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Article by DailyStocks_admin    (01-01-10 12:13 AM)

Filed with the SEC from Dec 17 to Dec 23:

Valeant Pharmaceuticals (VRX)
Hedge fund ValueAct Capital has agreed not to acquire more than 30% of the specialty pharmaceutical outfit in exchange for a board seat. The agreement, dated Dec. 17, will expire after Valeant's 2013 annual meeting. ValueAct will get one board seat and has agreed not to seek additional seats while the agreement is in effect. The firm will have to maintain ownership of at least 20% of Valeant's shares in order to retain the board seat. It also agreed not to sell any stock to an individual or entity that owns 15% or more of Valeant's shares, and to avoid selling more than 5% of Valeant's shares in the public market on a single day.
ValueAct has 17,775,903 shares (21.9%).

BUSINESS OVERVIEW

Unless the context indicates otherwise, when we refer to “we,” “us,” “our,” “Valeant” or the “Company” in this Form 10-K, we are referring to Valeant Pharmaceuticals International and its subsidiaries on a consolidated basis.

Introduction

We are a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Our specialty pharmaceutical and OTC products are marketed under brand names and are sold in the United States, Canada, Australia, and New Zealand, where we focus most of our efforts on the dermatology and neurology therapeutic classes. We also have branded generic and OTC operations in Europe and Latin America which focus on pharmaceutical products that are bioequivalent to original products and are marketed under company brand names.

Business Strategy

In March 2008, we announced a new company-wide restructuring effort and new strategic initiatives (the “2008 Strategic Plan”). The restructuring was designed to streamline our business, align our infrastructure to the scale of our operations, maximize our pipeline assets and deploy our cash assets to maximize shareholder value, while highlighting key opportunities for growth.

We have built our current business infrastructure by executing our multi-faceted strategy: 1) focus the business on core geographies and therapeutic classes, 2) maximize pipeline assets through strategic partnerships with other pharmaceutical companies, and 3) deploy cash with an appropriate mix of debt repurchases, share buybacks and selective acquisitions. We believe our multi-faceted strategy will allow us to expand our product offerings and upgrade our product portfolio with higher growth, higher margin assets.

Prior to the start of the 2008 Strategic Plan, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and, as a result, divested or discontinued certain non-strategic products. In September 2007, we decided to sell our rights to Infergen. We sold these rights to Three Rivers

Pharmaceuticals, LLC in January 2008. In 2007, we also sold product rights to Reptilase and Solcoseryl in Japan, our ophthalmic business in the Netherlands, and certain other products.

In March 2008, we sold certain assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS 144”).

In June 2008, we sold our subsidiaries in Argentina and Uruguay. In September 2008, we sold our business operations located in Western and Eastern Europe, Middle East and Africa (the “WEEMEA business”) to Meda AB, an international specialty pharmaceutical company located in Stockholm, Sweden (“Meda”).

As a result of these dispositions, the following information has been adjusted to exclude the operations of Infergen and of the WEEMEA business. The results of these operations have also been classified as discontinued operations in our consolidated financial statements for all periods presented in this report.

In October 2008, we completed a worldwide License and Collaboration Agreement (“the Collaboration Agreement”) with Glaxo Group Limited, a wholly owned subsidiary of GlaxoSmithKline plc, (“GSK”), to develop and commercialize retigabine, a first-in-class neuronal potassium channel opener for treatment of adult epilepsy patients with refractory partial onset seizures.

In October 2008, we acquired Coria Laboratories Ltd. (“Coria”), a privately-held specialty pharmaceutical company focused on dermatology products in the United States. In November 2008, we acquired DermaTech Pty Ltd (“DermaTech”), an Australian specialty pharmaceutical company focused on dermatology products marketed in Australia. In December 2008, we acquired Dow Pharmaceutical Sciences, Inc. (“Dow”), a privately-held dermatology company that specializes in the development of topical products on a proprietary basis, as well as for pharmaceutical and biotechnology companies.

Segment Information

In connection with the 2008 Strategic Plan and resulting acquisitions and dispositions, we realigned our organization in the fourth quarter of 2008 in order to improve our execution and align our resources and product development efforts in the markets in which we operate. We have realigned segment financial data for the years ended December 31, 2007 and 2006 to reflect changes in our organizational structure that occurred in 2008.

Our products are sold through three segments comprising Specialty Pharmaceuticals, Branded Generics — Europe and Branded Generics — Latin America. The Specialty Pharmaceuticals segment includes product revenues primarily from the United States, Canada, Australia and divested businesses located in Argentina, Uruguay and Asia. The Branded Generics — Europe segment includes product revenues from branded generic pharmaceutical products primarily in Poland, Hungary, the Czech Republic and Slovakia. The Branded Generics — Latin America segment includes product revenues from branded generic pharmaceutical products primarily in Mexico and Brazil.

Additionally, we generate alliance revenue, including royalties from the sale of ribavirin by Schering-Plough Ltd. (“Schering-Plough”) and revenues associated with the Collaboration Agreement with GSK. Effective January 1, 2009, we will also generate alliance and services revenue from the development of dermatological products resulting from the acquisition of Dow.

For information regarding the revenues, operating profits and identifiable assets attributable to our operating segments, see Note 16 of notes to consolidated financial statements in Item 8 of this annual report on Form 10-K.

Efudex/Efudix Efudex/Efudix is indicated for the treatment of multiple actinic or solar keratoses and superficial basal cell carcinoma. It is sold as a topical solution and cream under the Efudex/Efudix brand name and as generic fluorouracil, and provides effective therapy for multiple lesions.

Diastat/Diastat AcuDial Diastat and Diastat AcuDial are gel formulations of diazepam administered rectally in the management of selected, refractory patients with epilepsy, who require intermittent use of diazepam to control bouts of increased seizure activity. Diastat and Diastat AcuDial are the only products approved by the U.S. Food and Drug Administration (“FDA”) for treatment of such conditions outside of hospital situations.

Cesamet Cesamet is a synthetic cannabinoid. It is indicated for the management of severe nausea and vomiting associated with cancer chemotherapy.

Bedoyecta Bedoyecta is a brand of vitamin B complex (B1, B6 and B12 vitamins) products. Bedoyecta products act as energy improvement agents for fatigue related to age or chronic diseases, and as nervous system maintenance agents to treat neurotic pain and neuropathy.

Bisocard Bisocard is a Beta-blocker. It is indicated to treat hypertension and angina pectoris.

Kinerase Kinerase is a range of science-based, over-the-counter and prescription cosmetic products that help skin look smoother, younger and healthier. Kinerase contains the synthetic plant growth factor N6-furfuryladenine which has been shown to slow the changes that naturally occur in the cell aging process in plants. Kinerase helps to diminish the appearance of fine lines and wrinkles.

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

M.V.I. M.V.I., multi-vitamin infusion, is a hospital dietary supplement used in treating trauma and burns.

Migranal Migranal is a nasal spray formulation of dihydroergotamine indicated for the treatment of acute migraine headaches.

Nyal Nyal is a range of over-the-counter products covering an extensive range of tablets, liquids and nasal sprays to treat cough, cold, flu, sinus and hayfever symptoms.

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

Alliance Revenue and Service Revenue

Our royalties have historically been derived from sales of ribavirin, a nucleoside analog that we discovered. In 1995, Schering-Plough licensed from us all oral forms of ribavirin for the treatment of chronic hepatitis C. We also licensed ribavirin to Roche in 2003. Roche discontinued royalty payments to us in June 2007 when the European Patent Office revoked a ribavirin patent which would have provided protection through 2017.

Ribavirin royalty revenues were $59.4 million, $67.2 million and $81.2 million for the years ended December 31, 2008, 2007 and 2006, respectively, and accounted for 9%, 10% and 12% of our total revenues in 2008, 2007 and 2006, respectively. Royalty revenues in 2008, 2007 and 2006 were substantially lower than those in prior years. This decrease had been expected and relates to: 1) Roche’s discontinuation of royalty payments to us in June 2007, 2) Schering-Plough’s market share losses in ribavirin sales, 3) reduced Schering-Plough sales in Japan from a peak in 2005 driven by the launch of combination therapy and 4) further market share gains by generic competitors in the United States since they entered the market in April 2004.

We expect ribavirin royalties to decline significantly in 2009 in that royalty payments from Schering-Plough will continue for European sales only until the ten-year anniversary of the launch of the product, which varied by European country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

Beginning in January 2009, we will receive royalties from patent protected formulations developed by Dow and licensed to third parties. In 2008, Dow had royalties of approximately $20.0 million.

Beginning in January 2009, we will receive revenue from contract research services performed by Dow in the areas of dermatology and topical medication. The services are primarily focused on contract research for external development and clinical research in areas such as formulations development, in vitro drug penetration studies, analytical sciences and consulting in the areas of labeling, and regulatory affairs. In 2008, Dow had revenue from contract research services of approximately $25.0 million.

Business Acquisitions

In December 2008, we acquired Dow for an agreed price of $285.0 million, subject to certain closing adjustments. We paid $242.5 million in cash, net of cash acquired, and incurred transaction costs of $5.4 million. We paid $5.6 million in January 2009. We have remaining payment obligations of $36.0 million, $35.0 million of which we will pay by June 30, 2009 into an escrow account for the benefit of the Dow common stockholders, subject to any indemnification claims made by us for a period of eighteen months following the acquisition closing. We have granted a security interest to the Dow common stockholders in certain royalties to be paid to us until we satisfy our obligation to fund the $35.0 million escrow account. The accounting treatment for the acquisition requires the recognition of an additional $95.9 million of conditional purchase consideration because the fair value of the net assets acquired exceeded the total amount of the acquisition price. Contingent consideration of up to $235.0 million may be incurred for future milestones related to certain pipeline products still in development. Over 85% of this contingent consideration is dependent upon the achievement of approval and commercial targets. Future contingent consideration paid in excess of the $95.9 million will be treated as an additional cost of the acquisition and result in the recognition of goodwill.

In November 2008, we acquired DermaTech for aggregate cash consideration of $15.5 million, including transaction costs and working capital adjustments.

In October 2008, we acquired Coria for aggregate cash consideration of $96.9 million, including transaction costs and working capital adjustments. As a result of the acquisition, we acquired an assembled sales force and a suite of dermatology products which enhanced our existing product base.

For information regarding these acquisitions, see Note 3 of notes to consolidated financial statements in Item 8 of this annual report on Form 10-K.

Collaboration Agreement

In October 2008, we closed a worldwide License and Collaboration Agreement (the “Collaboration Agreement”) with Glaxo Group Limited, a wholly owned subsidiary of GlaxoSmithKline plc (“GSK”), to collaborate with GSK to develop and commercialize retigabine, a first-in-class neuronal potassium channel opener for treatment of adult epilepsy patients with refractory partial onset seizures.

Pursuant to the terms of the Collaboration Agreement, we granted co-development rights and worldwide commercialization rights to GSK. We agreed to collaborate with GSK on the development and marketing of retigabine in the United States, Australia, New Zealand, Canada and Puerto Rico (the “Collaboration Territory”). In addition, we granted GSK an exclusive license to develop and commercialize retigabine in countries outside of the Collaboration Territory and certain backup compounds to retigabine worldwide.

GSK paid us $125.0 million in upfront fees pursuant to the Collaboration Agreement. In addition, GSK has agreed to pay us up to $545.0 million based upon the achievement of certain regulatory, commercialization and sales milestones and the development of additional indications for retigabine. GSK has also agreed to pay us up to an additional $150.0 million if certain regulatory and commercialization milestones are achieved for backup compounds to retigabine. We will share up to 50% of net profits within the United States, Australia, New Zealand, Canada and Puerto Rico, and will receive up to a 20% royalty on net sales of retigabine outside those regions. In addition, if backup compounds are developed and commercialized by GSK, GSK will pay us royalties of up to 20% of net sales of products based upon such backup compounds.

We will jointly fund research and development and pre-commercialization expenses for retigabine with GSK in the Collaboration Territory. Our share of such expenses in the Collaboration Territory is limited to $100.0 million, provided that GSK will be entitled to credit our share of any such expenses in excess of such amount against payments owed to us under the Collaboration Agreement. GSK will solely fund the development of any backup compound and will be responsible for all expenses outside of the Collaboration Territory. Following the launch of a retigabine product, we will share operating expenses equally with respect to retigabine in the Collaboration Territory. We expect to complete our research and development and pre-commercialization obligations by mid to late 2010.

GSK has the right to terminate the Collaboration Agreement at any time prior to the receipt of the approval by the FDA of a new drug application (“NDA”) for a retigabine product, which right may be irrevocably waived at any time by GSK. The period of time prior to such termination or waiver is referred to as the “Review Period”. If GSK terminates the Collaboration Agreement prior to the expiration of the Review Period, we would be required to refund to GSK up to $90.0 million of the upfront fee; however, the refundable portion will decline over the time the Collaboration Agreement is in effect. In February 2009, the Collaboration Agreement was amended to, among other matters, reduce the maximum amount that we would be required to refund to GSK to $40.0 million through March 31, 2010, with additional reductions over the time the Collaboration Agreement is in effect. Unless otherwise terminated, the Collaboration Agreement will continue on a country-by-country basis until GSK has no remaining payment obligations with respect to such country.

Our rights to retigabine are subject to an Asset Purchase Agreement between Meda Pharma GmbH & Co. KG (“Meda Pharma”), the successor to Viatris GmbH & Co. KG, and Xcel Pharmaceuticals, Inc., which was acquired by Valeant in 2005 (the “Meda Pharma Agreement”). Under the terms of the Meda Pharma Agreement, we are required to pay Meda Pharma milestone payments of $8.0 million upon acceptance of the filing of an NDA and $6.0 million upon approval of the NDA for retigabine. We are also required to pay royalty rates which, depending on the geographic market and sales levels, vary from 3% to 8% of net sales. Under the Collaboration Agreement with GSK, these royalties will be treated in the Collaboration Territory as an operating expense and shared by GSK and the Company pursuant to the profit sharing percentage then in effect. In the rest of the world, we will be responsible for the payment of these royalties to Meda Pharma from the royalty payments we receive from GSK. We are required to make additional milestone payments to Meda Pharma of up to $5.3 million depending on certain licensing activity. As a result of entering into the Collaboration Agreement with GSK, we paid Meda Pharma a milestone payment of $3.8 million in October 2008. An additional payment of $1.5 million could become due if a certain indication for retigabine is developed and licensed to GSK.

During the three months ended December 31, 2008, the combined research and development expenses and pre-commercialization expenses incurred under the Collaboration Agreement by us and GSK were $13.1 million as outlined in the table below. We recorded a credit of $4.1 million against our share of the expenses to equalize our expenses with GSK.

CEO BACKGROUND

Year First

Serving as

Name and Principal Occupation

Age

Director

Other Public Company Directorships


Nominees For Election

RICHARD H. KOPPES(a)(c)
Mr. Koppes has been Of Counsel to the law firm of Jones Day since August 1996, and is Co-Director of Executive Education Programs at Stanford University School of Law. From May 1986 through July 1996, Mr. Koppes held several positions with the California Public Employees’ Retirement System (CalPERS) including General Counsel, Interim Chief Executive Officer and Deputy Executive Officer. He has also been an officer of the National Association of Public Pension Attorneys (NAPPA) for the past nine years. He is also on the Boards of Investor Research Responsibility Center Institute (IRRCI) and the Society of Corporate Secretaries and Governance Professionals.
61 2002 Apria Healthcare Group Inc. (Chairman of Compliance Committee and member of Corporate Governance and Nominating Committee)
G. MASON MORFIT(a)(b)
Mr. Morfit is a Partner of ValueAct Capital. Prior to joining ValueAct Capital in January 2001, Mr. Morfit worked in equity research for Credit Suisse First Boston for more than two years. He supported the senior healthcare services analyst, covering fifteen companies in the managed care and physician services industries. Mr. Morfit is a director of MSD Performance, Inc., a privately held auto parts company, and a former director of Solexa, Inc. He has a B.A. from Princeton University, and is a CFA charterholder.
32 2007 Advanced Medical Optics, Inc. (member of Science and Technology Committee)

MANAGEMENT DISCUSSION FROM LATEST 10K

Company Overview

Introduction

We are a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Our specialty pharmaceutical and OTC products are marketed under brand names and are sold in the United States, Canada, Australia, and New Zealand where we focus most of our efforts on the dermatology and neurology therapeutic classes. We also have branded generic and OTC operations in Europe and Latin America which focus on pharmaceutical products that are bioequivalent to original products and are marketed under company brand names.

Our products are sold through three segments comprising Specialty Pharmaceuticals, Branded Generics — Europe and Branded Generics — Latin America. The Specialty Pharmaceuticals segment includes product revenues primarily from the United States, Canada, Australia and divested businesses located in Argentina, Uruguay and Asia. The Branded Generics — Europe segment includes product revenues from branded generic pharmaceutical products primarily in Poland, Hungary, the Czech Republic and Slovakia. The Branded Generics — Latin America segment includes product revenues from branded generic pharmaceutical products primarily in Mexico and Brazil.

Additionally, we generate alliance revenue, including royalties from the sale of ribavirin by Schering-Plough Ltd. (“Schering-Plough”) and revenues associated with the worldwide License and Collaboration Agreement (the “Collaboration Agreement”) with Glaxo Group Limited, a wholly owned subsidiary of GlaxoSmithKline plc, (“GSK”) entered into in 2008.

Business Strategy

In March 2008, we announced a new company-wide restructuring effort and new strategic initiatives (the “2008 Strategic Plan”). The restructuring was designed to streamline our business, align our infrastructure to the scale of our operations, maximize our pipeline assets and deploy our cash assets to maximize shareholder value, while highlighting key opportunities for growth.

We have built our current business infrastructure by executing our multi-faceted strategy: 1) focus the business on core geographies and therapeutic classes, 2) maximize pipeline assets through strategic partnerships with other pharmaceutical companies, and 3) deploy cash with an appropriate mix of debt repurchases, share buybacks and selective acquisitions. We believe our multi-faceted strategy will allow us to expand our product offerings and upgrade our product portfolio with higher growth, higher margin assets.

Prior to the start of the 2008 Strategic Plan, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and, as a result, divested or discontinued certain non-strategic products. In September 2007, we decided to sell our rights to Infergen. We sold these rights to Three Rivers Pharmaceuticals, LLC in January 2008. In 2007, we also sold product rights to Reptilase and Solcoseryl in Japan, our ophthalmic business in the Netherlands, and certain other products.

In March 2008, we sold certain assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset (“SFAS 144”).

In June 2008, we sold our subsidiaries in Argentina and Uruguay. In September 2008, we sold our business operations located in Western and Eastern Europe, Middle East and Africa (the “WEEMEA business”) to Meda AB, an international specialty pharmaceutical company located in Stockholm, Sweden (“Meda”).



As a result of these dispositions, the following information has been adjusted to exclude the operations of Infergen and of the WEEMEA business. The results of these operations have also been classified as discontinued operations in our consolidated financial statements for all periods presented in this annual report on Form 10-K.

In October 2008, we completed a worldwide License and Collaboration Agreement with Glaxo Group Limited to develop and commercialize retigabine, a first-in-class neuronal potassium channel opener for treatment of adult epilepsy patients with refractory partial onset seizures.

In October 2008, we also acquired Coria Laboratories Ltd. (“Coria”), a privately-held specialty pharmaceutical company focused on dermatology products in the United States. In November 2008, we acquired DermaTech Pty Ltd (“DermaTech”), an Australian specialty pharmaceutical company focused on dermatology products marketed in Australia. In December 2008, we acquired Dow Pharmaceutical Sciences, Inc. (“Dow”), a privately-held dermatology company that specializes in the development of topical products on a proprietary basis, as well as for pharmaceutical and biotechnology companies.

Pharmaceutical Products

Product sales from our pharmaceutical segments accounted for 90% of our total revenues from continuing operations for the year ended December 31, 2008, compared to 87% for the year ended December 31, 2007. Product sales decreased by $9.9 million for the year ended December 31, 2008, as compared to the year ended December 31, 2007.

Our current product portfolio comprises approximately 389 products, with approximately 982 stock keeping units. We market our products globally through a marketing and sales force consisting of approximately 991 employees. Our future growth is expected to be driven primarily by the commercialization of new products, growth of our existing products, and business development.

We have experienced generic challenges and other competition to our products, as well as pricing challenges, and expect these challenges to continue in 2009 and beyond.

Alliance Revenue and Service Revenue

Our royalties have historically been derived from sales of ribavirin, a nucleoside analog that we discovered. In 1995, Schering-Plough licensed from us all oral forms of ribavirin for the treatment of chronic hepatitis C. We also licensed ribavirin to Roche in 2003. Roche discontinued royalty payments to us in June 2007 when the European Patent Office revoked a ribavirin patent which would have provided protection through 2017.

Ribavirin royalty revenues were $59.4 million, $67.2 million and $81.2 million for the years ended December 31, 2008, 2007 and 2006, respectively, and accounted for 9%, 10% and 12% of our total revenues in 2008, 2007 and 2006, respectively. Royalty revenues in 2008, 2007 and 2006 were substantially lower than those in prior years. This decrease had been expected and relates to: 1) Roche’s discontinuation of royalty payments to us in June 2007, 2) Schering-Plough’s market share losses in ribavirin sales, 3) reduced sales in Japan from a peak in 2005 driven by the launch of combination therapy and 4) further market share gains by generic competitors in the United States since they entered the market in April 2004.

We expect ribavirin royalties to decline significantly in 2009 because royalty payments from Schering-Plough will continue for European sales only until the ten-year anniversary of the launch of the product, which varied by European country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

Beginning in January 2009, we will receive royalties from patent protected formulations developed by Dow and licensed to third parties. During the year ended December 31, 2008, Dow had royalties of approximately $20.0 million.

Beginning in January 2009, we will receive revenue from contract research services performed by Dow in the areas of dermatology and topical medication. The services are primarily focused on contract research for external development and clinical research in areas such as formulations development, in vitro drug penetration studies,

analytical sciences and consulting in the areas of labeling, and regulatory affairs. In 2008, Dow had revenue from contract research services of approximately $25.0 million.

Research and Development

We are developing product candidates, including two clinical stage programs, retigabine and taribavirin, which target large market opportunities. Retigabine is being developed in partnership with GSK as an adjunctive treatment for partial-onset seizures in patients with epilepsy. Taribavirin is a pro-drug of ribavirin, for the treatment of chronic hepatitis C in treatment-naive patients in conjunction with a pegylated interferon. We are looking for potential partnering opportunities for taribavirin.

Epilepsy

There are more than 50 million people worldwide who have epilepsy, with approximately 6 million people afflicted with the disease in the United States, the European Union and Japan. The majority of all epilepsy patients are adequately and appropriately treated with the first or second AED they try. However approximately 30% of patients with epilepsy do not respond adequately to existing therapies despite trying multiple different AEDs. These patients are considered to have refractory epilepsy, thus representing the greatest unmet need in epilepsy treatment.

Chronic Hepatitis C

Worldwide, approximately 170 million individuals are infected with the hepatitis C virus. In the United States alone, 3 to 4 million individuals are infected. Current therapies consist of pegylated interferon alfa and ribavirin with a sustained virological response ranging as high as 54% to 56%.

Business Acquisitions

In December 2008, we acquired Dow for an agreed price of $285.0 million, subject to certain closing adjustments. We paid $242.5 million in cash, net of cash acquired, and incurred transaction costs of $5.4 million. We paid $5.6 million in January 2009. We have remaining payment obligations of $36.0 million, $35.0 million of which we will pay by June 30, 2009 into an escrow account for the benefit of the Dow common stockholders, subject to any indemnification claims made by us for a period of eighteen months following the acquisition closing. We have granted a security interest to the Dow common stockholders in certain royalties to be paid to us until we satisfy our obligation to fund the $35.0 million escrow account. The accounting treatment for the acquisition requires the recognition of an additional $95.9 million of conditional purchase consideration because the fair value of the net assets acquired exceeded the total amount of the acquisition price. Contingent consideration of up to $235.0 million may be incurred for future milestones related to certain pipeline products still in development. Over 85% of this contingent consideration is dependent upon the achievement of approval and commercial targets. Future contingent consideration paid in excess of the $95.9 million will be treated as an additional cost of the acquisition and result in the recognition of goodwill.

In November 2008, we acquired DermaTech for aggregate cash consideration of $15.5 million, including transaction costs and working capital adjustments.

In October 2008, we acquired Coria for aggregate cash consideration of $96.9 million, including transaction costs and working capital adjustments. As a result of the acquisition, we acquired an assembled sales force and a suite of dermatology products which enhanced our existing product base.

For information regarding these acquisitions, see Note 3 of notes to consolidated financial statements in Item 8 of this annual report on Form 10-K.

Results of Operations

In connection with the 2008 Strategic Plan and resulting acquisitions and dispositions, we realigned our organization in the fourth quarter of 2008 in order to improve our execution and align our resources and product development efforts in the markets in which we operate. We have realigned segment financial data for the years ended December 31, 2007 and 2006 to reflect changes in our organizational structure that occurred in 2008.

Our products are sold through three operating segments comprising Specialty Pharmaceuticals, Branded Generics — Europe and Branded Generics — Latin America. The Specialty Pharmaceuticals segment includes product revenues primarily from the United States., Canada, Australia and divested businesses located in Argentina, Uruguay and Asia. The Branded Generics — Europe segment includes product revenues from branded generic pharmaceutical products primarily in Poland, Hungary, the Czech Republic and Slovakia. The Branded Generics — Latin America segment includes product revenues from branded generic pharmaceutical products primarily in Mexico and Brazil. Certain financial information for our business segments is set forth below (in thousands). This discussion of our results of operations should be read in conjunction with the consolidated financial statements included elsewhere in this annual report on Form 10-K. For additional financial information by business segment, see Note 16 of notes to consolidated financial statements in Item 8 of this annual report on Form 10-K.
Year Ended December 31, 2008 Compared to 2007

Computations of percentage change period over period are based upon our results, as rounded and presented herein.

Product Sales Revenues: Total consolidated revenues decreased $32.6 million for the year ended December 31, 2008 compared with 2007. Total product sales decreased $9.9 million (2%) to $593.2 million in 2008 from $603.1 million in 2007. Product sales in 2008 included a 3% favorable impact from foreign exchange

rate fluctuations, offset by a 4% reduction in volume and a 1% aggregate decrease in price. The decline in volume is primarily a result of the divestment of operations in Asia, Argentina and Uruguay, which resulted in aggregate revenue decreases of $24.7 million in 2008 compared with 2007. This decline was partially offset by revenues of $8.2 million in 2008 attributable to our Coria acquisition. The decrease in sales is also attributable to the sales decline in Mexico, offset by sales increases in Poland and Canada.

In our Specialty Pharmaceuticals segment, revenues for the year ended December 31, 2008 decreased $23.0 million (7%) to $303.7 million from $326.7 million in 2007. The decrease in Specialty Pharmaceuticals sales for the year ended December 31, 2008 was due to a 9% decrease in volume, partially offset by a 2% increase in price. This decrease reflects the divestment of operations in Asia, Argentina and Uruguay, which resulted in aggregate revenue decreases of $24.5 million in 2008 compared with 2007, partially offset by revenues of $8.2 million attributable to our Coria acquisition. The decrease in volume is also attributable to a decrease in sales of Diastat, Kinerase and Efudex in the United States.

In our Branded Generics — Europe segment, revenues for the year ended December 31, 2008 increased $27.7 million (22%) to $152.8 million from $125.1 million in 2007. Branded Generics — Europe sales in 2008 were impacted by a 14% positive contribution from currency fluctuations and a 12% increase in volume, offset by a 4% aggregate reduction in prices. The increase in the value of currencies in the region relative to the U.S. Dollar contributed $17.9 million to revenues in the segment in 2008. The increase in volume includes a full year of sales in 2008 from products launched during 2007, resulting in a sales increase of $3.9 million.

In our Branded Generics — Latin America segment, revenues for the year ended December 31, 2008 decreased $14.6 million (10%) to $136.7 million from $151.3 million in 2007. Branded Generics — Latin America sales in 2008 reflected a 5% decrease in price, a 4% reduction in volume and a 1% reduction from foreign currency. The decline in volume in 2008 is due in part to a planned reduction of shipments to wholesaler customers in Mexico to reduce the amount of product in the wholesale channel.

Alliance Revenue (including Ribavirin royalties): Alliance revenue in the year ended December 31, 2008 included $4.4 million attributable to the GSK Collaboration Agreement. Alliance revenue in 2007 included a licensing payment of $19.2 million which we received from Schering-Plough as a payment for the license to pradefovir. In 2007, we announced an agreement with Schering-Plough and Metabasis which returned all pradefovir rights to Metabasis.

Ribavirin royalties for the year ended December 31, 2008 were $59.4 million compared with $67.2 million for 2007, a decrease of $7.8 million (12%). Ribavirin royalty revenues decreased due to Schering-Plough’s global market share losses in ribavirin sales and Roche’s discontinuation of royalty payments to us in June 2007.

We expect ribavirin royalties to continue to decline significantly in 2009 because royalty payments from Schering-Plough will continue for European sales only until the ten-year anniversary of the launch of the product, which varied by European country and started in May 1999. We expect royalties from Schering-Plough in Japan will continue after 2009.

Gross Profit Margin: Gross profit margin was negatively impacted for the year ended December 31, 2008 by increases in reserves for returns, in addition to inventory provisions and write offs in Mexico, the United States and Europe resulting primarily from decisions to cease promotion of or discontinue certain products, decisions to discontinue certain manufacturing transfers, and product quality failures. The following table sets forth a summary of gross profit by segment, both excluding and including amortization (discussed below), for the three years ended December 31, 2008, 2007 and 2006 (dollar amounts in thousands):

Selling, General and Administrative Expenses: Selling, general and administrative (SG&A) expenses were $278.0 million for the year ended December 31, 2008 compared with $292.0 million for 2007, a decrease of $14.0 million (5%). As a percent of product sales, SG&A expenses were 47% for the year ended December 31, 2008 and 48% in 2007. The decrease in SG&A expense primarily reflects the effects of our restructuring initiatives, including a $10.1 million reduction due to the divestment of our businesses in Asia, Argentina and Uruguay, in addition to a reduction in stock-based compensation expense of $4.5 million in 2008. The savings from our restructuring initiatives were offset in part by the recognition of an other-than temporary impairment of $4.8 million in an investment in a publicly traded investment fund, a $3.4 million reversal of a tax benefit in Mexico and $3.5 million of expenses related to our expansion into additional markets in Central Europe.

Research and Development: Research and development expenses were $87.0 million for the year ended December 31, 2008 compared with $98.0 million for 2007, a reduction of $11.0 million (11%). The decrease in research and development expenses was primarily due to $10.2 million of expense offsets attributable to the GSK Collaboration Agreement, which was effective in October 2008.



Acquired In-Process Research and Development: Acquired in-process research and development (“IPR&D”) expense represents the estimate of the fair value of in-process technology for projects that, as of the acquisition date, had not yet reached technological feasibility and had no alternative future use. In 2008 we incurred IPR&D expense of $185.8 million related to the acquisition of Dow and $0.5 million related to the acquisition of Coria for IPR&D assets acquired that we determined were not yet complete and had no future uses in their current state. The major risks and uncertainties associated with the timely and successful completion of the acquired in-process research and development assets consist of the ability to confirm the safety and efficacy of the product based upon the data from clinical trials and obtaining the necessary approval from the FDA.

The IPR&D assets of Dow are comprised of the following items; IDP-107 for the treatment of acne, IDP-108 for fungal infections and IDP-115 for rosacea, which were valued at $107.3 million, $49.0 million and $29.5 million, respectively. All of these IPR&D assets had not yet received approval from the FDA as of the acquisition date. IDP-107 is an antibiotic targeted to treat moderate to severe inflammatory acne and is in Phase II studies. IDP-108 is an investigational topical drug for nail, hair and skin fungal infections and is in Phase II studies. IDP-115 is a topical treatment for rosacea and has completed Phase II studies.

The estimated fair value of the IPR&D assets was determined based upon the use of a discounted cash flow model for each asset. The estimated after-tax cash flows were probability weighted to take into account the stage of completion and the risks surrounding the successful development and commercialization of each asset. The cash flows for each asset were then discounted to a present value using a discount rate of 15%. Material net cash inflows were estimated to begin in 2013 for IDP-107, IDP-108 and IDP-115. Gross margins and expense levels were estimated to be consistent with Dow’s historical results. Solely for the purpose of estimating the fair value of these assets, we assumed we would incur future research and development costs of $26.6 million, $29.6 million and $20.1 million to complete IDP-107, IDP-108 and IDP-115, respectively.

Amortization: Amortization expense was $50.0 million for the year ended December 31, 2008 compared with $56.0 million for 2007, a decrease of $6.0 million (11%). The decrease is the result of the declining amortization of the rights to the ribavirin royalty intangible, which was amortized using an accelerated method and was fully amortized in the third quarter of 2008. Amortization expense in 2008 includes a $1.6 million intangible asset impairment charge related to a product sold in the United States.

Restructuring Charges, Asset Impairments and Dispositions: In 2008 and 2007 we incurred $21.3 million and $27.7 million, respectively, in restructuring charges, asset impairments and subsidiary dispositions.

Our restructuring charges include severance costs, contract cancellation costs, the abandonment of capitalized assets such as software systems, the impairment of manufacturing and research facilities, and other associated costs, including legal and professional costs. We have accounted for statutory and contractual severance obligations when they are estimable and probable, pursuant to SFAS No. 112, Employers’ Accounting for Postemployment Benefits . For one-time severance arrangements, we have applied the methodology defined in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). Pursuant to these requirements, these benefits are detailed in an approved severance plan, which is specific as to number of employees, position, location and timing. In addition, the benefits are communicated in specific detail to affected employees and it is unlikely that the plan will change when the costs are recorded. If service requirements exceed a minimum retention period, the costs are spread over the service period; otherwise they are recognized when they are communicated to the employees. Contract cancellation costs are recorded in accordance with SFAS 146. We have followed the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”), in recognizing the abandonment of capitalized assets such as software and the impairment of manufacturing and research facilities. Other associated costs, such as legal and professional fees, have been expensed as incurred, pursuant to SFAS 146.

2008 Restructuring

In October 2007, our board of directors initiated a strategic review of our business direction, geographic operations, product portfolio, growth opportunities and acquisition strategy. In March 2008, we completed this strategic review and announced a strategic plan designed to streamline our business, align our infrastructure to the scale of our operations, maximize our pipeline assets and deploy our cash assets to maximize shareholder value. The strategic plan includes a restructuring program (the “2008 Restructuring”), which is expected to reduce our

geographic footprint and product focus by restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Canada and Australia and on the branded generics markets in Europe (Poland, Hungary, the Czech Republic and Slovakia) and Latin America (Mexico and Brazil). The 2008 Restructuring includes actions to divest our operations in markets outside of these core geographic areas through sales of subsidiaries or assets or other strategic alternatives.

In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell to Invida certain assets in Asia in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. We closed this transaction in March 2008. The assets sold to Invida were classified as “held for sale” as of December 31, 2007. During the year ended December 31, 2008, we received proceeds of $37.9 million and recorded a gain of $34.5 million, net of charges for closing costs, on this transaction. We expect to receive additional proceeds of approximately $3.4 million subject to net asset settlement provisions in the agreement.

In June 2008, we sold our subsidiaries in Argentina and Uruguay, and recorded a loss on the sale of $2.6 million, in addition to an impairment charge of $7.9 million related to the anticipated sale. These subsidiaries are classified as “held for sale” in accordance with SFAS 144 as of December 31, 2007. Total proceeds received from the sale of these subsidiaries were $13.5 million.

In December 2008, as part of our efforts to align our infrastructure to the scale of our operations, we exercised our option to terminate the lease of our Aliso Viejo, California corporate headquarters as of December 2011 and, as a result, recorded a restructuring charge of $3.8 million for the year ended December 31, 2008. The charge consisted of a lease termination penalty of $3.2 million, which will be payable in October 2011, and $0.6 million for certain fixed assets.

The net restructuring, asset impairments and dispositions charge of $21.3 million in the year ended December 31, 2008 included $19.2 million of employee severance costs for a total of 389 affected employees who were part of the supply, selling, general and administrative and research and development workforce in the United States, Mexico, Brazil and the Czech Republic. The charges also included $10.4 million for professional service fees related to the strategic review of our business, $7.7 million of contract cancellation costs and $0.3 million of other cash costs. Additional amounts incurred included a stock compensation charge for the accelerated vesting of the stock options of our former chief executive officer of $4.8 million, impairment charges relating to the sale of our subsidiaries in Argentina and Uruguay and certain fixed assets in Mexico of $10.8 million, and the loss of $2.6 million in the sale of our subsidiaries in Argentina and Uruguay, offset in part by the gain of $34.5 million in the transaction with Invida.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Company Overview
Introduction
We are a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Our specialty pharmaceutical and OTC products are marketed under brand names or as OTC products and are sold in the United States, Canada, Australia, and New Zealand, where we focus most of our efforts on the dermatology and neurology therapeutic classes. We also have branded generic operations in Europe and Latin America which focus on pharmaceutical products that are bioequivalent to original products and are marketed under company brand names.
Our products are sold through three segments comprising Specialty Pharmaceuticals, Branded Generics — Europe and Branded Generics — Latin America. The Specialty Pharmaceuticals segment generates product revenues primarily from the United States, Canada, Australia and New Zealand. The Branded Generics — Europe segment generates product revenues from branded generic pharmaceutical products primarily in Poland, Hungary, the Czech Republic and Slovakia. The Branded Generics — Latin America segment generates product revenues from branded generic pharmaceutical products primarily in Mexico and Brazil.
Additionally, we generate alliance revenue, including royalties from the sale of ribavirin by Schering-Plough Ltd. (“Schering-Plough”) and revenues associated with the Collaboration Agreement with GSK (each as defined below). We also generate alliance revenue and service revenue from the development of dermatological products resulting from the acquisition of Dow Pharmaceutical Sciences, Inc. (“Dow”), including profit sharing payments from the sale of a 1% clindamycin and 5% benzoyl peroxide gel product (“IDP-111”) by Mylan Pharmaceuticals Inc. (“Mylan”) pursuant to a 2008 agreement between Dow and Mylan, as well as payments received from licensing of certain other products.
Business Strategy
In March 2008, we announced a new company-wide restructuring effort and new strategic initiatives (the “2008 Strategic Plan”). The restructuring was designed to streamline our business, align our infrastructure to the scale of our operations, maximize our pipeline assets and deploy our cash assets to maximize shareholder value, while highlighting key opportunities for growth.
We have built our current business infrastructure by executing our multi-faceted strategy: 1) focus the business on core geographies and therapeutic classes; 2) maximize pipeline assets through strategic partnerships with other pharmaceutical companies; and 3) deploy cash with an appropriate mix of selective acquisitions, share buybacks and debt repurchases. We believe our multi-faceted strategy will allow us to expand our product offerings and upgrade our product portfolio with higher growth and higher margin assets.
Our leveraged research and development (“R&D”) model is a key element to our business strategy. It allows us to progress development programs to drive future commercial growth, while minimizing the R&D expense in our income statement. This is achieved in 4 ways: (1) we structure partnerships and collaborations so that our partner partially or fully funds development work, e.g. GSK collaboration on retigabine, (2) we bring products already developed for other markets to our territories, e.g. our joint venture relationship with Meda AB (“Meda”), an international specialty pharmaceutical company located in Stockholm, Sweden, (3) we acquire dossiers and registrations for branded generic products, which require limited and low risk formulation and development activities, and (4) we have a dermatology service business that works with external customers as well as progressing our internal development programs. This service business model brings invaluable scientific experience and allows higher utilization and infrastructure cost absorption.

Prior to the start of the 2008 Strategic Plan, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and, as a result, divested or discontinued certain non-strategic products and regional operations. In January 2008, we sold our rights in Infergen to Three Rivers Pharmaceuticals, LLC. In March 2008, we sold certain assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included the sale of certain product rights in Japan. In June 2008, we sold our subsidiaries in Argentina and Uruguay. In September 2008, we sold our business operations located in Western and Eastern Europe, Middle East and Africa (the “WEEMEA business”) to Meda.
The results of operations for the three and nine months ended September 30, 2008 have been adjusted in this quarterly report to exclude the results of operations for Infergen and the WEEMEA business, whose results are presented as discontinued operations.
In October 2008, we closed the worldwide License and Collaboration Agreement (“the Collaboration Agreement”) with Glaxo Group Limited, a wholly-owned subsidiary of GlaxoSmithKline plc, (“GSK”), to develop and commercialize retigabine, a first-in-class neuronal potassium channel opener for the treatment of adult epilepsy patients with refractory partial onset seizures.
In October 2008, we acquired Coria Laboratories Ltd. (“Coria”), a privately-held specialty pharmaceutical company focused on dermatology products in the United States. In November 2008, we acquired DermaTech Pty Ltd (“DermaTech”), an Australian specialty pharmaceutical company focused on dermatology products marketed in Australia. In December 2008, we acquired Dow, a privately-held dermatology company that specializes in the development of topical products on a proprietary basis, as well as for pharmaceutical and biotechnology companies. In April 2009, we acquired EMO-FARM sp. z o.o. (“Emo-Farm”), a privately-held Polish company that specializes in gel-based over-the-counter and cosmetic products.
In May 2009, we entered into an exclusive option agreement with Schering Corporation and Schering-Plough (together with Schering Corporation, “SP”) for taribavirin in Japan. Under the terms of the option agreement, we granted SP an option to enter into an exclusive license agreement for the development and commercialization of taribavirin in Japan. In exchange for the exclusive option, SP agreed to waive and release its right of last refusal on taribavirin under a 2000 agreement. Upon exercising the option and entering into the exclusive license agreement, SP would provide us with a $2.0 million upfront payment and pay mid-single digit royalties on net sales of taribavirin in Japan.
In July 2009, we acquired Tecnofarma S.A. de C.V. (“Tecnofarma”), a privately-held Mexican company that produces generic pharmaceuticals for sale primarily to the government and private label markets. In October 2009, we acquired Private Formula Holdings International Pty Limited (“PFI”), a privately-held company located in Australia that is engaged in product development, sales and marketing of premium skincare products primarily in Australia.
Pharmaceutical Products
Product sales from our pharmaceutical segments accounted for 83% and 85% of our total revenues from continuing operations for the three and nine months ended September 30, 2009, respectively, compared with 91% for each of the corresponding periods in 2008. Product sales increased $29.3 million (19%) and $71.1 million (16%) for the three and nine months ended September 30, 2009, respectively, compared with the corresponding periods in 2008. The 19% increase in pharmaceutical product sales for the three months ended September 30, 2009 was due to a 25% increase in volume and a 10% increase in price offset by a 16% reduction due to currency fluctuations. The 16% increase in pharmaceutical product sales for the nine months ended September 30, 2009 was due to a 29% increase in volume and a 6% increase in price offset by a 19% reduction due to currency fluctuations.
We have experienced generic challenges and other competition to our products, as well as price and currency challenges, and expect these challenges to continue in 2009 and beyond.
Alliance Revenue Prior to the start of the 2008 Strategic Plan, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and, as a result, divested or discontinued certain non-strategic products and regional operations. In January 2008, we sold our rights in Infergen to Three Rivers Pharmaceuticals, LLC. In March 2008, we sold certain assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included the sale of certain product rights in Japan. In June 2008, we sold our subsidiaries in Argentina and Uruguay. In September 2008, we sold our business operations located in Western and Eastern Europe, Middle East and Africa (the “WEEMEA business”) to Meda.
The results of operations for the three and nine months ended September 30, 2008 have been adjusted in this quarterly report to exclude the results of operations for Infergen and the WEEMEA business, whose results are presented as discontinued operations.
In October 2008, we closed the worldwide License and Collaboration Agreement (“the Collaboration Agreement”) with Glaxo Group Limited, a wholly-owned subsidiary of GlaxoSmithKline plc, (“GSK”), to develop and commercialize retigabine, a first-in-class neuronal potassium channel opener for the treatment of adult epilepsy patients with refractory partial onset seizures.
In October 2008, we acquired Coria Laboratories Ltd. (“Coria”), a privately-held specialty pharmaceutical company focused on dermatology products in the United States. In November 2008, we acquired DermaTech Pty Ltd (“DermaTech”), an Australian specialty pharmaceutical company focused on dermatology products marketed in Australia. In December 2008, we acquired Dow, a privately-held dermatology company that specializes in the development of topical products on a proprietary basis, as well as for pharmaceutical and biotechnology companies. In April 2009, we acquired EMO-FARM sp. z o.o. (“Emo-Farm”), a privately-held Polish company that specializes in gel-based over-the-counter and cosmetic products.
In May 2009, we entered into an exclusive option agreement with Schering Corporation and Schering-Plough (together with Schering Corporation, “SP”) for taribavirin in Japan. Under the terms of the option agreement, we granted SP an option to enter into an exclusive license agreement for the development and commercialization of taribavirin in Japan. In exchange for the exclusive option, SP agreed to waive and release its right of last refusal on taribavirin under a 2000 agreement. Upon exercising the option and entering into the exclusive license agreement, SP would provide us with a $2.0 million upfront payment and pay mid-single digit royalties on net sales of taribavirin in Japan.
In July 2009, we acquired Tecnofarma S.A. de C.V. (“Tecnofarma”), a privately-held Mexican company that produces generic pharmaceuticals for sale primarily to the government and private label markets. In October 2009, we acquired Private Formula Holdings International Pty Limited (“PFI”), a privately-held company located in Australia that is engaged in product development, sales and marketing of premium skincare products primarily in Australia.
Pharmaceutical Products
Product sales from our pharmaceutical segments accounted for 83% and 85% of our total revenues from continuing operations for the three and nine months ended September 30, 2009, respectively, compared with 91% for each of the corresponding periods in 2008. Product sales increased $29.3 million (19%) and $71.1 million (16%) for the three and nine months ended September 30, 2009, respectively, compared with the corresponding periods in 2008. The 19% increase in pharmaceutical product sales for the three months ended September 30, 2009 was due to a 25% increase in volume and a 10% increase in price offset by a 16% reduction due to currency fluctuations. The 16% increase in pharmaceutical product sales for the nine months ended September 30, 2009 was due to a 29% increase in volume and a 6% increase in price offset by a 19% reduction due to currency fluctuations.
We have experienced generic challenges and other competition to our products, as well as price and currency challenges, and expect these challenges to continue in 2009 and beyond.
Alliance Revenue Our royalties have historically been derived from sales of ribavirin, a nucleoside analog that we discovered. In 1995, Schering-Plough licensed from us all oral forms of ribavirin for the treatment of chronic hepatitis C. We also licensed ribavirin to Roche in 2003. Roche discontinued royalty payments to us in June 2007.
Ribavirin royalties were $12.2 million and $38.0 million for the three and nine months ended September 30, 2009, respectively, compared with $15.2 million and $42.8 million in the corresponding periods in 2008. We expect ribavirin royalties to continue to decline in 2009 and in 2010 as royalty payments from Schering-Plough will continue for European sales only until the ten-year anniversary of the launch of the product, which varied by European country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.
Alliance revenue also includes $3.8 million and $9.9 million for the three and nine months ended September 30, 2009, respectively, related to the GSK Collaboration Agreement.
Beginning in January 2009, we receive royalties from patent protected formulations developed by Dow and licensed to third parties. These royalties were $2.3 million and $7.9 million for the three and nine months ended September 30, 2009, respectively.
In the three months ended September 30, 2009, we received $6.0 million in initial fees pursuant to licensing agreements for various products. Beginning in the third quarter of 2009, we receive profit sharing payments equal to a greater than majority portion of the net profits on the sale of 1% clindamycin and 5% benzoyl peroxide gel (“IDP-111”) by Mylan, which totaled $8.5 million in the three and nine months ended September 30, 2009. The Abbreviated New Drug Application (“ANDA”) for IDP-111 received final approval by the United States Food and Drug Administration (“FDA”) on August 11, 2009. We will also receive future royalty payments on Meda’s net sales of Cesamet in the U.S. and its net sales of two dermatology products in Europe pursuant to license agreements entered into with Meda.
Beginning in January 2009, we also receive revenue from contract research services performed by Dow in the areas of dermatology and topical medication. These services are primarily focused on contract research for external development and clinical research in areas such as formulations development, in vitro drug penetration studies, analytical sciences and consulting in the areas of labeling and regulatory affairs. This service revenue was $4.8 million and $17.1 million for the three and nine months ended September 30, 2009, respectively. Other service revenue totaled $0.2 million and $0.3 million in the three and nine months ended September 30, 2009, respectively.
Research and Development
We are developing product candidates, including two clinical stage programs, retigabine and taribavirin, which target large market opportunities. Retigabine is being developed in partnership with GSK as a first-in-class neuronal potassium channel opener for the treatment of adult epilepsy patients with refractory partial-onset seizures. Taribavirin is a pro-drug of ribavirin for the treatment of chronic hepatitis C in treatment-naive patients in conjunction with a pegylated interferon. We are looking for potential partnering opportunities for taribavirin.
Collaboration Agreement
In October 2008, we closed the Collaboration Agreement with GSK to develop and commercialize retigabine and its back up compounds and received $125.0 million in upfront fees from GSK upon the closing.
We agreed to share equally with GSK the development and pre-commercialization expenses of retigabine in the United States, Australia, New Zealand, Canada and Puerto Rico (the “Collaboration Territory”) and GSK will develop and commercialize retigabine in the rest of the world. Our share of such expenses in the Collaboration Territory is limited to $100.0 million, provided that GSK will be entitled to credit our share of any such expenses in excess of such amount against future payments owed to us under the Collaboration Agreement. To the extent that our expected development and pre-commercialization expenses under the Collaboration Agreement are less than $100.0 million, the difference will be recognized as alliance revenue over the period prior to launch of a retigabine product (the “Pre-Launch Period”). We will recognize alliance revenue during the Pre-Launch Period as we complete our performance obligations using the proportional performance model, which requires us to determine and measure the completion of our expected development and pre-commercialization costs during the Pre-Launch Period, in addition to our participation in the joint steering committee. We expect to complete our research and development and pre-commercialization obligations in effect during the Pre-Launch Period by the first quarter of 2011.
GSK has the right to terminate the Collaboration Agreement at any time prior to the receipt of the approval by the FDA of a new drug application (“NDA”) for a retigabine product, which right may be irrevocably waived at any time by GSK. The period of time prior to such termination or waiver is referred to as the “Review Period”. In February 2009, the Collaboration Agreement was amended to, among other matters, reduce the maximum amount that we would be required to refund to GSK to $40.0 million through March 31, 2010, with additional reductions in the amount of the required refund over the time the Collaboration Agreement is in effect. During the three and nine months ended September 30, 2009, the combined research and development expenses and pre-commercialization expenses incurred under the Collaboration Agreement by us and GSK were $17.5 million and $44.4 million, respectively, as outlined in the table below. We recorded a charge of $1.3 million and $1.1 million in the three and nine months ended September 30, 2009, respectively, against our share of the expenses to equalize our expenses with GSK, pursuant to the terms of the Collaboration Agreement.


The table below outlines the alliance revenue, expenses incurred, associated credits against the expenses incurred, and the remaining upfront payment for the Collaboration Agreement during the following period (in thousands):

Results of Operations
In connection with the 2008 Strategic Plan and resulting acquisitions and dispositions in 2008, we realigned our organization in the fourth quarter of 2008 to improve our execution and align our resources and product development efforts in the markets in which we operate. We have realigned segment financial data for the three and nine months ended September 30, 2008 to reflect these changes in our organizational structure.
Certain financial information for our business segments is set forth below. This discussion of our results of operations should be read in conjunction with the consolidated condensed financial statements included elsewhere in this quarterly report. For additional financial information by business segment, see Note 14 of notes to consolidated condensed financial statements included elsewhere in this quarterly report.
The following table summarizes revenues by reportable segments and operating expenses for the three and nine months ended September 30, 2009 and 2008:

Product Sales Revenues: In the Specialty Pharmaceuticals segment, revenues from product sales for the three months ended September 30, 2009 were $101.6 million, compared with $70.1 million for the corresponding period in 2008, representing an increase of $31.5 million (45%). Revenues from product sales for the nine months ended September 30, 2009 were $284.6 million, compared with $214.6 million for the corresponding period in 2008, representing an increase of $70.0 million (33%). The increase in product sales in the three months ended September 30, 2009 was driven by growth in existing products as well as from sales of products acquired in late 2008 as part of the Coria and DermaTech acquisitions, which contributed $13.8 million and $36.7 million in the three and nine months ended September 30, 2009, respectively. In the three months ended September 30, 2009, these increases were partly offset by a $1.7 million reduction from the depreciation of the Canadian Dollar and Australian Dollar relative to the U.S. Dollar. Sales increases in the nine months ended September 30 were partly offset by a $7.2 million reduction in sales of Efudex as a result of generic competition, a reduction of $5.8 million due to the sale of business operations in Argentina, Uruguay and Asia and $11.6 million from the depreciation of the Canadian Dollar and Australian Dollar relative to the U.S. Dollar. In the nine months ended September 30, 2008, as part of our restructuring efforts, we reduced shipments to wholesaler customers aggregating approximately $17.4 million to reduce the amount of inventory in the wholesale channel.
In the Branded Generics — Europe segment, revenues for the three months ended September 30, 2009 were $40.2 million, compared with $40.4 million for the corresponding period in 2008, representing a decrease of $0.2 million (0%). Revenues for the nine months ended September 30, 2009 were $109.6 million, compared with $116.9 million for the corresponding period in 2008, representing a decrease of $7.3 million (6%). The depreciation of foreign currencies, particularly the Polish Zloty, relative to the U.S. Dollar resulted in decreases of $12.1 million and $41.0 million in product sales revenue in the three and nine months ended September 30, 2009, respectively. This reduction was partly offset by growth in existing products, increased revenue from a distribution contract and $3.0 million and $5.3 million in the three and nine months ended September 30, 2009, respectively, from the April 2009 acquisition of Emo-Farm.
In the Branded Generics — Latin America segment, revenues for the three months ended September 30, 2009 were $40.7 million, compared with $42.6 million for the corresponding period in 2008, representing a decrease of $1.9 million (4%). Revenues for the nine months ended September 30, 2009 were $108.1 million, compared with $99.7 million for the corresponding period in 2008, representing an increase of $8.4 million (8%). Product sales increased across substantially all products primarily from the improvement of trading relationships with the major

wholesalers in Mexico that impacted product sales for the previous two years. This increase was offset by decreases of $10.1 million and $29.5 million due to the depreciation of foreign currencies, particularly the Mexican Peso, relative to the U.S. Dollar in the three and nine months ended September 30, 2009, respectively. Revenues attributable to the third quarter 2009 acquisition of Tecnofarma were $4.7 million.

CONF CALL

Laurie Little
Good morning everyone and welcome to Valeant's 2009 Third Quarter Financial Results conference call. Joining us on the call today are Mike Pearson, chairman and chief executive officer. Peter Blott, chief financial officer. Bhaskar Chaudhuri, president of Valeant and Rajiv De Silva, chief operating officer of Specialty Pharmaceuticals.
In addition to a live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section. Certain statements made in this presentation and other statements made during this call and the Q&A session afterwards may constitute forward-looking statements. Please refer to the current slide for our cautionary statement regarding these forward-looking statements.
In addition to supplement the consolidated financial results prepared in accordance with generally accepted accounting principles, the company uses non-GAAP financial measures. These non-GAAP financial measures include measures such as, cash EPS, organic product sales growth and adjusted cash flow from operations.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the table to our third quarter earnings press release, which was issued earlier today and can be found in the investor relations section of our website at www.valeant.com and with that I'd like to turn the call over to Mr. Pearson.
Michael Pearson
Good morning everyone and thank you for joining us. Valeant's third quarter results again delivered solid growth in cash flows across all of our operating units. Total revenue in the third quarter of 2009 is $220 million as compared to $168 million in the same period last year, an increase of 31%. Our cash EPS is $0.58 per share and adjusted cash flow from operations is $65 million for the quarter.
The solid business performance that we have achieved so far this year provides a platform for us to again raise our earnings guidance for 2009 from our previous range of $1.90 to $2.10 cash EPS to our new guidance range from $2.10 to $2.20 cash EPS.
Our confidence and the continuing strength of our base business and our management team here at Valeant is reflected in our guidance. Additionally, I am very pleased to report that on October 30, we and our colleagues at GSK submitted both the NDA and MAA registration packages for retigabine.
This is a major achievement and I would like to publicly thank both the GSK and Valeant members of the joint development team for their hard work and dedication to getting this file completed. And I would like to note that while the submission took longer than we expected, what matters is when a drug gets approved, not when it is submitted.
And we believe that with GSK's assistance a very high quality file has been put together and we are hopeful that this potentially important medication for epilepsy patients will be available sooner rather than later.
Today, I would like to spend some time on the following three areas. First, the performance of our core business and continued improvement in our cash generation, second a review of how we have deployed our cash, first by reviewing the performance of our acquisitions and second, by reviewing our securities repurchase program.
And third, our new strategic objectives for 2010, including an early outlook on our expected grow and revenues and earnings. I will then turn the call over to Peter to discuss our third quarter financial results in more detail.
One of our core operating principles of Valeant is to achieve double-digit top and bottom line growth. Similar to our first and second quarter results, our third quarter product sales, net of currency and acquisitions, delivered strong double-digit organic growth of 18%. While Specialty Pharma in Europe had high double-digit organic growth, our organic growth in Mexico did not.
This is largely due to the fact that we chose not to extend credit terms to our Mexican distributors who are unfortunately experienced delayed payments from their customers, the retailers. We are committed to continuing our very conservative fiscal policy in Latin America given the problems we had there before I joined Valeant. If this translates into slower growth in Latin America [per] quarter, we will live with it.
In addition to our healthy sales growth, our businesses continued to deliver strong earnings in cash generation. Our Specialty Pharmaceutical segment had non-GAAP operating margins well in excess of our 40% operating margin target, due in part to the inclusion of generic BenzaClin and the total contributed $34 million this quarter to our adjusted cash flow number.
Our two branded generic businesses delivered operating margins above the 30% level and generated $27 million of adjusted cash flow. We expect our branded generic margins to improve in 2010 as we integrate our past acquisitions and become more efficient.
After three quarters we have generated over $170 million in adjusted cash flow and we are well on our way to beating our objective of generating over $200 million in adjusted cash flow from operations in 2009 and more important we are building a business that will continue to grow this number in the years to come.
Let me now turn to our capital deployment. As important as generating cash is, it is equally important what we do with it. Since joining Valeant 20 months ago our primary uses of cash have been bolt on acquisitions and our security repurchase programs. First, let me review our acquisitions.
Starting this November we will undertake an annual formal evaluation for our board of how we are doing on our acquisitions. We will review each acquisition on two dimensions, growth and cash generation relative to the models we used at the time of the deal.
I am pleased to report that on the six acquisitions we evaluated this year, we are ahead in revenues for five of the six and ahead on cash generation for all six. In the U.S., Coria was acquired a year ago and our dermatology products acquired with that transaction are performing well.
Atralin has grown almost 30% year-to-date and CeraVe our OTC moisturizing line has grown over 40% over the same time period. This month we reached an agreement with Wal-Mart to introduce our three SKUs of CeraVe in over 3,000 Walmarts in 2010.
Overall Coria, excluding Acanya which came to us through the Dow acquisition has grown 22% over the prior year. Our acquisitions in Australia have also provided strong growth with Dermafine growing almost 30% and UV Reef at 6% since they were acquired. Lastly, EMO-FARM our dermatology acquisition in Poland has grown over 30% since the deal closed in May.
In addition to sales growth all these acquisitions continue to generate positive cash flows well ahead of our initial projections. To conclude our acquisition evaluation we are pleased with the progress we have made with the integration of Dow.
Our team at Dow has moved three products out of Phase II. We had several positive FDA meetings this past summer on these compounds and we are in the process of initiating Phase III clinical trials.
We have seen a decline in the Dow services business this year primarily due to economic factors that have affected our client this year.
We believe this affect will lesson as the economy improves. However, the service business continues to be profitable and we utilized the leveraged R&D model to offset our R&D expenses, a prime strategic reason for acquiring Dow.
Our royalties generated from Dow including generic BenzaClin are $22 million for the first nine months of 2009, well ahead of our original forecast. Our three most recent acquisitions, Tecnofarma in Mexico, PFI in Australia and the Polish dermatology acquisition we announced last Friday are all to recent to comment on other than to say that we are pleased with both the underlying economics and the results we have seen to date.
Now let me turn to our second major use of cash. Over the last three years we have been executing an aggressive campaign to repurchase our securities. Our board of directors initially approved a $200 million share repurchase program that eventually expanded to $800 million and included the option of repurchasing our convertible debt.
Through these programs we have purchased over 20 million shares of our common stock at an average stock price of $17.93 and acquired over $200 million principal amount of our convertibles at an average rate of $0.97 to $0.98. In total we have spent $574 million on our repurchase programs and based on our current stock price we believe this has been a tremendous value creating event for our shareholders.
We feel very good about the progress we have made on completing our six initiatives for 2009. With the exception of partnering to ribavirin, all of our 2009 objectives are now essentially complete. Let me look to the future, our plans for 2010. We have recently established six new strategic initiatives for 2010. First our stretch target for 2010 is to grow our global dermatology from approximately $300 million in 2009 to $500 million in 2010.
Second, now that we have submitted our retigabine immediate release formulation to the FDA and the EMEA, we are putting significant resources behind the modified release program. The current ongoing Phase I study is evaluating multiple MR options. Our goal is to have a lead MR candidate identified for progression next year.
Third, while we have been successful identifying and executing against a series of bolt-on acquisitions across most of our market units, business units, there are two notable exceptions, Canada and Brazil. In 2010, we are committed to completing at least one strategic transaction for each of these geographies.
Fourth, our 2009 revenues for the combined Latin American and European branded generics business are expected to be slightly north of $300 million. We have set a stretch target for 2010 for these combined businesses of $500 million.
Fifth, again we will continue to maintain a scorecard and remain committed to over-delivery on all of our acquisitions.
And finally, sixth, while we have made significant improvement to our cash flow generation in 2009, I believe we can become much more efficient and get much more out of our businesses, by improving our businesses in areas such as accounts receivable, inventory and other elements of working capital, which will be reflected in improved cash flow from operations next year.
Finally, in terms of operational performance, we expect to grow organically in double digits next year and also show double digit growth in both cash EPS and in cash generation from operations. We will provide more specific guidance on our next earnings call.
With this, I will turn the call over to Peter to discuss our third quarter financials.
Peter J. Blott
Thank you, Mike. Mike has already highlighted our top line growth over last year. We are also pleased to see continued strong sequential growth over the first two quarters of 2009, $220 million in the third quarter versus $192 million in the second quarter and $178 million in the first quarter.
As in earlier quarters, out P&L clearly shows the benefits of the structural changes made last year, as we implemented our business strategy changes. Adjusted operating income excluding currency impact was 40% of revenue in the third quarter, up from 18% in the same last year.
This benefited from additional alliance revenue, notably $8.5 million profit share related to the 1% clindamycin and 5% benzoyl peroxide products launched by Mylan in August. Our cost of goods sold percentage for the quarter was 29% as compared to 28% in the third quarter of 2008. This increase primarily relates to the impact of acquisitions such as Dow, Tecnofarma and EMO-FARM.
We mentioned earlier that the Tecnofarma business in Mexico, which is mostly generics sold into the government sector, has a high cost of goods sold percentage – has a higher cost of goods sold percentage than our existing business in Mexico. We expect this to improve over time, as we transition out of older plants into the new plant outside of Mexico City.
Also cost of goods sold in Specialty Pharma was higher than usual this quarter because of a number of small reserve and expense items totaling approximately $2.5 million taken in the quarter. We are maintaining a tight rein on our expenses and continue to see a downward trend in SG&A expenses. SG&A expenses were 47% of revenue in the third quarter 2008 versus 36% in this most recent quarter.
R&D expenses began to increase in the third quarter from previous quarters. But we're still down 51% from the third quarter last year. As Mike mentioned, we are ramping up our efforts for our dermatology pipeline compounds to enter Phase III before the end of the year and we will be incurring increased R&D expense related to those efforts.
We also expect to pay out an $8 million milestone payment to [Meta] in the fourth quarter due upon acceptance by the FDA of our retigabine filing.
We're also pleased to report this quarter was another strong quarter of cash generation. Our adjusted cash flow from operations record was $65 million coming off the back of $55 million adjusted cash flow from operations in the second quarter. We are clearly on track to exceed our goal of $200 million cash flow from operations in 2009.
As I've mentioned before, currency movement continues to have a negative impact on our business in the third quarter. We expect that in the fourth quarter the foreign exchange impact to be broadly neutral to us assuming exchange rates stay where they are today. We now estimate that foreign exchange will negatively affect our top line by approximately $80 million for the full year 2009 and our bottom line by approximately $0.20.
The next chart shows the key components for our cash sources and uses in the quarter. At June 30, 2009 we had an opening cash balance of $453 million. During the quarter, you can see the cash inflows of $65 million generated from operations.
We used $56 million for purchases of our convertible notes in the quarter, $36 million for share repurchases and $33 million for our acquisition of Tecnofarma in Mexico. Our ending cash balance for the third quarter was $386 million.
The cash movement of $115 million for the Dow buyout and $69 million for the acquisition of Private Formula in Australia took place in the first weeks of October. After these two items our cash balance was about $200 million.
We announced today that we have once again decided to raise our cash EPS guidance for 2009 up to a range of $2.10 to $2.20 for the year. Having already delivered $1.54 cash EPS for the first nine months of 2009, and with expectations for growth, the new range is a better reflection of our current expectations.
Now, I will turn the call back to Mike for closing remarks.
J. Michael Pearson
In conclusion, I believe the results of the first nine months of 2009 demonstrate the strength of our base business and our ability to deliver growth, earnings and cash flows. The acquisitions we have made so far have added depth to our core business and will provide product growth drivers for each of our businesses. As we look to the next few years, I believe we are well positioned to achieve both our financial and strategic goals of becoming a leading specialty pharmaceutical company.
With that, we'll now open it up for question. Operator, may we have the first question, please.


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