Jason Arnold, Kari Froehlich, Mat McBride, Stanley Parker, Ann.docx

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.
408
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 .
Globe:© Jan Rysa vy/iStockphoto.com
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
Partner, ValueAct Capital
Formerly a member of the Va leant board of directors
Founding Principal, Laurel Crown Capital LLC
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
Syprine J
Mephyton l
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)
()
"' "' ct>
~
a;:
ii>
"' ~
" "'" "' 3
"' @
~
&r

ii>
"' ill
"' u
<t
t:'.
"' a...
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.
CompetitorsNeurology Division CompetitorsValeantTevaUCB
S.A.H. Lundbeck A/SSales
(mil)$820.40$13,899.00$4,170.60$2,647.70Employees1,31135,0
899,3245,733Growth 8.40%25.40% -
19.2%21.90%StrategyFocused DifferentiationLow CostGrowth-
Based on:neurology product focus early introduction of
genericsCNS products - 40% of salesdeveloping medicine for
CNS diseases late-stage acquisitionsalliancesalliances - 30
partnerships for access to R&DinnovationR&Dquickly provide
new products through acquisitions - $120 millionlowest R&D
investment rates in the CNS product categoryhighest
reinvestment in R&D - 9 products in neurology pipeline20%
revenue spent on R&D - $530 millionNotesoutsources secondary

operations and acquires pipeline productsAzilect offered
through a collaborative agreement with H. Lundbeckseeking
lead in severe disease, LT shareholder return, patient pain
points, and bio-chem target of proteins Azilect offered through
a collaborative agreement with Teva
Comp PerfRival Performance MeasuresKey Numbers
ValeantLundbeckUCBTevaAnnual Sales ($ mil.)
8202,6484,17113,899Employees1,3115,7339,32435,089Sales
per employee 625,477461,887447,340396,107Profitability
ValeantLundbeckUCBTevaIndustry MarketGross Profit Margin
73.15%80.40%64.78%56.11%57.16%28.77%Pre-Tax Profit
Margin -6.01%22.29%23.20%21.32%11.22%8.48%Net Profit
Margin -11.46%16.68%17.63%18.96%-0.48%5.53%Return on
Equity -3.10%22.90%12.20%14.40%-0.50%10.10%Return on
Assets -1.60%13.40%5.50%8.10%-0.20%1.50%Return on
Invested Capital -1.60%22.90%12.20%10.80%-0.30%4.40%P-E
Ratio-59.888.989.6617.3650Operations
ValeantLundbeckUCBTevaIndustry MarketDays of Sales
Outstanding 117.0652.09116.7378.0434.66Inventory Turnover
0.81.92.71.92.58.1Days CGS in Inventory
44219513719614445Asset Turnover 0.10.80.30.40.50.3Net
Receivables Turnover Flow
3.173.14.710.5Liquidity/LeverageValeantLundbeckUCBTevaInd
ustry MarketCurrent Ratio 1.361.360.871.62.051.33Leverage
Ratio 1.531.952.061.761.927.13Total Debt/Equity
0.290.30.510.290.421.37Interest Coverage -
0.3115.984.0515.254.7517.33Per Share
ValeantLundbeckUCBTevaIndustry MarketRevenue per
Share5.6875.3415.8716.957.87Dividends per Share
0.372.210.920.620.470.25Cash Flow per
Share2.4620.451.614.361.44Total Assets per Share
6.8987.3349.7436.1213.69GrowthValeantLundbeckUCBTevaInd
ustry Market1-yr Revenue Growth8.40%21.90%-
19.20%25.40%14.70%31.90%3-yr Revenue Growth-
8.50%14.20%4.90%18.20%18.10%14.30%1-yr Net Income
Growth-11.70%32.90%1095%215%-27.70%3-yr Net Income

Growth-4.70%21.90%11.90%54.20%84.50%-5.60%
Prod StratNumber of Products:20092008200720062005Phase
I1Phase II211Phase III1Pre-
Registration13Launched12322ProductConditionAffected
PopulationProjectionCommentsCompeting ProductsZelapar -
acquired Parkinson's1 million (4-6 million
worldwide)expected to rise dramatically as U.S. population ages
- growing at 50-60,000 new cases each yearonce-daily dosage
adjunctive treatment Teva's Azilect & generic
SelegilineTasmar - acquiredParkinson's2 million (4-6 million
worldwide)last resort - Black Box warningTeva's Azilect &
generic SelegilineDiastat AcudialEpilepsy3 milliononly FDA-
approved at home medication - unattractive delivery system -
developing new intranasal administrationNoneRetigabine
(P)Epilepsy3 millionpartial treatment - preliminary Swiss
approvalNoneMigranal - acquiredMigraines28 million200,000
new cases of seizures each year (30% not relieved by drugs)only
intranasal product for patients with nauseaImigran/
ImitrexMestinonMyasthenia Gravis13,600low
incidenceapproved but not promoted - little incentive to invest
genericsTaribavirin (P)Hepatitis Cfrom the merger:Wellbutrin
XLDepressionUltram ERChronic PainXenazineHuntington's
DiseaseAtivanAnxiety
Income20092007% Change2011 ProjectionRevenues:Specialty
Pharmaceuticals Product Sales $403,865$326,68223.6%850-
950,000Specialty Pharmaceuticals Service and Alliance
Revenue 73,02819,200280.4%+765-820 in Canada, Australia,
dermatologyBranded Generics - Europe Product
Sales151,650125,07021.3%225-245,000Branded Generics -
Latin America Product Sales155,246151,2992.6%260-
285,000Alliances (Ribavirin Royalties Only)46,67267,252-
30.6%Consolidated Revenues830,461689,50320.4%$2.1 - 2.3
billionOperating Income (Loss):Specialty Pharmaceuticals
165,92014,8461017.6%Branded Generics - Europe
37,65041,908-10.2%Branded Generics - Latin America
55,30036,21852.7%Alliances46,67267,252-30.6%Income (Loss)

from Continuing Operations Before
Taxes199,34920,145889.6%Costs and Expenses:Cost of Goods
Sold 204,310223,680-8.7%Selling/General/Administrative
178,600159,27012.1%Research and development costs
120,780118,1202.3%Amortization of
Intangibles104,73048,050118.0%Total Operating
Expenses622,490676,220-7.9%Income (Loss) from Operations
197,940166,60018.8%NIBT174,960208,740-16.2%Net Income
(Loss)176,460195,540-9.8%Gross
Margin74.56%72.88%2.3%Operating
Margin24.13%19.77%22.1%Net Profit Margin21.51%23.20%-
7.3%Gross Dividends - Common Stock102,520241,300-57.5%
Balance Sheet20092007% ChangeCash$114,460$433,640-
73.6%Inventories82,77080,7502.5%Total Current
Assets350,640707,020-
50.4%Property/Plant/Equipment221,950391,190-
43.3%Intangibles - Gross1,805,350933,48093.4%Accumulated
Intangible Amortization(470,130)(302,970)55.2%Intangibles -
Net1,335,220630,510111.8%Total
Assets2,067,0401,782,12016.0%Total Current
Liabilities256,910367,580-30.1%Long Term Debt313,980-
0Total Liabilities712,670484,30047.2%Total
Equity1,354,3701,297,8204.4%Employees1,2911,533-15.8%
Instructions
This case is a comprehensive overview of Valeant
Pharmaceuticals, a specialty drug manufacturer operating in the
fast-cycle pharmaceutical industry. It focuses on the company’s
neurology division, providing detailed market, product,
and competitive information, extensive coverage of external
environmental conditions, and the strategies employed by
Valeant to deliver long-term value to shareholders.
This case study touched on basic healthcare financing theory
and practice. It determines if the company’s recent merger

with Biovail and restructuring efforts will yield the benefits
promised to shareholders and enable the firm to compete more
effectively in the marketplace. To reasonably determine the
merit of its strategic approach, external environmental trends,
competitor positions, financial indicators, internal resources,
and company strategies must be considered. The results of the
analysis can then be used
to suggest measures that can improve Valeant’s strategic
position and potential for ongoing success.
For this mid-term exercise. Please apply what you have learned
so far from this course, particular draw references from
the Healthcare Economics Text.
From the following Six questions. Please
select THREE questions to respond to (2 pages maximum for
each question,
including references):
1. Are rising drug expenditures necessarily bad? Discuss in the
context of pharmaceutical company’s stakeholders
2. (list three).
2. Is the high price of drugs determined by the high cost of
developing a new drug?
3. Within an economic framework, discuss the changing
economic outlook for Valeant.
4.How does cost-shifting differ from price discrimination?
Discuss using drug prices provided in VAleant’s case as an
example.
5.What is the consequence of the FDA providing the public with
greater assurance that a new drug is safe?

6. How does Valeant’s R&D capabilities provide competitive
advantage over its competitors? Will this be different story
without the merger operation?
Note: Six pages maximum for the mid-term.
ValeantCaseForAnalysis
Valeant Worksheet

Jason Arnold, Kari Froehlich, Mat McBride, Stanley Parker, Ann.docx

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