dow Pharmaceutical Sciences, Inc. (a privately held dermatology company that specialized in the development of topical products).25 According to Pearson, "Dermatology, we think, is a very attractive area for us to continue to grow as a smaller company. Skin drugs carry less development risks and don't require a big sales force in order for Valeant to compete with larger players."26 In addition, it successfully completed the retigabine Phase III epilepsy program and announced a worldwide license and collaboration agreement with GlaxoSmithKline (GSK) for the development and commercialization of retigabine. 27

As part of the 2008 restructuring plan, Valeant also cut its R&D budget by half. Such a move is generally considered unwise in the pharmaceutical industry, as profitability depends heavily on the development of new drugs. 28 Valeant decided to use the funds resulting from the budget cut for acquisitions and stock buybacks, in addition to paying off debt. Research was considered so

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risky, it was best left to small biotechnology companies that Valeant could later buy if they were successful.29 Robert Ingram, V aleant' s lead director (now chairman of the board) and vice chairman of pharmaceuticals at GSK, believed that R&D "is a high-risk bet, and the fact is we fail more often than we succeed. Rather than invest in a high-risk bet, we will be smart through acquisition and licensing."30

The strategy appeared to pay off as V aleant shares increased 60 percent on the New York Stock Exchange during 2008. 31

More acquisitions followed in 2009, including EMO-FARM sp. z o.o. (a privately held Polish company specializing in gel-based OTC and cosmetic products), Tecnofarma S.A. de C.V. (a Mexican generic company) , Private Formula Holdings International Pty Limited (a privately held company in Australia engaged in product developm ent and sales and marketing of premium skincare products mostly in Australia) , and Laboratoire Dr. Renaud (a privately held cosmeceutical company located in Canada). The year 2009 was also when the FDA accepted the New Drug Application (NDA) filing for retigabine. 32 As external R&D expenses for taribavirin were $2.3 m illion in 2009 and $8.5 million in 2008, Valeant chose to stop further independent development of taribavirin and seek potential partners for the program.33

In 2010, Valeant acquired three Brazilian companies (Instituto Terapeutico Delta Ltda, Bunker Industria Farmace utic a Ltda, and a branded generics/OTC company), along with Vital Science Corp. in Canada and Aton Pharma, Inc. , located in Lawrenceville, New Jersey. Aton, a specialty pharmaceutical company, focused on ophthalmology and "orphan drugs" that are used to treat rare medical conditions.34 The Aton acquisition was considered a significant enhancement to Valeant' s

Exhibit 2 Va lea nt Pha rma ceuti cal s Intern ati o nal M erger Pla n

neurology and other products as it had both an in -line business and a development pipeline that mainly consisted of orphan drugs. 35 In addition, Valeant entered into collaboration with Spear Pharmaceuticals. In June 2010, Valeant announced plans to merge with the Canadian pharmaceutical company Biovail and, on September 28, 2010, Valeant Pharmaceuticals International and Biovail Corporation completed the merger to for m one company.36

The Merger Although the merger was officially announced in June 2010, Valeant and Biovail Corporation, one of Canada's largest pharmaceutical companies, had been independently considering a business combination or transaction with the other for several years. Management of each company was generally famil iar with the other's businesses, and in early 2008, when Valeant implemented its new strategy focused on shifting investment from R&D to acquiring small in-line undervalued products and companies, it also considered a transformational business combination to apply the new strategy to a larger asset base with the goal of increasing shareholder value. It identified Biovail as a future potential tran saction partner. In August 2009, Pearson contacted William M. Wells, CEO ofBiovail, to discuss a transaction involving a Valeant neurological product, based on Biovail's primary focus on specialty neurology. Discussions continued throughout 2009 and in January 20 10, shifted to a potential merger. In June 2010, the board of directors of each company approved the finalized agreement, and on June 21, Valeant and Biovail issued a joint press release announcing the merger37 (see Exhibit 2).

Deta il ed Plann ing Executi on

Deal ann o unced 6/ 21 / 10

Deal clo se 9/ 28/ 10

• Restru cture o rg an izatio n

New ye ar 1/ 1/ 11

• M anage business for growth and cash fl ow

• Ali g n strat eg y and o p e rati o nal phil osophy • Ratio nali ze pi pe li ne • Gea r up M&A activi ti es

• Design new • Rati o nalize fac ilities organizat io n

• Im p lem ent t ax • Identify co st and ta x strat eg ies

syn ergi es • Impl em ent b alance

• Ensure fi nanc in g sheet stat egy

• Underpromise/ ove rdeli ver

Source: Va leant Pha rmaceuticals International, Inc. Th ird Quarter Earnings Call, Nov 4, 20 10.

The deal, a reverse merger worth approximately $3.2 billion, would allow Biovail to acquire Valeant. Biovail shareholders would own 50.5 percent of the combined company and Valeant shareholders would own 49.5 percent. 38 The combined company would be listed on both the Toronto Stock Exchange and the New York Stock Exchange. Just prior to the merger, Valeant shareholders would receive a one-time special dividend of $16.77 per share, and would receive 1.7809 shares of Biovail common stock in exchange for each share of Valeant stock owned. Biovail shareholders would con- tinue to own their existing common shares. The trans- action was intended to qualify as a tax-exempt reorga- nization for Valeant shareholders. 39 After the merger in November 2010, Valeant declared a special one-time dividend of $1.00 per common share, as outlined in the merger agreement. The company stated that it did not anticipate paying dividends in the future. The board also established a Special Dividend Reinvestment Plan in which shareholders could elect to reinvest the spe- cial dividend in additional common shares. This plan would automatically terminate after payment of the dividend. 40

Under term s of the merger, the name of the combined company would be Valeant Pharmaceuticals International, Inc., and it would be headquartered in Mississauga, Ontario, Canada, where corporate income taxes were 18 percent federal and 14 percent provincial, as opposed to a location in the US where the corporate tax rate was 35 to 40 percent with a state tax rate of approximately 8 percent. 4 1 Pearson would become CEO and Wells would serve as nonexecutive chairman of the board of directors .42 The initial composition of the board of directors would be 11 directors including five representatives from Valeant, five representatives from Biovail, and one additional resident Canadian director who would be selected through a search process, chosen by Valeant and subject to the approval of Biovail.43

Biovail's corporate structure would be retained. The merger was considered a positive move by both

companies. Biovail CEO William Wells said that Biovail had always planned to add a second therapeutic area, along with international markets, once it had established a position in specialty neurology, and it had been acquiring products in various stages of development in that area for the past few years. According to Wells, "With this deal, we have accomplished that in one fell swoop. We've achieved with this deal what I only hoped we'd be able to do in ten years."44 Additional benefits of the merger included: 45

• a larger, more globally diversified company with a broader and better diversified range of products, a deeper drug development pipeline and an expanded presence in North America and internationally;

• the combination of two well known and respected specialty pharmaceutical companies to create a supe- rior combined specialty pharmaceutical company;

• the expected market capitalization, strong balance sheet, free cash flow, liquidity, and capital structure of the combined company;

• the belief that the combined company could achieve approximately $175 million in annual operational cost savings (synergy benefits) by the second year of operations, coming from reductions in general and administrative expenses, R&D consolidation, and sales and marketing;

• Valeant's and Biovail's product lines and geographic markets were complementary and did not present significant areas of overlap;

• additional revenue growth opportunities presented by the expanded product offerings and stable cash flows from legacy products anticipated to support future growth with limited patent exposure with respect to the existing portfolio of products;

• the combination of two strong senior management teams;

• the combined company would be able to operate under Biovail's existing corporate structure.

Valeant and Biovail would have to obtain governmental and regulatory approvals prior to closing the merger. Notifications were required by the FTC and the Antitrust Division of the Department of Justice, and a mandatory pre-merger waiting period had to be observed. The merger was not notifiable under the Competition Act in Canada. A pre-merger notification was required in Poland under the Competition and Consumer Protection Act and in Mexico under the Federal Economic Competition Law. 46 All approvals were obtained successfully, and on September 27, 2010, the shareholders of Valeant Pharmaceuticals International and Biovail Corporation voted in favor of combining the two companies.47

After the merger, Pearson began a new restructuring plan for the combined company. Valeant targeted 1,100 jobs (approximately 25 percent of the combined workforce) that were considered redundant for elimination. By January 2011, approximately 500 employees had received notification 48 (see Exhibit 3). Valeant also eliminated eight or nine R&D programs to focus on its strategy of growth through acquisitions of small companies rather than creating new products in house. "What we try to do is find these things, most of these companies no one's ever heard of and we like that," said Pearson. "We try to buy them inexpensively. Our average price since I've been here is 1.8 times sales." Pearson also said that the company would like to make at least five acquisitions in 2011. 49 By October 2011, Valeant was in negotiations for Afexa Life Sciences, Kaunas, Ortho Dermatologies, and Dermik.

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Exhibit 3 Valeant Ph arma ceu ticals International , Inc., US and Canada Personnel Reductions

-1,72 5 - 675

Total Combined Manufacturing Headcou nt Headcount

Excluded From Consideration

- 1,050

Total Popul ation Addressed

- 500

- 550

Separated Retained

Reduction Summary

• 90% of reductio ns communicated by 10/ 15 , rem ainder by 11 /1 5

• Most transitions co mpleted by end of 2010, with some in 2011

• Steady state non-manufacturing hea dcount -600

• Ongoing non-man ufacturing personnel costs equivalent to legacy Valeant non- manufacturing perso nnel cost

Source: Va leant Pharmaceuticals Internat iona l, Inc., Third Quarter Earnings Call, Nov 4, 2010.

On February l , 2011, Valeant announced an agree- ment for Valeant to acquire PharmaSwiss S.A., a pri- vately owned pharmaceutical company based in Zug, Switzerland specializing in branded generics and OTC pharmaceuticals. Valeant agreed to pay approximately 350 million euros for the company. PharmaSwiss has a product portfolio in seven therapeutic areas and opera- tions in 19 countries throughout Central and Eastern Europe including Poland, Hungary, the Czech Republic, and Serbia. It also has operations in Greece and Israel. 50

On February 3, 2011, Valeant launched an offering of $650 million aggregate principal amount of 6.75 per- cent senior unsecured notes due 2021. Proceeds from the offering would be used to finance the PharmaSwiss acquisition and the acquisition of all US and Canadian rights to nonophthalmic topical formulations ofZovirax (an antiviral drug) from GSK, along with associated fees and expenses, and for general corporate purposes.51 The acquisition of PharmaSwiss was expected to close in the first or second quarter of 2011. According to Pearson,

This acquisition of PharmaSwiss solidifies our position as a leading pharmaceutical company in Central and Eastern Europe. PharmaSwiss has an attractive partner- ing strategy as well as a complementary branded generics and OTC product portfolio that will strengthen our pres- ence in the region. 52

CEO Pearson, formerly with McKinsey & Company, had the leadership skills and abilities required to lead Valeant through the merger process and into its next phase of development efficiently and effectively.

Leadership In 2002, because of shareholder disgruntlement, Robert W. O'Leary replaced Panic as the new CEO and chairman of the board. O'Leary was well respected in the health care industry, having served as CEO of six different companies in 28 years prior to joining Valeant. He specialized in managing diffic ult restructuring circumstances. His job was to undertake a complete strategic restructuring of Valeant. The goal was to create a leaner company that emphasized the specialty pharmaceutical business. In pursuit of this goal, noncore businesses not fitting with futu re strategic growth plans were divested. The divestiture process began by eliminating all operations in Russia and Eastern Europe and the raw materials businesses in Central Europe. The biomedical division, North American photonics business, personal radiation dos im etry division, and Circe unit were also immediately divested. The company's real estate holdings in Costa Mesa, California, were sold in 2006, and the headquarters moved to a new, leased campus in Aliso Viejo, California. 53

O'Leary for med a new management team with the majority of his senior personnel recruits remaining in place for many years. The change in the composition of the board of directors was dramatic. Nearly all of the new board members were not employed by the company and had no previous consulting or other business relationship with Valeant. A primary goal of the new board was to institute new corporate governance initiatives to make the board indepe ndent and transparent. 54 O ' Leary remained with the company until his death from cancer in 2006. 55

In January 2005, Timothy C. Tyson took over as Valeant's CE O when O ' Leary became too sick to manage the fir m on a daily basis. Tyson had been hired as the pres ident and COO. Before coming to Valeant, Tyson was president of global manufacturing and supply for GSK, the third-largest pharmaceutical company in th e US at that time. The connection to GSK is noteworthy because, at the time , many members of senior management were alumni of that company. This influx of GSK alumni in management helped to accelerate needed culture changes, many derived from GSK.

In February 2008, Tyson resigned as CEO and J: Michael Pearson was selected as the successor. Pearson was head of McKinsey & Company's global pharmaceutical practice and head of its mid -Atlantic region . Pearson held various positions at McKinsey during his 23 -year career, including membership on McKinsey's board of directors .56 At McKinsey, Pearson worked with leading CEOs to develop and implement major turnarounds, acquisitions, and corporate strategy. Pearson was already providing advice and guidance to Valeant prior to Tyson 's departure .

Pearson 's pay package, in sharp contrast to Panic's, was developed by G. Mason Morfit, chairman of Valeant's board compensation committee. Morfit was also a partner of Value-Act Capital, an "activist hedge fund " with a 22 percent stake in Valeant, which made it Valeant's largest stockholder. 57 The pay package focused on giving Pearso n incentives to increase long- term value for investors and was considered unusual for a public company. Morfit explained to Pearson and the other finalists for the CEO position that he preferred the private equity model for executive compensation "because it aligns management's incentives with those of the investor. " He later recalled, "Nobody was scared off." 58 This drew n ational attention and praise from compensation critics .59 Pearson was awarded $ 18.1 million in equity but was also required to buy at least $3 million in stock and would not receive routine annual equity grants. He wo uld not be allowed to sell mo st restricted shares or exercise stock options for two years after they vested and would only get to keep certain

restricted shares if Valeant 's share price increased by at least 15 percent per year through February 2011. Pearson actually purchased $5 million in Valeant shares. 60 Pearson and the board of directors then adopted the same approach for new senior exe~utives. They were required to buy large amounts of company stock, which limited candidates to "affluent risk takers." According to Pearson, already successful people were willing to take less guaranteed pay up front. 61

Although this pay plan model was not a guarantee of success, from the end of the 2009 fiscal year to May 2010, Valeant's shares were up 40 percent with a market value of approximately $3.5 billion and a first-quarter adjusted profit of $52.8 million (up 39 percent from the previous year). Valeant also .posted a 40 percent gain in 2009. 62 According to analyst David Amsellem of Piper Jaffray & Co., "It is time for us to concede that the run in the stock is no fluke and that investors are likely to view this management team with increasing confidence given its execution over the past one to two years." 63

After the merger, Pearson became the CEO of the combined company, Valeant Pharmaceuticals International, Inc. He agreed to waive the accelerated vesting of the equity awards he would have been entitled to in association with the merger. A significant portion of his future compensation would be in the form of equity in the company and would be contingent on the performance of the company's common shares.64

Although Pearson has continued in his role as CEO of the combined company, William Wells resigned from his position as nonexecutive chairman in December 2010. One week after Wells' resignation , CFO Peggy Mulligan also resigned. Although the reasons for both resignations were stated as "to pursue other interests," analysts said that old Valeant personnel had dominated the combined company, and the changes were viewed as part of the new direction and strategy of the new company. 6 5 Philip W . Loberg, Valeant's former senior vice president and corporate controller, was appointed Interim CFO replacing Mulligan,66 and Valeant's Lead Independent Director, Robert A. Ingram, was appointed as Chairman of the Board of Directors67 (see Exhibit 4). Pearson and Valeant's management team co ntinue to work together to help Valeant reach its potential in providing products that offer relief to customers and generate revenue.

Product Overview As noted in the introduction, this case focuses on the neurology division-a division that develops products to treat PD, epilepsy, migraines, and other central nervous system disorders .

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Exhibit 4 Valeant Pharmaceutica ls International , Inc. Leadership

Board of Directors

Robert A. Ingram

J. Michael Pearson

Kate Stevenson

Lloyd Segal

Norma A. Provencio

Robert N. Power

G. Mason Morfit

Dr. Laurence Paul

Michael R. Van Every

Theo Melas-Kyriazi

Senior Management

J. Michael Pearson

Philip W. Loberg

Robert Chai-Onn

Mark Durham

Rajiv De Silva

Richard K. Masterson

Chairman General Partner, Hatteras Venture Partners Formerly Lead Director of the Va lea nt board of directors

CEO, Valeant Pharmaceuti cals International, Inc. Formerly Chairman of the Va leant board of directors and CEO of Va leant

Corporate Director

Equity Partner, Persiste nce Capital Partners Formerly a member of the Biovail board of directors

President and Owner, Provencio Advisory Services Inc. Formerly a member of the Va leant board of directors

Corporate Director Formerly a member of the Biovail board of directors

Partner, ValueAct Capital Formerly a member of the Va leant board of directors

Founding Principal, Laurel Crown Capital LLC Formerly a member of the Biovail board of directors

Retired Partner of Price Waterhouse Coopers LLP Formerly Chairman of the Audit Committee of the Biovail board of directors

Chief Finan cial Officer, Levitronix LLC Formerly a member of the Valeant board of directors

CEO, Valeant Pharmaceuticals International, Inc. Formerly Chairman of the Va leant board of directors and CEO of Va leant

Executive Vice President and Chief Financial Officer Formerly Senior Vice President, Group Financial Controller for Va leant

Executive Vice President, General Counse l and Corporate Secretary Formerly Vice President, Assistant General Counsel, of Va leant

Senior Vice President, Human Resources Formerly Senior Vice President, Human Resources of Biovail Corp.

President, Valeant Pharmaceuticals International, Inc. and COO, Specialty Pharmaceuticals Formerly COO of Specialty Pharmaceuticals for Valeant

President of Biovail Laboratories International in Barbados, a wholly owned subsid iary of Valeant Pharmaceuticals, International

Source: 2011, Va leant Pharmaceuti cals, www.valeant.com.

Parkinson's Disease Parkinson's disease (PD), a disorder characterized by slow movement, rigidity, and tremor, affects more than one million Americans. 68 Most people are diagnosed with PD in the later years of life . It is estimated that four to six million people around the world currently have PD . Approximately 50,000 to 60,000 new cases are diagnosed each year. 69 As the US population ages and lives longer, PD is expected to "rise astronomically in the coming decades ."70 Valeant's PD drugs include Zelapar• ar{d Tasmar•. Both products are approved for use as an adjunctive treatment with levadopa/carbidopa (1-dopa) , a product every patient with PD eventually takes.

Valeant obtained Zelapar® through the acquisition of Xcel Pharmaceuticals . Zelapar• offers patients the ease of once-daily dosing, as compare d to other medications used to treat PD that re quire multiple dosages each day. 71 Two other products that compete in the same market are Teva's Azilect• and the generic drug selegiline.

Tasmar• is a COMT-inhibitor. 72 It is used as a last resort option in the pharmace utical treatment algorithm si nce it has a "black box" warning that requires patients to monitor their liver functions on a biweekly basis. Tasmar• was initially launched in 1997 by Roche Pharmaceuticals but, due to three

patient deaths in 1998, it stopped promoting it. Valeant acquired the product in May 2004 in an effort to expand its presence in the neurology market. 73

The only other COMT -inhibitor on the market is Novartis's Comtan•.

Epilepsy Approximately three million Americans live with epilepsy, a disor der caused by the hyperactivity of electrical charges in the brain, and "approximately 200,000 new cases of seizures and epilepsy occur each year." 74 However, an estimated 30 percent of patients with epilepsy do not find sufficient relief with current drugs. Analysts fo recast that the annual sales of epilepsy medications will range from $200 million to $800 million in 2011.75

Valeant's Diastat ® Acudial™ is the only FDA- approved medication for at-home acute seizure con - trol; as such, it does not have any direct competitors. However, as a rectal gel , the delivery system is unat- tractive to patients,76 and Valeant is developing a new delivery system where the drug would be administered intranasally.

Retigabine , r eferred to as ezogabine in the US, is a neuronal potassium channel blocker that is a possible treatment for adult partial-onset seizures in combination with other antiepileptic products. It is also used for posthe rpetic neuralgia pain. 77 In December 2010, retigabi n e received preliminary approval from the Swis s Agency for Therapeutic Products, Swissmedic, and in January 2011, Valeant and GSK announced that the European Medicines Agency's Committee for Medicinal Products for Human Use (CHMP) recommended marketing authorization for retigabine .78 In th e US, retigabine's NDA is under review by the FDA. Until the NDA has been approved by the FDA, retigabine cannot be commercialized in the US. 79

Migraines Migraines affe ct 28 million Americans and are characterized by severe headaches with side effects including nausea, vomiting, and sensitivity to light and/ or sound. Migranal" is Valeant's migraine medication and the only product available in its medication class. Migranal" is administered intranasally, a distinct advantage for patients experiencing nausea or vomiting. Valeant gained the rights to Migranal" through its acquisition of Xcel.

Myasthenia Gravis Myasthenia gravis is a rare disease that affects only 13,600 Americans. It is a neuromuscular disorder that affects

the body's voluntary muscles. It is often characterized by a drooping eyelid or loss of facial movement. Unfortunately, the low incidence of myasthenia gravis provides little financial incentive for pharmaceutical companies to invest in drug development. Mestinon• is Valeant's approved, but not promoted, drug for myasthenia gravis.

Additional Products As a result of the merger, Valeant added the following key neurology products to its portfolio: Wellbutrin" XL for depression, Ultram• ER for chronic pain management, Xenazine• for the reduction of involuntary movements caused by Huntington's disease, and Ativan• for the treatment of anxiety disorders. 80

Valeant also has products in its development pipeline. These products include retigabine (for treating epilepsy and pain), taribavirin (for chronic hepatitis C), and several dermatology drugs for treating rosacea, acne, and dermatological fungus. Valeant plans to expand its pipeline with the addition of new compounds and product extensions through company and product acquisitions8 1 (see Exhibit 5).

To remain competitive and achieve its vision of becoming the "leading specialty pharmaceutical company in the world," 82 Valeant needs to be aware of its competitors and their products.

Competitive Environment In the US, approximately 1,500 companies compete in the pharmaceutical market estimated to be worth $200 billion annually. Revenue market share is highly consolidated with 80 percent of the market driven by the top 50 companies. Global pharmaceutical market growth is predicted to reach $880 billion in 2011. 83

Market consolidation is further highlighted by the recent acquisition trend, whereby drug manufacturers gain R&D capability by acquiring smaller firms. 84

Valeant's neurology division competitors can be narrowed to a few key companies: Teva Pharmaceutical Industries Ltd., UCB S.A., and H. Lundbeck (see Exhibit 6 for comparative information on Valeant and its competitors).

Teva Pharmaceutical Industries Ltd. Teva endeavors to introduce generic versions of branded products as early as possible following patent expiration. To support this strategy, Teva actively reviews current patents for opportunities to legitimately challenge patent duration. It also enters into alliances to share product development and litigation costs and maintains the lowest R&D investment rates in

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Exhibit 5 Valeant Pharmaceutica ls International, Inc. Produ ct Deve lopment Pipe line

Development Pipeline

In Development I Discovery I Pre-Clin ical I Phase 1 Phase 2 Phase 3 NDA/MAA Submitted

ANDA

Dermatology Lacrisert

(life cycle management)

IDP 115 (Rosacea)

IDP107(Acne) ~- ,_

-:::i IDP 108 (Topical Anti-fungal) IDP 113 (Topical Anti-fungal)

Specialty CNS -Demser (life cycle management)

Syprine J (life cycle management)

Mephyton l (life cycle management)

lstradefylline (Parkinson's Disease)

GSK Partnership Retigabine/ Ezogabine Retigabine/ Ezogabine Pain

,_ - - l==:J - ,_ - Retigabine/Ezogabine MR

Other Compounds Venlafaxine ER J Fenofibrate J Ouetiapine ER J

Source: Valeant Pharmaceuticals International, Inc. website, http:// www.valeant.com, January 2011.

the central nervous system product category. Teva's Azilect• (offered through a collaborative agreement with H. Lundbeck) competes with Valeant's Zelapar• product for the treatment of PD. In 2009, Teva had $13.9 bill ion in sales.Bs,B6

UCB UCB's vision is to develop a leadership position in severe dis ease categories to deliver superior long- run returns to shareholders. It aspires to connect with patients to understand their pain points, and to connect sciences, specifically "biology and chemistry in a unique way to target proteins which are currently undruggable."

UCB has nine products in the R&D pipeline to address epilepsy, migraine prophylaxis, multiple sclerosis, fibromyalgia, restless legs syndrome, and PD. BB Sales of ce ntral nervous system (CNS) products accounted for

41 percent of its 2009 net sales of 2.7 billion euros. B9

Consistent with its strategy, UCB maintains more than 30 partnerships to gain access to specific R&D expertise

within the value chain. For example, it has alliances with Sanofi-Aventis and Amgen.B7

H. Lundbeck A/S H. Lundbeck focuses primarily on developing medicine for the treatment of CNS diseases. Main products include Cipralex• (marketed as Lexa pro• in the US) for depression and anxiety disorders, Ebixa• for Alzheimer's disease, and Azilect• for the treatment of PD (offered through a collaborative agreement with Teva). Approximately 20 percent of its annual revenue ($2.6 billion in 2009) is spent on R&D. 90

Company and Product Acquisitions V aleant uses its acquisition strategy as a reso urce allocation methodology as well as to man age the competi tive environment. These acquisitions also establish future products in the pipeline, such as retigabine. Valeant's acquisitions have allowed it to overcome barriers to

Exhibit 6 Valeant Pharmaceuticals International, Inc. Competitive Landscape

KEY NUMBERS Valeant Lundbeck Teva UCB Pharm. Pharm.

Annual Sales ($ m il.)

Employees

Market Cap ($ mil.)

820.4

1,311

11,696.6

2,647.7

5,733

13,899.0

35,089

52,2 10 .1

4, 170.6

9,324

PROFITABILITY Valeant Lundbeck Teva UCB Industry Market Pharm. Pharm . Median Median'

Gross Profit Margin 73.15% 80.40% 56. 11% 64.78% 57 .1 6% 28.77%

Pre-Tax Profit M arg in (6 .01 %) 22.29% 21.32% 23 .20% 11.22% 8.48%

Net Profit Marg in (11.46%) 16.68% 18.96% 17.63% (0.48%) 5.53%

Return on Equity (3 .1%) 22 .9% 14.4% 12.2% (0.5%) 10.1%

Return on Assets (1.6%) 13.4% 8.1% 5.5% (0.2%) 1.5%

Return on Invested Capital (1.6%) 22 .9% 10.8% 12.2% (0.3%) 4.4%

VALUATION Va leant Lundbeck Teva UCB lndu~try Market Pharm. Pharm. Median Median

Price/Sales Ratio

Price/Earnings Rat io

Price/Book Ratio

Price/Cash Flow Ratio

6.86

(59.88)

2.19

15.87

1.50

8.98

2.05

5.52

3.29

17.36

2.41

12.79

1.65

9.66

1.09

16.29

3.06

50.00

2.99

16.72

OPERATIONS Va leant Lundbeck Teva UCB lndu~try Market Pharm . Pharm . Median Median

Days of Sales O utstanding 117 .06 52 .09 116.73 - 78 .04 34 .66

Inventory Turnover 0.8 1.9 1.9 2.7 2.5 8.1

Days Cost of Good s Sold in Inventory 442 195 196 137 144 45

Asset Turnover 0 .1 0.8 0.4 0.3 0 .5 0.3

Net Rece ivables Tu rn over Flow 3.1 7.0 3.1 - 4.7 10.5

Effective Tax Rate - 25 .2% 10.0% 24.9% 37 .9%

FINANCIAL Valeant Lundbeck Teva UCB lndu~try Mar~et Ph arm. Pharm . Median Median

Current Ratio 1.36 1.36 1.60 0.87 2.05 1.33

Quick Ratio 0.9 - 1.0 - 1.4 1.2

Leverage Ratio 1.53 1.95 1.76 2.06 1.92 7.13

Total Debt/Equity 0.29 0.30 0.29 0.51 0.42 1.3 7

Interest Coverage (0.31) 15.98 15.25 4.05 4.75 17 .33

PER SHARE DATA Valeant Lundbeck Teva UCB Industry Market Pharm . Pharm . Median Median

Revenue Per Share 5.68 75 .34 16.95 15.8 7 7.87

Dividends Per Share 0 .37 2.21 0.62 0.92 0.47 I 0.25 Cash Flow Per Share 2.46 20.45 4.36 1.61 1.44

Working Capital Per Share 0.31 8.25 4.85 (1.46) 2.86

Long-Term Debt Per Share 1.27 - 4.61 - 2.65

Book Value Per Share 17 .83 54.90 23.15 24.09 8.06

Total Assets Per Share 6.89 87 .33 36.12 49.74 13.69 ----- . - (Continued)

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Exhibit 6 Valeant Pharmaceuticals International, Inc. Competitive Landscape Valeant Pharmaceuticals Internation al, Inc. and Top

Competitors (Continued)

GROWTH Va leant

Lundbeck Teva

UCB Industry Market

Ph arm . Ph arm. Median Median

12-Month Revenue Growth 8.4% 21.9% 25.4% (19 .2%) 14.7% 31.9%

12-Month Net Income Growth (11.7%) 32.9% 215.0% 1,095.3% - (27.7%)

12-Month EPS Growth (11.2%) 33.5% 185.9% 1,095.7% - (50.0%)

12-Month Dividend Growth (57.0%) (10.2%) 17.5% 0.0% (9.7%) -

36-Mont h Revenue Growth (8.5%) 14.2% 18.2% 4.9% 18.1 % 14.3%

36-Month Net Income Growth (4.7%) 21 .9% 54.2% 11.9% 84 .5% (5.6%)

36-Month EPS Growth (5 .1%) 25.0% 47.8% 3 .0% - (14.7%)

36-Month Dividend Growth 8 .9% - 23.7% - 13.1% -

' Publ ic companies trading on the NYSE, ASE , and NASDAQ.

© 2011 Morningstar, Inc. Financial Data provided by MORNINGSTAR. Hoover's Company Reports 201 1, Valeant Pharm aceuti cals Internati onal, Inc.

market entry and quickly provide new products; it has also potentially reduced the number of competitors.

In addition to its acquisition strategy, Valeant seeks opportunities to outsource some of the secondary operations so it can focus on key operations.

Outsourcing In an effort to capitalize on core competencies, pharmaceutical companies are moving toward areas of specialty, specifically in R&D, manufacturing, or sales and marketing. In turn, they outsource other functions.

Valeant and other companies rely heavily on their outsourcing partners for a number of reasons including to reduce the time it takes to bring a drug to market through enhanced R&D or manufacturing processes; to increase patient enrollment in clinical trials; to optimize the drug's promotion; or to capitalize on human labor, whether involving scientists, marketing, or sales personnel. The FDA enforces stringent regulations on quality manufacturing and ethical promotions therefore, pharmaceutical companies must consider quality, compliance, and reputation ahead of contract flexibility and price when selecting outsourcing partners to help them meet the demands of key customers.9 1

Key Customers Companies in the pharmaceutical industry typically focus on four customer groups: physicians, pharmacy benefit managers (PBMs), patients, and pharmacies.

Physicians Valeant specifically targets neurologists and primary care providers. According to an interview with Dr. Joseph Sirven, a neurologist at the Mayo Clinic in Scottsdale, Arizona, physicians utilize several methods

to learn about a product and its use in clinical practice. They study product-specific articles published in peer- reviewed journals, paying close attention to the efficacy and safety outcomes, the number of subjects enrolled, the journal in which the study was published, and the physicians who conducted the trial. The volume of clinical trials available and the long-term safety data reported on a particular product also carry significant weight. Sales and marketing efforts, a product's cost, availability of insurance coverage, and physician habit all influence a physician's decision-making process.92

Pharmacy Benefit Managers (PBMs) PBMs are companies that manage the prescription pharmaceutical benefits for managed care companies, employers, and government programs. Approximately 95 percent of all drug formularies (lists of medications that are usually covered under a particular health care plan) are managed by a PBM.93 The role of a PBM is to determine the drugs that will be placed on a formulary, a tier status for the drugs, restrictions, and copays. They also make suggestions to physicia ns and patients regarding disease-state management.

Pharmaceutical companies negotiate contracts with PBMs to get their products on formularies, offering discounts to get preferred status. A drug with preferred status is easier for physicians to pre scribe and more affordable for patients. Some formul aries place "prior authorizations" on certain products, requiring physicians to justify why they requested the medication. Products without prior authorization requirements have a better chance of being prescribed because they eliminate the need for extra paperwork and patient wait-time. 94

Patients Many patients take an active role in their health care. These proactive patients search the Internet to find

product- and disease-specific websites and often ask their physicians about the products they see advertised on television and in magazines. They also attend support groups and seek out local foundations to learn more about available therapies, costs, symptomatic benefits, and physicians' recommendations regarding the prescriptions they take.

Pharmacists Pharmaceutical companies must work with distributors to ensure phar macies have ample stock to fill prescriptions. Companies must also provide pharmacists with educational tools regarding the drugs and their indications, as they influence patients' medication regimens. If pharmacists are not educated on the role a product plays in disease management, they may provide information that negatively influences the patients' desires to fill the prescription and could perhaps harm patients.

Customer needs and desires are significantly affected by the general environment. Therefore, Valeant must analyze the trends and adjust its strategies accordingly.

Trends Influencing Pharmaceutical Companies Technological advancements, demographic changes, cultural tendencies , and various governmental policies all create added pressures to the pharmaceutical industry.

Technology Technology provides the means to increase the speed and efficiency of pharmaceutical companies in bringing a product to market. Companies are moving toward electronic collaboration software such as the EMC Documentum enterprise compliance platform to reduce costs, provide faster solution delivery times, and improve the ability to quickly retrieve information. 95 Because information changes quickly, books such as encyclopedias are considered outdated even as they are printed. With information constantly updated, scientists and pharmaceutical companies are finding it hard to keep up.96

According to the World Health Organization (WHO), "chronic conditions are projected to be the leading cause of disability throughout the world by the year 2020; if not successfully prevented and managed, they will become the most expensive problems faced by our health care systems."97 Technological advances in equipment aid in early detection and will help keep rising health costs in check.

Aging Population and Lifestyle Life expectancy in the US is increasing due to advances in medicine and technology as well as improved access to health care. Life expectancy at birth and at 65 years has

steadily increased for both genders. "The US population age 65 and over is expected to double in size within the next 25 years."98 According to the WHO, "Neurological disorders ranging from migraines to epilepsy and dementia affect up to one billion people worldwide and the toll will rise as populations' age."99 These factors will increase the need for drugs. Moreover, a study conducted by the US Government Accountability Office found that the cost of prescription medications increased by almost 25 percent from 1997 to 2002. 100 With the trend only worsening, the entire health care industry needs a better way to manage its rising costs.

Many adults try alternative treatments rather than pharmaceuticals as an answer to health-related issues. Complementary and alternative medicine (CAM) include a variety of techniques including prayer, massage therapy, yoga, herbal remedies, breathing techniques, meditation, and altering one's diet. Another option is surgery, especially for many neurological conditions, with a goal of offering patients improved symptomatic benefits. 101 However, this alternative is not without risk; deep brain stimulation is associated with potential side effects such as panic attacks, brain hemorrhages, infection, mood changes, delirium, movement disorders, lightheadedness, insomnia, speech problems, and suicide. w2

On the other hand, for the members of society not pursuing alternative cures, prescription drug use · is increasing. Many patients believe that pills can cure just about anything. From diet pills to ADHD pills, the majority of Americans are becoming more medicated. Greg Critser, author of Generation RX: How Prescription Drugs Are Altering American Lives, Minds and Bodies, discusses how "the average number of prescriptions per person in 1993 was seven, but that had risen to 11 by 2000, and 12 in 2004."!03

Prescription drug abuse is on the rise, particularly among teens. In the US, for example, "Abuse of prescription pain killers now ranks second-only behind marijuana-as the nation's most prevalent illegal drug problem." 104 The President's National Drug Control Strategy 2010 outlines the extent of prescription drug abuse in the US and federal programs designed to address the problem. 105

Regulation The US government's role in the pharmaceutical industry is highlighted by the FDA and the associated hurdles that companies must clear to safely take a drug to market. These hurdles represent an expensive, time-consuming process that increases the cost of dn.igs. The problem is that many consumers view the high cost for prescriptions as greed on the part of pharmaceutical companies.

Statistics show that "R&D costs in the drug industry are among the highest with only three out of ten marketed

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drugs producing revenues that match or exceed average R&D costs ." 106 These factors , in addition to other government restrictions such as "stem cell research limitations and US visa policies," 107 are a leading cause in the trend of offshore pharmaceutical R&D processes. 108

The Health Insurance Portability and Accountability Act of 1996 (HIP AA) has significantly affected the pharmaceutical industry's marketing strategies. Patient Health Information (PHI) must be removed from all records before pharmaceutical companies can use it to gather marketing data. This restriction directly affects mail advertising campaigns. Additionally, it limits the number of individuals who qualify for clinical studies, as pharmaceutical companies must now work with cov- ered providers to obtain patient authorization of medical records. 109

The Prescription Drug Marketing Act (PDMA) was created by the FDA to monitor prescription drugs. PDMA requires pharmaceutical companies to perform annual audits of drug samples in addition to monitoring the storage of the drug sample. The goal is to "assure that the drug samples are free of contamination, deterioration, and adulteration." 110

The FDA also has a Division of Drug Marketing, Advertising, and Communications (DDMAC). It ensures that "information contained in prescription drug promotional materials is not false or misleading." 1 11 The DDMAC has a list of firm guidelines that pharmaceutical companies must follow when publishing all communications, including commercials. If the DDMAC decides to ban this mode of advertising, pharmaceutical companies will need to find other effective means of advertising their products. The DDMAC also administers the FDA's educational outreach program, the "Bad Ad" program, designed to educate health care providers on ways they can assist the FDA to ensure that prescription drug advertising and promotion is truthful and straightforward. It also provides them with an easy way to report misleading prescription drug promotion.11 2

Medicare Part D, a program to assist Medicare beneficiaries pay for their prescription drugs , has resulted in more US consumers choosing generic drugs. Medicare Part D has a gap (known as the "Donut Hole") such that Medicare beneficiaries must pay for drugs out-of-pocket when they reach a certain benefit limit and do not qualify for the next tier in the prescription drug structure. The increased out-of-pocket expenses has caused more patients to shift their use of branded products to the cheaper generic products. 11 3 However, in 2011, efforts began to close the Donut Hole. People who reach the Donut Hole in 2011 will receive a 50 percent discount on brand-name formulary drugs and a 7 percent discount on all generic formulary medications. 114

Retail pharmacies such as Walmart offer $4 generic prescription options. 115 Because of its size, Walmart and similar large retail pharmacies further contribute to the increased generic drug awareness and usage .116

Therefore, to keep its products in the pre ferred category, Valeant works hard to employ effective and creative marketing strategies.

Marketing Valeant sells its products through its direct sales forces in Canada and the US and through marketing partnerships. 11 7 Valeant develops marketing materials for its sales force to use in interactions with key customers. They, however, must ensure that the marketing pieces are medically accurate and compliant with the DDMAC. They also provide prescription samples. Samples allow physicians to gauge whether a m ed ication is well tolerated and efficacious before patients purchase a prescription. Valeant also generates press releases and special interest stories, and develop s advertising for medical journals, websites, email opt- ins, pharmacy fax blasts, and physician and patient direct mailings.

Related to its direct marketing efforts, Vale ant provides funding and educational m aterials for peer- to-peer and pharmacy educational programs. These programs are divided into two segments: (1) medical education, continuing medical education, grand rounds, and unrestricted educational grants (Valeant provides funding for these programs, but in no way influences the content); and (2) promotional programs, including peer- to -peer programs, roundtable discussions, and pharmacy educational events. Valeant drives the content that is approved through the regulatory and legal departments.

Additionally, V aleant supports national foundations including the Epilepsy Foundation , Michael J. Fox Foundation, National PD Foundatio n, and American PD Foundation. Valeant provides these foundations with educational resources and fina ncial support to promote research in different therapeutic areas.

Valeant employees also attend professional society meetings and trade shows to display product information and to gain information on the changing pharmaceutical environment. 11 8

Patients who are financially disadvantaged can apply for free medicine through the Valeant Patient Assistance Program . It is available to legal residents of the US who do not have a medical insurance plan that covers prescription drug costs and/or do not have funding from government or private programs for medicine.11 9

Financial Results With the two companies expected to be fully integrated by the middle of 2011 and a $250 million savings

resulting from the merger anticipated the same year, Valeant gave strong forecasts for fourth quarter 2010 and fiscal year 2011 :120

Fourth Quarter 2010

• 44 to 48 cents profit per share • $510 to $520 million in revenue

Fiscal Year 2011

• $2.25 to $2.50 profit per share • $2.l to $2.3 billion in total revenue • $850 to $950 million in sales of neurologic drugs and

other products • $480 to $515 million in US sales of dermatology

products • $285 to $305 million in revenue from Canada and

Australia • $225 to $245 million in sales of branded generic

drugs in Central Europe

• $260 to $285 million in sales of branded generic drugs in Latin America (see Exhibit 7)

In 2009, Valeant posted $820 million in annual revenue with a gross profit margin of 74.56 percent, which was above both the industry median of 57.16 and market median of 28.77 percent (see Exhibits 8, 9, 10, and 11).

Analysts believe that the combined company will benefit from greater scale, tax benefits, and stable cash flows and anticipate that Valeant will meet its earnings forecasts. Pearson's recommendation that the executive management team should not receive bonuses if Valeant fails to meet its targeted earnings per share also gained analysts' approval, and they liked that he waived the accelerated vesting of his equity awards because of the merger. 121 Analysts support Valeant's acquisition strategy and subsequent savings on R&D expenses and expect that Valeant will be able to generate compound annual growth of 17 percent until 2019. 122

Exhibit 7 Valeant Pharmaceuticals International Segment Information 2007 through 2009

Year Ended December 31

Revenues 2009 2008 2007

Specialty pharm product sales $403,865 $ 303,723 $326,682

Specialty pharm service and alliance revenue 73,028 4,374 19,200

Branded generics-Europe product sales 151 ,650 152,804 125,070

Branded generics-Latin America product sa les 155,246 136,638 151,299

Alliances (ribaviri n royalties only) 46,672 59,438 67 ,252

Consolidated revenues $830,461 $ 656,977 $689,503

Operating Income (Loss)

Specialty pharm $165,920 $ 3,778 $ 14,846

Branded generics-Europe 37,650 45,262 41 ,908

Branded generics-Latin America 55,300 25,751 36,218

258,870 74,791 92,972

Alliances 46,672 59,438 67,252

Corporate (56,290) (60,127) (74,724)

Subtotal 249,252 74,102 85,500

Special charges and credits including acquired in-process research and (6,351) (186,300) development

Restructuring, asset impairments, dispositions and acquisition-related (10,068) (2 1,295) I (27,675) costs

Consolidated segment operating income (loss) 232,833 (133,493) 57,825

Interest income 4,321 17 ,129 17,584

Interest expense (43 ,571) (45 ,385) (56,923)

Gain (loss) on ea rly extinguishment of debt 7,221 (12 ,994)

Other income (expense), net including translation and exchange (1,455) 2,063

I 1,659

Income (loss) from continuing operations before income taxes $199,349 $(172,680) $ 20,145

Sou rce: Valeant Pharm aceuticals International 2009 Annual Report .

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Exhibit 8 Valeant Pharmaceuticals International, Inc. Selected Financial Data

Year Ended December 31

2009 2008 2007 2006 2005

(In thousands except per share data)

Revenues :

Product sales $ 710,761 $ 593,165 $603 ,0 51 $603,810 $ 546,429

Service revenue 22,389

Alliance revenue 97,311 63,812 86,452 81,242 91,646

Total revenues 830,461 656,977 689,503 685 ,052 638,075

Incom e (loss) from continuing operations before 199,349 (172,680) 20,145 3,522 (92,838) income taxes

Provision (benefit) for income taxes (58,270) 34,688 13,535 36,577 67,034

Income (loss) from continuing ope rations 257,619 (207,368) 6,610 (33,05 5) (159,872)

Income (loss) from discontinued operations, net of 6,125 166,548 (26,796) (37 ,332) (40,468) tax

Net income (loss) 263,744 (40,820) (20,186) (70,387) (200,340)

Less: Net income attributable to noncontrolling interest 3 7 2 3 287

Net incom e (loss) attributab le to Valeant $ 263,741 $ (40,827) $(20, 188) $(70,390) $(200,627)

Basic income (loss) per share attributable to Valeant:

Income (loss) from con tinuing operations attributable to Valeant $ 3.15 $ (2.37) $ 0.07 $ (0 .35) $ (1.74)

Income (loss) from discontinued operations attributab le to Valeant O.Q7 1.90 (0 .29) (0.40) (0 .45)

Net income (loss) per share attributable to Valeant $ 3.22 $ (0.47) $ (0 .22) $ (0.75) $ (2.19)

Diluted income (loss) per share attributable to Valeant:

Income (loss) from continuing operations attributable to Valeant $ 3.07 $ (2.37) $ 0.07 $ (0 .35) $ (1.74)

Incom e (loss) from discontinued operations attributable to Valeant 0.07 1.90 (0.28) (0.40) (0 .45)

Net income (loss) per share attributable to Valeant $ 3. 14 $ (0 .47) $ (0 .21 ) $ (0 .75) $ (2.19)

Dividends declared per share of common stock $ $ $ $ 0 .24 $ 0.23

Source: SEC.gov http://www.sec.gov/Archi ves

Exhibit 9 Valeant Pharmaceuticals International In c. Balance Sheet 2005-2009

As of December 31 ~~~~~~~~~~~~~~~~~~~~~~~~~

2009 2008 2007 2006 2005

(In thousands)

Balance Sheet Data:

Cash and cash equiva lents $ 68,080 $ 199,582 $ 287,728 $ 311,012 $ 208,397

Working capital 125,079 175,450 412,272 348,402 220,447

Net assets of discontinued operations 272,047 282,251 307,096

Total assets 1,305,479 1,185,932 1,492,321 1,503,386 1,512,740

Total debt 600,589 398,802 716,821 698,502 681,606

Stockholders' equity 371 ,179 251,748 479,571 509,857 527 ,843

Source: SEC.gov http://sec.gov/Archives

Exhibit 10 Va lea nt Pha rma ce uticals Int ernational , Inc. Ca sh Flow Stat ement

Cash flows fro m operating activities:

Net income (loss)

Income (loss) fro m d isco ntinued operations

Income (loss) fro m continuing operations

Adjust ment s to re concile income (loss) from continuing operations to net cash

provided by operating activities in continuing operations:

Depreciation and amortization

Provision for losses on accounts receivable and inventory

Stock compen sation expense

Excess tax ded uction from stock options exercised

Translation an d exchange (gains) losses, net

Impa irment ch arges and other non-cash items

Payments of accreted interest on long-term debt

Acq ui red in-p ro cess research and development

Deferred inco me taxes

(Gain) loss on ext in guishment of debt

Change in assets and liabilities , net of effects of acquisitions:

Accounts receivable

Inventories

Prepaid expen ses and other assets

Trade payabl es and accrued liab iliti es

Income t axes

Other liabilities

Cash flow from operating activities in continuing operations

Cash flow from operating activities in discontinued operations

Net cash provi d ed by operating activities

Cash flows from investing activities:

Capital expen ditures

Proceeds from sale of assets

Proceeds from sale of businesses

Proceeds from investments

Purchase of investments

Acquisition of b usinesses, license rights, and product lines

Cash flow from investing activities in continuing operations

Cash flow from investing activities in discontinued operations

Net cash (used in) provided by investing activities

Cash flows fro m financing activities:

Payments on lo ng-term debt and notes payable

Proceeds from issuance of long-term debt and notes payab le

Stock option exercises and employee st ock purchases

Payments of employee withholding taxes related to equity awards

Excess tax ded uct ion from stock options exercised

Purchase of trea sury stock

Cash flow fro m financing activities in continu ing operations

Cash flow fro m fin ancing activities in discontinued operations

2009 2008 2007

(In thousands)

$ 263,744 $ (40,820) $(20,186)

6, 125 166,548 (26,796)

257,619 (207,368) 6,610

86,381 66,480 71,634

2,911 21,665 6,488

16, 121 5,064 12,419

(1,735) (12,303)

1,019 (2,063)

I (1,659)

14,966 9,242 30,035

(35,338) {6,115)

- 186,300

(97,653) (23,663) I 18, 122 (7 ,221) 954

1,508 11,038 23,440

(13,193) (22,369) 7,609

2,885 9,517 (7,839)

6,144 49,1 11 (9,768)

1,297 32,842 (57 ,350)

(49,390) 82,323 824

186,321 200,655 100,565

(2,768) 9,759 (8,044)

183,553 210,414 92 ,521

(20,047) (16,575) (29 ,140)

760 971 38,627

3,342 48,57 5 2,453

135,937 200,802 35 ,248

(129 ,089) (155,653) (72,518)

(328,442) (355,303) (22 ,520)

(337,539) (277 ,183) (47,850)

(4,941) 447,101 8,508

(342,480) 169,918 (39,342)

(151,718) (323,804) (3,494)

348,982 118 1,799

40,387 49,054 15,288

(7,099)

1,735 12,303

(202 ,378) (206,517) (99 ,557)

29,909 (468,846) (85 ,964)

- (43) (7 ,353)

(Cont inued)

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Exhibit 10 Valeant Pharmaceuti cals International, Inc. Cash Flow Statement (Continued)

Net cash provided by (used in) financing activities 29,909 (468,889) (93,317)

Effect of exchange rate chan ges on cash and cash equivalents (2,484) (21,226) 23,924

Net decrease in cash and cash equivalents (131,502) (109,783) (16,2 14)

Cash and cash equivalents at beginning of period 199,582 309 ,365 325,579

Cash and cash equivalents at end of period 68,080 199,582 309,365

Cash and cash equivalents classified as part of discontinued operations - - (21,637) Cash and cash equivalents of continuing operations

Source: SEC.gov http://www.sec.gov

Exhibit 11 Valea nt Pharmaceuticals Int ernational , Inc. Key Ratios

Valuation

P/ E (TTM)

Price to Revenue (TTM)

Price to Cash Flow (TTM)

Price to Book (MRQ)

Per Share

Revenue/Share (TTM)

EPS Fully Diluted (TIM)

Dividend/Share (TTM)

Book Value/ Share (MRQ)

Cash Flow/Sha re (TIM)

Cash (MRQ)

Profitability

Operating Margin (TIM) (%)

Net Profit Marg in (TTM) (%)

Gross Margin (TTM) (%)

Growth

5-Year Annual Growth(%)

5-Year Annual Revenue Growth Rate(%)

5-Year Annual Dividend Growth Rate(%)

5-Year EPS Growth(%)

Financial Strength

Quick Ratio (MRQ)

Current Ratio (M RQ)

LT Debt to Equity (MRQ) (%)

Total Debt to Equity (MRQ) (%)

Management Effectiveness

Return on Equity (TTM) (%)

Return on Assets (TTM) (%)

Return on Investment (TIM) (%)

Inventory Turnover (TTM)

12.06

166.54

2.05

5.66

- .62

.38

18.13

.41

2.03

-.94

-11.46

72.50

-1.28

-1.37

1.45

1.19

1.54

58 .21

60.48

-3 .13

-1 .58

-1.72

*TIM (Trailing 12 Months) refers to the most recently completed 12-month period, ending on the last day of the most recent month. Above data refer to the 12-month period ending Dec 2010.

Source: Valeant Pharmaceuticals International, In c. company website, http://

www.valeant.com, Jan 2011 .

$ 68,080 $ 199,582 $287,728

Strategic Direction Before resigning, Tyson outlined to shareholders his strategy as follows:

Our strategic focus will be to aggressively acquire, develop and commercialize new products . Through strategic acquisitions, growth in our promoted bran ds, and contin- ued management of expenses, we expect to make further progress toward our goal of creating lo ng-term value for our stockholders .... We have talented and experienced professionals, good products and a sound business strat- egy. The management team continues to be committed to delivering on its promises. 123

Tyson's successor, J. Michael Pears on, appears to have been succe ssful in the application and further development of Tyson's acquisition strategy. However, there are many challenges and opp or tunities ahead. For example, pharmaceutical sales in emerging markets are anticipated to increase by 14 to 17 percent through 2014, led by China and Brazil, compared with a 3 to 6 percent growth rate in developed markets, according to IMS Health. 124 Some Western companies such as Eli Lilly and Novartis, have already made long-term investments in manufacturing facilities and partnerships with local Chinese fi rms. Pfizer has anno unced plans to pursue a 6 percent market share in China within three years. 125 Although Brazil is one ofValeant's target markets and it has a manufacturing facility there, was the March 2008 sale of Valeant's Asian assets to Invida Pharmaceutical Holdings Pte. Ltd. 126 a decision that Pearson will eventually regret? Is the February 2011 purchase of PharmaSwiss an indication that Pearson is considering further expansion of Valeant's geographic scope?

Will the strategy outlined here combined with the current restructuring efforts resulting from the merge be substantiated in the marketplace or will the strategy need to be further refined? Where Pearson invests the combined company's financial , intellectual , and other resources will be critical to the fi rm's success in delivering long-term value to shareholders.