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Article by DailyStocks_admin    (06-25-08 09:09 AM)

Valeant Pharmaceuticals International. CEO Michael J Pearson bought 48847 shares on 6-19-2008 at $17.06

BUSINESS OVERVIEW

Introduction

We are an international pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Historically, our marketing and promotion efforts focused on our Promoted Products, which consisted of products marketed globally, regionally, or locally with annual sales in excess of $5,000,000. Our products are currently sold in more than 100 markets around the world.

Although historically we have focused most of our efforts on neurology, dermatology, and infectious disease, our prescription pharmaceutical products also treat, among other things, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. Our products are sold through three pharmaceutical segments comprising: North America, International (Latin America, Asia, and Australasia) and EMEA (Europe, Middle East, and Africa).

Strategic Review and Restructuring

In October 2007, our board of directors initiated a strategic review of our business direction, geographic and commercial operations, product and business portfolio, growth opportunities, and acquisition strategy. This strategic review, which we refer to as the “2008 Strategic Review,” is still underway as of the date of this filing and we expect to describe it in an announcement in late March 2008. We expect the 2008 Strategic Review to lead to significant changes in our business and will include a restructuring program.

Prior to the start of the 2008 Strategic Review, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and divested or discontinued certain non-strategic products as a result. In September 2007, we decided to sell our rights to Infergen. We sold these rights to Three Rivers Pharmaceuticals, LLC on January 14, 2008. In 2007, we also sold product rights to Reptilase, Solcoseryl in Japan, our ophthalmic business in Holland, and certain other products. In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell Invida certain of our subsidiaries and product rights in Asia, in a transaction that includes 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 includes certain product rights in Japan. We closed this transaction on March 3, 2008. The assets sold to Invida have been classified as “held for sale” in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets , as of December 2007.

We announced on February 4, 2008 that our board of directors had appointed J. Michael Pearson to the position of chief executive officer and chairman of our board of directors effective February 1, 2008, the date of the resignation of our former chief executive officer, Timothy C. Tyson. Robert A. Ingram, who served as chairman prior to Mr. Pearson’s appointment, remains on our board of directors, serving as lead director. Prior to joining Valeant as our chief executive officer, Mr. Pearson was a director at McKinsey & Company, where he had recently served as head of the global pharmaceutical practice, as a member of its board of directors and in various other capacities.

Our internet address is www.valeant.com . We post links on our website to the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendment to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of 1934. All such filings are available through our website free of charge. Our filings may also be read and copied at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov .

Retigabine — RESTORE 1 Data Announcement

On February 12, 2008, we reported results for retigabine in RESTORE 1, the first of two Phase III pivotal trials using retigabine as an adjunctive treatment for adult epilepsy patients with refractory partial-onset seizures. RESTORE 1 evaluated the 1200 mg daily dose of retigabine (the highest dose in the RESTORE program) versus placebo in patients taking stable doses of one to three additional anti-epileptic drugs. Retigabine demonstrated statistically significant results on the primary efficacy endpoints important for regulatory review by both the US Food and Drug Administration (FDA) and the European Medicines Evaluation Agency (EMEA). More details on the RESTORE 1 data announcement are provided in Item 7, Products in Development .

Taribavirin — 12-week analysis of the Phase IIb study

On March 17, 2008 we reported the results of the 12-week analysis of the taribavirin Phase IIb study. The Phase IIb study is a U.S. multi-center, randomized, parallel, open-label study in 278 treatment naïve, genotype 1 patients evaluating taribavirin at 20 mg/kg, 25 mg/kg, and 30 mg/kg per day in combination with pegylated interferon alfa-2b. The control group is being administered weight-based dosed ribavirin (800/1,000/1,200/1,400 mg daily) and pegylated interferon alfa-2b. The 12-week early viral response (EVR) data from the Phase IIb study showed comparable reductions in viral load for weight-based doses of taribavirin and ribavirin. The anemia rate was statistically significantly lower for patients receiving taribavirin in the 20mg/kg and 25mg/kg arms versus the ribavirin control arm. More details on the taribavirin Phase IIb study announcement are provided in Item 7, Products in Development . We are using the data to explore the options for the continued role of taribavirin in our portfolio, including consideration of partnering opportunities.

Infergen (Reported in Discontinued Operations)

On December 30, 2005, we acquired the U.S. and Canadian rights to the hepatitis C drug Infergen from InterMune. In September 2007, we decided to divest these Infergen product rights and we sold them to Three Rivers Pharmaceuticals, LLC on January 14, 2008. The results of the Infergen operations and the related financial position have been reflected as discontinued operations in the consolidated financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . The consolidated financial statements have been reclassified to conform to discontinued operations presentation for all historical periods presented.

Ribavirin Royalties

Our royalties are 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 $67,202,000, $81,242,000 and $91,646,000 for the years ended December 31, 2007, 2006 and 2005, respectively, and accounted for 8%, 9% and 11% of our total revenues in 2007, 2006 and 2005, respectively. Royalty revenues in 2007, 2006 and 2005 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 continue to decline in 2008. The royalty will 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.

The following table summarizes sales by major product for each of the last three years (dollar amounts in thousands). It includes any product with annualized sales of greater than $10,000,000 and currently promoted products with annualized sales of greater than $5,000,000. It is categorized by therapeutic class.

Acquisitions

In 2007, we acquired product rights in the United States, Europe and Argentina for aggregate consideration of $40,803,000, of which $36,184,000 was cash consideration. In the United States, we acquired a paid-up license for Kinetin and Zeatin, the active ingredients in the Kinerase product line, for cash consideration of $21,000,000 and other consideration of $4,170,000. In Europe we acquired the rights to Nabilone, the product we currently market as Cesamet in Canada and the United States, for $13,582,000. We acquired the rights to certain products in Poland, Argentina and Spain for $1,602,000 in cash consideration and $449,000 in other consideration.

In 2006, we acquired rights to new product lines in Poland and the UK. In Poland we acquired the rights to a number of branded generic products for nominal cash consideration. In the UK we acquired exclusive rights to distribute certain dermatological skin care products from Intendis AG, including Finacea, Skinoren, Scheriproct, and Ultrabase. In 2006, we also acquired the rights to Zelapar in Canada and Mexico. We had acquired the rights to Zelapar in the United States as part of the Amarin acquisition in 2004 and launched the product in the United States in 2006. In 2006, we also acquired from Novartis the rights to Melleril in Argentina, having acquired the rights to this product in Brazil in 2005.

On December 30, 2005, we acquired the U.S. and Canadian rights to the hepatitis C drug Infergen from InterMune. We paid InterMune $120,000,000 in cash at the closing. Subsequently, we paid InterMune a non-contingent milestone payment of $2,585,000 in January 2007 and a $5,000,000 contingent milestone in July 2007 which we recorded as goodwill. In September 2007, we decided to divest these Infergen product rights and we sold them to Three Rivers Pharmaceuticals, LLC on January 14, 2008. The results of the Infergen operations and the related financial position have been reflected as discontinued operations in the consolidated financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . The consolidated financial statements have been reclassified to conform to discontinued operations presentation for all historical periods presented.

On March 1, 2005, we acquired Xcel Pharmaceuticals, Inc. (“Xcel”), a specialty pharmaceutical company focused on the treatment of disorders of the central nervous system, for $280,000,000 in cash, plus expenses of $5,435,000. Under the terms of the purchase agreement, we paid an additional $7,470,000 as a post-closing working capital adjustment. The Xcel acquisition expanded our existing neurology product portfolio with four products that are sold within the United States, and retigabine, a late-stage clinical product candidate that is an adjunctive treatment for partial-onset seizures in patients with epilepsy.

See Note 4 of notes to consolidated financial statements for further discussion of these acquisitions.

Research and Development

With our restructured research and development organization, we no longer conduct discovery research to identify new compounds. Instead, we focus on the development of products through clinical trials. We currently have two compounds in late-stage clinical development: retigabine and taribavirin.

Our research and development expenses for the years ended December 31, 2007, 2006 and 2005 were $98,025,000, $105,442,000 and $114,100,000. The reduction in research and development expenses in 2007 compared with 2006 is principally due to the discontinuation of our discovery operations and the sale of the pradefovir rights to Schering-Plough, partly offset by the increase in clinical development expense for retigabine.

As of December 31, 2007, there were 132 employees involved in our research and development efforts.

CEO BACKGROUND

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.

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.

Mr. Ingram has been the Vice Chairman Pharmaceuticals of GlaxoSmithKline plc, a pharmaceutical research and development company, since January 2003. Mr. Ingram was the Chief Operating Officer and President, Pharmaceutical Operations, of GlaxoSmithKline plc from January 2001 to January 2003. He was Chief Executive of Glaxo Wellcome plc from October 1997 to December 2000 and Chairman of Glaxo Wellcome Inc., Glaxo Wellcome plc’s U.S. subsidiary, from January 1999 to December 2000. Mr. Ingram was President and Chief Executive Officer of Glaxo Wellcome Inc. from October 1997 to January 1999. Mr. Ingram is also a member of the Board of Advisors for the H. Lee Moffitt Cancer Center and Research Institute.

Mr. Kugelman is a healthcare consultant and private investor. From December 1995 through October 1996, Mr. Kugelman was President, Chief Executive Officer and Director of Coventry Health Care, Inc., a managed care organization. From 1980 through 1992, he served as a Chief Executive Officer of several HMOs and managed healthcare organizations in the United States.

Mr. Melas-Kyriazi has been the Chief Financial Officer of Levitronix LLC since July 2006. He was the Chief Financial Officer of Thermo Electron Corporation from January 1999 through October 2004. Mr. Melas-Kyriazi was a Vice President of Thermo Electron Corporation from February 1998, and was Treasurer of Thermo Electron Corporation and all of its publicly traded subsidiaries from May 1988 to June 1994.

Mr. Pearson has been the Chairman of the Board and Chief Executive Officer of our Company since February 2008. Prior to joining Valeant, Mr. Pearson was a Director at McKinsey & Company. Over a 23-year career, he worked with leading CEOs and was an integral driver of major turnarounds, acquisitions, and corporate strategy. Within McKinsey, Mr. Pearson held various positions, including as a member of McKinsey’s Board of Directors, head of its global pharmaceutical practice and head of its mid-Atlantic region.

Ms. Provencio has been president and owner of Provencio Advisory Services, Inc., a healthcare financial and operational consulting firm since October 2003. From May 2002 to September 2003, she was Partner-in-Charge of the Healthcare Industry for the Pacific Southwest for KPMG LLP. From 1979 to May 2002, she was with Arthur Andersen, and was Partner-in-Charge of Arthur Andersen’s Pharmaceutical, Biomedical and Healthcare Practice for the Pacific Southwest from November 1995 to May 2002.

MANAGEMENT DISCUSSION FROM LATEST 10K

Company Overview

Introduction

We are an international pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Historically, our marketing and promotion efforts focused on our Promoted Products, which consisted of products marketed globally, regionally, or locally with annual sales in excess of $5,000,000. Our products are currently sold in more than 100 markets around the world.

Although historically we have focused most of our efforts on neurology, dermatology, and infectious disease, our prescription pharmaceutical products also treat, among other things, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. Our products are sold through three pharmaceutical segments comprising: North America, International (Latin America, Asia, and Australasia) and EMEA (Europe, Middle East, and Africa).

Strategic Review and Restructuring

In October 2007, our board of directors initiated a strategic review of our business direction, geographic and commercial operations, product and business portfolio, growth opportunities and acquisition strategy. This strategic review, which we refer to as the “2008 Strategic Review,” is still underway as of the date of this filing and we expect to describe it in an announcement in late March 2008. We expect the 2008 Strategic Review to lead to significant changes in our business and will include a restructuring program.

Prior to the start of the 2008 Strategic Review, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and divested or discontinued certain non-strategic products as a result. In September 2007, we decided to sell our rights to Infergen. We sold these rights to Three Rivers Pharmaceuticals, LLC on January 14, 2008. In 2007, we also sold product rights to Reptilase, Solcoseryl in Japan, our ophthalmic business in Holland, and certain other products. In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell Invida certain Valeant subsidiaries and product rights in Asia, in a transaction that includes 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 includes certain product rights in Japan. We closed this transaction on March 3, 2008. The assets sold to Invida have been classified as “held for sale” in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets , as of December 2007.

We announced on February 4, 2008 that our board of directors had appointed J. Michael Pearson to the position of chief executive officer and chairman of our board of directors effective February 1, 2008, the date of the resignation of our former chief executive officer, Timothy C. Tyson. Robert A. Ingram, who served as chairman prior to Mr. Pearson’s appointment, remains on our board of directors, serving as lead director. Prior to joining Valeant as our chief executive officer, Mr. Pearson was a director at McKinsey & Company, where he had served as head of the global pharmaceutical practice, as a member of its board of directors and in various other capacites.

Retigabine — RESTORE 1 Data Announcement

On February 12, 2008 we reported results for retigabine in RESTORE 1, the first of two Phase III pivotal trials using retigabine as an adjunctive treatment for adult epilepsy patients with refractory partial-onset seizures. RESTORE 1 evaluated the 1200 mg daily dose of retigabine (the highest dose in the RESTORE program) versus placebo in patients taking stable doses of one to three additional anti-epileptic drugs. Retigabine demonstrated statistically significant results on the primary efficacy endpoints important for regulatory review by both the US Food and Drug Administration (FDA) and the European Medicines Evaluation Agency (EMEA). More details on the RESTORE 1 data announcement are provided in Item 7, Products in Development .

Taribavirin — 12-week analysis of the Phase IIb study

On March 17, 2008 we reported the results of the 12-week analysis of the taribavirin Phase IIb study. The Phase IIb study is a U.S. multi-center, randomized, parallel, open-label study in 278 treatment naïve, genotype 1 patients evaluating taribavirin at 20 mg/kg, 25 mg/kg, and 30 mg/kg per day in combination with pegylated interferon alfa-2b. The control group is being administered weight-based dosed ribavirin (800/1,000/1,200/1,400 mg daily) and pegylated interferon alfa-2b. The 12-week early viral response (EVR) data from the Phase IIb study showed comparable reductions in viral load for weight-based doses of taribavirin and ribavirin. The anemia rate was statistically significantly lower for patients receiving taribavirin in the 20mg/kg and 25mg/kg arms versus the ribavirin control arm. More details on the taribavirin Phase IIb study announcement are provided in Item 7, Products in Development . We are using the data to explore the options for the continued role of taribavirin in our portfolio, including consideration of partnering opportunities.

Infergen (Reported in Discontinued Operations)

On December 30, 2005, we acquired the U.S. and Canadian rights to the hepatitis C drug Infergen from InterMune. In September 2007, we decided to divest these Infergen product rights and we sold them to Three Rivers Pharmaceuticals, LLC on January 14, 2008. The results of the Infergen operations and the related financial position have been reflected as discontinued operations in the consolidated financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . The consolidated financial statements have been reclassified to conform to discontinued operations presentation for all historical periods presented.

Ribavirin Royalties

Our royalties are 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 $67,202,000, $81,242,000 and $91,646,000 for the years ended December 31, 2007, 2006 and 2005, respectively, and accounted for 8%, 9% and 11% of our total revenues in 2007, 2006 and 2005, respectively. Royalty revenues in 2007, 2006 and 2005 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 continue to decline in 2008. The royalty will 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.

Specialty Pharmaceuticals

Product sales from our specialty pharmaceuticals segment accounted for 90% of our total revenues from continuing operations for the year ended December 31, 2007, compared to 91% for 2006. Product sales increased for the year ended December 31, 2007 compared with 2006 by $4,208,000.

Our current product portfolio comprises approximately 352 branded products, with approximately 1,974 stock keeping units. We market our products globally through a marketing and sales force consisting of approximately 1,652 employees. We focus our sales, marketing and promotion efforts on the Promoted Products within our product portfolio. We have identified these Promoted Products as offering the best potential return on investment. The majority of our Promoted Products are in our three targeted therapeutic areas. Promoted Products in other therapeutic areas have characteristics and regional or local market positions that also offer significant growth and returns on marketing investments.

Our future growth is expected to be driven primarily by the commercialization of new products, growth of our existing products, and business development. Our Promoted Products accounted for 58% and 55% of our specialty pharmaceutical product sales for the years ended December 31, 2007 and 2006, respectively. Sales of our Promoted Products increased $25,941,000 (6%) in the year ended December 31, 2007 compared to 2006.

We have experienced generic challenges and other competition to our products, as well as pricing challenges through government imposed price controls and reductions, and expect these challenges to continue in 2008 and beyond.

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 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.

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, 3-4 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%.

Acquisitions

In 2007, we acquired product rights in the United States, Europe, and Argentina for aggregate consideration of $40,803,000, of which $36,184,000 was cash consideration. In the United States, we acquired a paid-up license for Kinetin and Zeatin, the active ingredients in the Kinerase product line, for cash consideration of $21,000,000 and other consideration of $4,170,000. In Europe we acquired the rights to Nabilone, the product we currently market as Cesamet in Canada and the United States, for $13,582,000. We acquired the rights to certain products in Poland, Argentina and Spain for $1,602,000 in cash consideration and $449,000 in other consideration.

In 2006, we acquired rights to new product lines in Poland and the UK. In Poland we acquired the rights to a number of branded generic products for nominal cash consideration. In the UK we acquired exclusive rights to distribute certain dermatological skin care products from Intendis AG, including Finacea, Skinoren, Scheriproct and Ultrabase. In 2006, we also acquired the rights to Zelapar in Canada and Mexico. We had acquired the rights to Zelapar in the United States as part of the Amarin acquisition in 2004 and launched the product in the United States in 2006. In 2006, we also acquired from Novartis the rights to Melleril in Argentina, having acquired the rights to this product in Brazil in 2005.

On December 30, 2005, we acquired the U.S. and Canadian rights to the hepatitis C drug Infergen from InterMune. We paid InterMune $120,000,000 in cash at the closing. Subsequently, we paid InterMune a non-contingent milestone payment of $2,585,000 in January 2007 and a $5,000,000 contingent milestone in July 2007 which we recorded as goodwill. In September 2007, we decided to divest these Infergen product rights and we sold them to Three Rivers Pharmaceuticals, LLC on January 14, 2008. The results of the Infergen operations and the related financial position have been reflected as discontinued operations in the consolidated financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . The consolidated financial statements have been reclassified to conform to discontinued operations presentation for all historical periods presented.

On March 1, 2005, we acquired Xcel Pharmaceuticals, Inc. (“Xcel”), a specialty pharmaceutical company focused on the treatment of disorders of the central nervous system, for $280,000,000 in cash, plus expenses of $5,435,000. Under the terms of the purchase agreement, we paid an additional $7,470,000 as a post-closing working capital adjustment. The Xcel acquisition expanded our existing neurology product portfolio with four products that are sold within the United States, and retigabine, a late-stage clinical product candidate that is an adjunctive treatment for partial-onset seizures in patients with epilepsy.

See Note 4 of notes to consolidated financial statements for further discussion of these acquisitions.

Year Ended December 31, 2007 Compared to 2006

Specialty Pharmaceutical Revenues: Total consolidated revenues increased $9,418,000 for the year ended December 31, 2007 compared with 2006. Total specialty pharmaceutical product sales increased $4,208,000 (1%) for the year ended December 31, 2007 over 2006. Specialty pharmaceutical product sales in 2007 included a 5% favorable impact from foreign exchange rate fluctuations and a 1% aggregate increase in price, partly offset by a 5% reduction in volume. A significant factor that contributed to this reduction was the sales decline in Mexico, partly offset by sales increases in Central Europe, Canada, and the United Kingdom. The reported sales declines in Mexico were also impacted by accounting reserves for product returns and credits memos. The reported sales for the year ended December 31, 2007 include $4,144,000 for products divested in 2007 (Reptilase, Solcoseryl in Japan and our

former ophthalmic business in the Netherlands), compared to $15,403,000 of revenue reported for these products in 2006.

Approximately 58% of our total pharmaceutical revenues resulted from sales of Promoted Products in 2007. We define Promoted Products as being those that we promote with annual sales of greater than $5,000,000. Worldwide sales of Promoted Products totaled $453,082,000 in 2007, an increase of $25,941,000 or 6% over 2006. The increased sales in Promoted Products were partially offset by declines in sales of non-promoted products.

In our North America pharmaceuticals segment, revenues for the year ended December 31, 2007 increased $12,278,000 (5%) over 2006. This increase reflects the growth in Cesamet sales in Canada, a full year of Zelapar sales in the United States, and sales increases in Librax, Kinerase, and Migranal. Cesamet sales were primarily in Canada. These sales increases were offset by sales decreases of Efudex, Imovane, and Limbitrol. Decreases in Efudex sales were expected and were a result of our launch of an authorized generic in December 2006. The increase in North American pharmaceutical sales for the year ended December 31, 2007 was due to a 7% percent increase in price and a 1% positive contribution from the appreciation of the Canadian Dollar, offset by a 3% decline in volume.

In our International pharmaceuticals segment, revenues for the year ended December 31, 2007 decreased $38,287,000 (16%). The decrease was due to the reduced shipments to our largest wholesalers in Mexico who had ceased making payments to us because they felt disadvantaged by changes we made in our distribution channel in 2006. This situation continued to impact sales in the fourth quarter of 2007 and affected most of our products in Mexico. Results in Mexico were also impacted by increased reserves for returns and discounts. Reptilase sales in 2007 decreased $5,337,000 because we stopped selling Reptilase with the sale of our Basel, Switzerland manufacturing plant in June 2007. International sales in 2007 reflected an 18% reduction in volume, partly offset by a 2% benefit from foreign currency.

In our EMEA pharmaceuticals segment, revenues for the year ended December 31, 2007 were $307,789,000, an increase of $30,217,000 (11%). The increase in the value of currencies in the region relative to the U.S. Dollar contributed $25,743,000 to revenues in the region in 2007. Sales of Nabilone (Cesamet) in the United Kingdom and Spain were $3,462,000 in 2007. We acquired these product rights in January 2007. Sales of the dermatology products licensed from Intendis, including Finacea, were $2,885,000 in 2007, compared with $498,000 in 2006. We licensed these products in September 2006. Much of the segment’s growth was in Central and Eastern Europe and the United Kingdom. Sales of Promoted Products in 2007 were $127,128,000 compared to $99,948,000 in 2006, an increase of $27,180,000 (27%). The increases in revenues from higher Promoted Product sales and stronger European currencies were partly offset by reductions in sales of non-promoted products. Sales in several European countries were also negatively affected by pricing policies imposed by governmental authorities. EMEA sales in 2007 were impacted by a 9% positive contribution from currency fluctuations and a 5% increase in volume, offset by a 3% aggregate reduction in prices.

Alliance Revenue (including Ribavirin royalties): Alliance revenue in the year ended December 31, 2007 included a licensing payment of $19,200,000 which we received in the first quarter of 2007 from Schering-Plough as a payment for the license to pradefovir. In September 2007, we announced an agreement with Schering-Plough and Metabasis which returned all pradefovir rights to Metabasis. We retained the $19,200,000 licensing payment but expect to receive no future income from pradefovir. Alliance revenue in 2007 also included $50,000 paid to us by an unrelated third party in the first quarter of 2007 for certain intellectual property assets. Alliance revenue in 2006 consisted exclusively of ribavirin royalties.

Ribavirin royalties for the year ended December 31, 2007 were $67,202,000 compared to $81,242,000 for 2006, a decrease of $14,040,000 (17%). Ribavirin royalty revenues decreased due to (i) Roche’s discontinuation of royalty payments to us in June 2007, (ii) Schering-Plough’s market share losses in ribavirin sales, and (iii) reduced sales in Japan from a peak in 2005 driven by the launch of combination therapy. We expect ribavirin royalties to continue to decline in 2008. The royalty will 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 royalties from Schering-Plough in Japan will continue after 2009.

Selling Expenses: Selling expenses were $259,324,000 for the year ended December 31, 2007 compared to $244,757,000 for 2006, an increase of $14,567,000 (6%). As a percent of product sales, selling expenses were 33% for the year ended December 31, 2007 and 31% for the corresponding period in 2006. The increase in selling expense reflects increased promotional activities related to the newly launched products in Central Europe and the United Kingdom. Selling expense in 2007 included a $2,776,000 bad debt provision for Mexico, sales force severance costs of $2,680,000 in Germany, Italy, and Latin America, and a $2,059,000 bad debt provision in Austria.

General and Administrative Expenses: General and administrative expenses were $111,721,000 for the year ended December 31, 2007 compared to $114,583,000 for 2006, a decrease of $2,862,000 (2%). General and administrative expenses included $8,708,000 in stock-based compensation expenses, a reduction of $4,989,000 from the corresponding expenses recorded in general and administrative expenses in 2006. General and administrative expenses in 2007 included information technology improvements, legal, and business development costs, professional service fees, and a payroll tax withholding charge related to a former executive. As a percent of product sales, general and administrative expenses were 14% for the year ended December 31, 2007 compared to 15% for 2006.

Research and Development: Research and development expenses were $98,025,000 for the year ended December 31, 2007 compared with $105,442,000 for 2006, a reduction of $7,417,000 (7%). The decrease in research and development expenses was primarily attributable to the completion of the VISER clinical trials for taribavirin and savings from our strategic restructuring program including the divestment of our discovery operations in December 2006. On January 9, 2007, we licensed the development and commercialization rights to pradefovir to Schering-Plough, who subsequently returned these rights to Metabasis after the results of a long-term preclinical study was released. On December 21, 2006, we sold our HIV and cancer development programs and certain discovery and preclinical assets to Ardea, with an option for us to reacquire rights outside of the United States and Canada to commercialize the compound being developed in the HIV program upon Ardea’s completion of Phase IIb trials. Research and development expenses in 2006 included a $7,000,000 milestone payment related to the development of retigabine. It is expected that clinical development expenses will decline in 2008 as a result of the completion of the Phase III clinical trials with retigabine.

Our rights to retigabine are subject to the Asset Purchase Agreement between Meda Pharma Gmbh & Co KG (as successor to Viatris Gmbh & Co KG) and Xcel Pharmaceuticals, Inc. by which Xcel acquired the rights to retigabine. The provisions of that agreement require milestone payments of $8,000,000 upon acceptance of filing of the NDA and $6,000,000 upon approval of the NDA. We expect to expense the NDA filing milestone in 2008.

Amortization: Amortization expense was $71,567,000 for the year ended December 31, 2007 compared to $65,276,000 for 2006, an increase of $6,291,000 (10%). The increase was primarily due to amortization of intangibles acquired with the acquisition of the Kinerase product rights and Nabilone in the United Kingdom and Spain, offset in part by a decrease in the amortization of a royalty intangible which was acquired in the Ribapharm acquisition and is being amortized on an accelerated basis. We expect this royalty intangible to be fully amortized in June 2008. Additionally, in 2007, we recorded asset impairment charges on a product sold in Spain in the amount of $310,000. In 2006, we recorded asset impairment charges on certain products sold in the Spain in the amount of $1,075,000.

Gain on Litigation Settlement: Litigation settlements contributed significantly to operating profit in 2006. The recoveries in 2006 included the settlement with the Republic of Serbia relating to the ownership and operations of a joint venture we formerly participated in known as Galenika of $34,000,000 of which $28,000,000 was received in 2006, and the settlement of litigation with a former chief executive officer, Milan Panic relating to Ribapharm bonuses, for which we received $20,000,000 and recorded a gain from litigation of $17,550,000 in 2006.

Restructuring Charges and Asset Impairments: In 2007 and 2006 we incurred $23,176,000 and $138,181,000, respectively, in restructuring charges relating to severance charges, contract cancellations, and asset impairments.

Restructuring Charge Detail

2007 Restructuring Charges

In 2007 we recorded a restructuring charge of $23,176,000 which consisted of $13,575,000 for the 2006 Restructuring and $9,601,000 for the restructuring program that will be announced in connection with the 2008 Strategic Review.

In December 2007 we signed an agreement with Invida to sell certain subsidiaries and product rights in Asia, in a transaction that includes certain Valeant subsidiaries, branch offices, and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia, and Macau. We closed this transaction March 3, 2008. This transaction also included certain product rights in Japan. In 2007, we recognized $3,968,000 in contract termination and transaction costs as restructuring charges in support of this transaction. The assets related to this transaction were classified as “held for sale” in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , in December 2007.

2008 Strategic Review and 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. This 2008 Strategic Review is still underway as of the date of this filing and we expect to describe it in an announcement in late March 2008. We expect the 2008 Strategic Review to lead to significant changes in our business and will include a restructuring program. The charges taken in 2007 for this 2008 restructuring include $957,000 for certain executive severances, $4,676,000 for professional service expenses for management consultants assisting with the Strategic Review, and the $3,968,000 contract termination and transaction costs associated with the sale of our Asia businesses and product rights to Invida.

We expect additional restructuring charges in 2008. We have accounted for severance costs pursuant to SFAS No. 112, Employers’ Accounting for Post-employment Benefits and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. As a result, we have incurred severance obligations of $8,345,000 related to the severance of our former chief executive officer in 2008 that will be recorded in the first quarter of 2008. This severance will include $3,676,000 in cash consideration.

March 2006 — June 2007 Restructuring Charges

On April 3, 2006, we announced a restructuring program to reduce costs and accelerate earnings growth (the “2006 Restructuring”). The 2006 Restructuring was primarily focused on our research and development and manufacturing operations. The objective of this restructuring program as it related to research and development activities was to focus our efforts and expenditures on two late stage projects currently in development. In December 2006 we sold our HIV and cancer development programs and certain discovery and pre-clinical assets to Ardea Biosciences, Inc. (“Ardea”), with an option for us to reacquire rights outside of the United States and Canada to commercialize the compound being developed in the HIV program upon Ardea’s completion of Phase IIb trials. In March 2007, we sold our former headquarters building in Costa Mesa, California, where our former research laboratories were located, for net proceeds of $36,758,000.

The objective of the 2006 Restructuring as it related to manufacturing was to further rationalize our manufacturing operations to reflect the regional nature of our existing products and further reduce our excess capacity after considering the delay in the development of taribavirin. In December 2006, we transferred our former factories in Basel, Switzerland and Puerto Rico to a “held for sale” classification in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets . In June 2007, we sold these manufacturing facilities and the related inventories to Legacy Pharmaceuticals International for aggregate proceeds of $29,500,000, of which $12,000,000 was received as consideration for inventories sold to Legacy Pharmaceuticals International and $17,500,000 was received as consideration for the manufacturing facilities. The transaction also included transition payment obligations of $6,000,000 to be paid by Valeant to Legacy Pharmaceuticals International over a 24-month period as well as capital expenditure obligations of $650,000 to be incurred by us. The sale of these manufacturing facilities to Legacy Pharmaceuticals International in June 2007 completed the 2006 Restructuring.

The charges in the 2006 Restructuring included impairment charges resulting from the sale of our former headquarters facility, discovery and pre-clinical operations equipment, and our former manufacturing facilities in Puerto Rico and Basel, Switzerland. The restructuring included the reduction of approximately 850 employees, the majority of whom work in the two manufacturing facilities sold to Legacy Pharmaceuticals International. As of December 31, 2007, employee severance costs in the 2006 Restructuring have been recorded for approximately 490 employees and no severance payments have been recorded for the remaining employees who transferred to Legacy Pharmaceuticals International.

The 2006 Restructuring also rationalized selling, general and administrative expenses primarily through consolidation of the management functions in fewer administrative groups to achieve greater economies of scale. Management and administrative responsibilities for our regional operations in Australia, Africa and Asia, which had previously been managed as a separate business unit, were combined in 2006 with those of other regions.

We recorded a restructuring provision for the 2006 Restructuring of $13,575,000 in 2007, compared with $138,181,000 for 2006. Severance charges recorded as part of this restructuring program were $22,127,000.

Abandoned software and other capital assets included an expense of $20,453,000 in 2006 relating to an Enterprise Resource Planning (ERP) project, which was discontinued in March 2006. It also included $632,000 of cash-related charges.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Company Strategy and Restructuring

In October 2007, our board of directors initiated a strategic review (the “2008 Strategic Review”) of our business direction, geographic and commercial operations, product and business portfolio, growth opportunities and acquisition strategy. On March 26, 2008, our board of directors approved a new strategic plan for our company. The key elements of this strategy include the following:

Focus the busines s. We are restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Mexico, Canada, Brazil and Australia. We are pursuing plans to divest our operations in markets outside of these core geographic areas, through sales of subsidiaries, assets, or other strategic alternatives.

Maximize the pipeline. We expect to find strategic partners to help us optimize the value of our two late-stage development projects, retigabine, a potential treatment for partial onset seizures in patients with epilepsy and for neuropathic pain, and taribavirin, a potential treatment for hepatitis C. We are identifying potential opportunities for taribavirin in niche indications where there are significant unmet medical needs and expect to utilize a partner if we pursue a large phase III clinical development program in hepatitis C.

Rebase and grow. With our focus on the therapeutic areas of neurology and dermatology in our core geographies, we plan to invest in our business and pursue selective acquisitions in order to deliver returns to our shareholders. Our strategic plan is designed to streamline our business, reduce expenses and align our infrastructure with the reduced scale of our operations.

Prior to the start of the 2008 Strategic Review, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and divested or discontinued certain non-strategic products as a result. We sold our rights to Infergen to Three Rivers Pharmaceuticals, LLC on January 14, 2008. In 2007, we also sold product rights to Reptilase, Solcoseryl in Japan, our opthalmic business in Holland, and certain other products. On March 3, 2008, we sold certain of our subsidiaries and product rights in Asia to Invida Pharmaceutical Holdings Pte. Ltd. in a transaction 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.

On April 11, 2008, the Food and Drug Administration (FDA) approved an Abbreviated New Drug Application (“ANDA”) for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals. On April 11, 2008, the FDA also responded to our Citizen Petition that was filed on December 21, 2004 and denied our request that the FDA refrain from approving any ANDA for a generic version of Efudex unless the application contains data from an adequately designed comparative clinical study conducted in patients with superficial basal cell carcinoma. On April 25, 2008, Valeant filed an application for a temporary restraining order (TRO) against Michael O. Leavitt and Andrew C. Von Eschenbach, in their official capacities at the FDA, in the United States District Court seeking to suspend the FDA’s approval of Spear’s ANDA. On May 1, 2008, the Court granted the FDA’s request to stay proceedings on Valeant’s application for a TRO until May 14, 2008. Spear Pharmaceuticals has agreed to suspend marketing, sales and

shipment activities for the duration of the stay. If a competitor is allowed to launch a generic version of our Efudex product, our sales in the U.S. of Efudex will significantly decline.

Specialty Pharmaceuticals

Product sales from our pharmaceutical segments accounted for 93% of our total revenue from continuing operations for the three months ended March 31, 2008, compared with 82% for the corresponding period in 2007, and increased $13,980,000 (8%) for the three months ended March 31, 2008 over the same period in 2007. The 8% increase in specialty pharmaceutical sales for the three months ended March 31, 2008 was due to an 8% benefit from foreign exchange fluctuations and a 1% price increase, partly offset by a 1% decline in volume.

Clinical Development

We seek to develop and commercialize innovative products for the treatment of significant unmet medical needs, principally in the areas of neurology and infectious disease. Research and development expenses were $29,392,000 for the three months ended March 31, 2008, compared to $20,990,000 for the same period in 2007, reflecting an increase of $8,402,000 (40%). This increase was largely driven by the expenditures for the retigabine clinical development program in the period.

Alliance Revenues

Alliance revenue for the three months ended March 31, 2008 consisted exclusively of $12,773,000 of ribavirin royalty revenue from Schering-Plough. Alliance revenue for the three months ended March 31, 2007 comprised the $19,200,000 pradefovir licensing payment from Schering-Plough, $17,220,000 of ribavirin royalties, and a separate licensing payment of $50,000. Ribavirin royalty revenues decreased $4,447,000 (26%) and accounted for 7% of our total revenues from continuing operations for the three months ended March 31, 2008 as compared to 8% in the similar three-month period in 2007. The decrease in ribavirin royalties reflects Schering-Plough’s 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 in 2008. The royalty will decline significantly in 2009 in that royalty payments from Schering-Plough continue for European sales only until the ten-year anniversary of the launch of the product, which varied by country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

Results of Operations

As part of the 2008 Strategic Review, we announced on March 27, 2008 that we would focus on the pharmaceutical markets in the United States, Mexico, Canada, Brazil, and Australia and intend to stop organizing our company by geographic regions. In the three months ended March 31, 2008, however, we were still operating in our three reportable pharmaceutical segments, comprising pharmaceuticals operations in North America; International; and Europe, Middle East, and Africa. In addition, we have a research and development division. Certain financial information for our business segments is set forth below. This discussion of our results of operations should be read in conjunction with our consolidated condensed financial statements included elsewhere in this quarterly report. For additional financial information by business segment, see Note 11 of notes to consolidated condensed financial statements included elsewhere in this quarterly report.

In the North America pharmaceuticals segment, revenues for the three months ended March 31, 2008 were $72,276,000, compared to $62,599,000 for the same period in 2007, representing an increase of $9,677,000 (15%). The region reported increases in sales of Efudex, Cesamet, and Zelapar, which were partly offset by decreases in sales in the first quarter of Kinerase and Oxsoralen-Ultra. Sales of Efudex in the three months ended March 31, 2007 were low because of the pull-through of inventory from our December 2006 launch of an authorized generic version of Efudex in the U.S. The reported growth of Cesamet reflects strong demand for Cesamet in Canada. Product sales in the North America region were 40% of total product sales in the three months ended March 31, 2008, compared with 37% in the three months ended March 31, 2007. The North America sales increase of 15% resulted from a volume increase of 7%, a price increase of 5%, and a 3% benefit from currency fluctuations in Canada.

In the International pharmaceuticals segment, revenues for the three months ended March 31, 2008 were $29,151,000 compared to $35,275,000 for the same period in 2007, a decrease of $6,124,000 (17%). Our sales to our two largest wholesalers in Mexico continue to be impacted by their reaction to the changes we made in our distribution channel in 2006. In addition, the decline in the International segment relates to our sale of certain subsidiaries and business operations in Asia to Invida on March 3, 2008. Our sales in the operations sold to Invida were $4,140,000 in the three months ended March 31, 2007, compared with $1,059,000 in the two months ended February 29, 2008. The International sales decrease of 17% resulted from a 21% decrease in volume and a 1% price reduction, partially offset by a 5% benefit from currency fluctuations.

In the EMEA pharmaceuticals segment, revenues for the three months ended March 31, 2008 were $80,486,000, compared to $70,059,000 for the same period in 2007, representing an increase of $10,427,000 (15%). The region reported increases in sales of Solcoseryl, Mestinon, and Bisocard, which were partly offset by declines in sales of Kinerase, Protamin, and Efudex. The EMEA sales increase resulted from a 15% benefit from currency fluctuations and a 1% increase in volume, partly offset by a 1% decline in price.

Gross Profit Margin (excluding amortization): Gross profit margin on product sales was 70% for the first quarter of 2008, compared with 72% for the same period in 2007. The decrease in gross profit margin primarily reflects increased inventory obsolescence charges.

Selling Expenses: Selling expenses were $63,790,000 for the three months ended March 31, 2008, compared to $58,440,000 for the same period in 2007. As a percent of product sales, selling expenses were 35% for the three months ended March 31, 2008 and March 31, 2007. The increase in selling expenses results primarily from currency impacts as well as increased promotional activity in support of branded generic products in Central Europe, Kinerase and neurology products in the United States.

General and Administrative Expenses: General and administrative expenses were $26,106,000 for the three months ended March 31, 2008, compared to $26,115,000 for the same period in 2007, a decrease of $9,000 (0%). As a percent of product sales, general and administrative expenses were 14% for the three months ended March 31, 2008, compared to 16% for the same period in 2007.

Included in general and administrative expenses in the three months ended March 31, 2007 was a $3,800,000 expense for the arbitration loss on the indemnification claim we had against the former shareholders of Xcel Pharmaceuticals associated with sales of Xcel products prior to our acquisition of the company. This was partially offset by a $2,200,000 gain on the sale of an ophthalmic business in Europe.

Research and Development: Research and development expenses were $29,392,000 for the three months ended March 31, 2008, compared to $20,990,000 for the same period in 2007, an increase of $8,402,000 (40%). This increase was largely driven by the expenditures for the retigabine clinical development program in the period.

Restructuring Charges:

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. As announced on March 27, 2008, we have completed this strategic review and announced a strategic plan which will include a restructuring program (the “2008 Restructuring”). The 2008 Restructuring 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, Mexico, Canada, Brazil and Australia. We are pursuing plans to divest our operations in markets outside of these core geographic areas through sales of subsidiaries, assets or other strategic alternatives, to seek partners for taribavirin and retigabine and to make selective acquisitions.

In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell Invida certain Valeant subsidiaries and product rights 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 on March 3, 2008. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with SFAS 144. We received initial proceeds of $37,855,000 and recorded a gain of $36,923,000 in this transaction. We expect to receive additional proceeds in 2008 of approximately $5,585,000 as a purchase price adjustment relating to net asset value.

As of March 31, 2008, we classified our subsidiaries in Argentina and Uruguay as “held for sale” in accordance with SFAS 144. We are negotiating the sale of these subsidiaries, which we expect to close in 2008. In the three months ended March 31, 2008, we recorded an impairment charge of $7,853,000 related to this sale.

The net restructuring, asset impairments and dispositions benefit of $12,664,000 in the three months ended March 31, 2008 resulted from the gain of $36,923,000 in the transaction with Invida, offset in part by restructuring charges of $24,259,000. Restructuring charges incurred in the three months ended March 31, 2008 included severance costs of $6,742,000, contract cancellation and other cash costs of $3,536,000, cash charges from the Invida transaction of $1,350,000, a stock compensation charge for the accelerated vesting of the stock options of our former chief executive officer of $4,778,000 and an impairment charge of $7,853,000 related to the planned sale of our subsidiaries in Argentina and Uruguay. The severance charges recorded in the 2008 Restructuring as of March 31, 2008 were primarily for our former chief executive officer and six other executives. The charges taken in 2007 for this 2008 Restructuring included $957,000 for executive severances, $4,677,000 for professional service expenses and $3,967,000 for contract termination and transaction costs associated with the sale of our Asia businesses to Invida.

As of the filing date of this quarterly report on Form 10-Q, we are not able to estimate the total restructuring charges that we will incur in the 2008 Restructuring.

CONF CALL

Laurie Little

Thank you, Christine. Good morning, everyone, and welcome to Valeant's 2008 first quarter financial results conference call. Joining us on the call today are Mike Pearson, Chairman and Chief Executive Officer; Peter Blott, Chief Financial Officer; and Dr. Janet Hammond, Vice President, Global Medical Affairs and Chief Medical Officer. In addition, Phil Loberg, Group Financial Controller; and Grace Lin, Treasurer are also here and available to answer questions during the Q&A session.

Before we begin, I would like to call your attention to the fact that this presentation may contain forward-looking statements, including, but not limited to, expectations and plans relating to retigabine our taribavirin and the and the ability to partner our products in development. These statements are based upon current expectations and beliefs of management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statement. These risks and uncertainties include, but are not limited to, risks and uncertainties related to RESTORE 1 results that are not necessarily predictive of RESTORE 2 results and that adverse events are not always immediately apparent even in well-defined clinical trials, the ability to partner our products in development, our ability to divest our European operations in the current credit environment and other risks and uncertainties discussed in the company's filings with the SEC. These factors are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements. Undue reliance should not be placed on any of these forward-looking statements which speak only as of the date of this call. Valeant undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this call or to reflect actual outcome.

Certain figures discussed in today's call will be based on adjusted or non-GAAP information. A reconciliation of historical GAAP to non-GAAP results can be found in the tables in the company's press release issued earlier today and on Valeant's website at www.valeant.com. Valeant has not provided the reconciliation of forward-looking non-GAAP financial measures due to the difficulty of forecasting and quantifying certain excluded items.

And now, I'd like to turn the call over to Mike.

Mike Pearson

Thank you, Laurie. Good morning to everyone and thank you for joining us.

Since our last call on March 27th, I've had the opportunity to meet with many of our shareholders, and many of you have asked me about the upcoming milestones and what are the key events that Valeant should be measured on. I would like to quickly summarize these.

The next 12 months, Valeant will be focused on six key initiatives. The first is to sell or IPO Europe. As we've talked about our European operations, our key driver of complexity in this company and while we operate in many countries and in many different businesses, a wide range of products, this has caused a lot of additional cost and complexity.

The second priority is to fix Mexico. Operation in Mexico has had very disappointing results in 2007 and the first quarter of 2008. And this is because of a series of very poor management decisions that have had a negative impact on our sales and market share. The third initiative is to partner our pipeline assets, retigabine and taribavirin to maximize both these compounds.

The fourth initiative is to file the NDA for retigabine. The fifth is to restructure the organization. This company needs to significantly downsize its G&A spending, needs to redirect its promotional spend and needs to rationalize its R&D programs. Finally, the sixth initiative, as we move through all these objectives, we plan on strengthening our balance sheet.

Now, let me update you on progress against these six initiatives. First, the sale or IPO of Europe. We have made significant steps forward on our plan to divest or IPO our European operations. Goldman Sachs has had many interested parties step forward, and we plan on issuing an offering memorandum in the second quarter. We have also put in place financial incentives for our key employees to ensure the business continues to perform well throughout the sale process.

Our second initiative, fixing Mexico, we have implemented a five-step program to fix Mexico. First, as previously announced, we have replaced management. Second, we have now aligned our sales force activities to call both on physicians and on the retail segment and to rebuild our important relationships with the pharmacists.

Third, we are repairing our relationships with our wholesalers. We now have full-time Valeant employees at the wholesalers who are working with these wholesalers to align our demand forecast with our manufacturing schedules and to ensure consistent payment on the parts that we sell to our wholesalers.

Fourth, we are dismantling our international regional organization in Mexico and making significant inroads to reduce our infrastructure in Mexico. Fifth, we have taken additional reserves against aged inventory and accounts receivable to more appropriately balance these accounts against current sales volumes.

Although the first quarter results in Mexico were poor, this is the last quarter under the previous management team. Dr. [Revollo], our new head of Mexico, has been in charge for one month and is taking decisive action. In terms of our third initiative, partnering our pipeline assets, again, we plan to partner both retigabine and taribavirin. And as we previously announced, we will announce the results for results for RESTORE 2 in the second quarter of this year.

In terms of taribavirin, we do not plan to directly fund a large scale Phase 3 trail. We are looking to partner this compound both for a major Phase 3 trial as well as the trial in the co-infected HIV patients. We will be willing to fund smaller clinical trails to evaluate taribavirin in patient population that cannot tolerate anemia such as dialysis patients and patients with disorders of the hemoglobin.

We were selected as a late breaker at the European Association for the Study of the Lever, EASL, and we presented on April 26th. I was over in Italy and was very pleased with the response from the various medical professionals I met and their renewed excitement in this molecule.

The next initiative is to file an NDA for retigabine. With the positive results from the RESTORE 1 in-house and the pending results from RESTORE 2 anticipated shortly, we are working diligently to be in a position to file an NDA with the FDA before the end of 2008. Our target remains in the third quarter of 2008. We are also targeting an MAA submission for Europe for retigabine before the end of 2008.

The next initiative is to restructure and right-size the organization. We have taken the first step to resize our organization to accurately reflect the size we will be after the sale of our assets. We recently announced headcount reductions of 130 physicians, primarily in the U.S. and our corporate operations. Cost savings associated with this action is approximately $20 million on an annualized basis. This is in addition to the $20 million that we previously announced, which is tied to the divestiture of our European operations.

We have redirected our selling and marketing dollars against those products that we believe will be more promotionally sensitive, products such as Kinerase and Diastat, and we have taken promotional dollars away from Tasmar and Zelapar. We will also be addressing our R&D spend, which will be reduced significantly as we move through the completion of our Phase 3 retigabine program.

Finally, we will strengthen our balance sheet by deploying our cash in appropriate ways. We will discuss this in greater detail at our next quarter earnings call.

I'd also like to just take few minutes to address two other relevant issues, Efudex and trade inventories. First, on Efudex. As you know Spear Pharmaceuticals received regulatory approval of their ANDA for our Efudex Cream on April 11 and reportedly began selling their products shortly thereafter.

On April 25th, Valeant filed an application for temporary restraining order, a TRO, in the federal court against the FDA, seeking to suspend the FDA's approval of Spear's ANDA. On May 1st, the federal court entered a stay of all proceedings through May 14th.

Spear has committed to the court that it will or has suspended sales and shipments of the product during the duration of the court ordered stay. We will update you on subsequent events as they unfold, and in the meantime, we continue to provide Efudex to our patients.

We filed this lawsuit, because we feel the approval of Spear's product by the FDA without requiring appropriate clinical testing of its efficacy in the treatment of basal cell carcinoma represents an inappropriate risk to patients. Allowing another company to launch an AB-rated product that has only been clinically tested on sun damaged skin, but which will be labeled and used to treat superficial basal cell carcinoma, a form of skin cancer, is not in the best interest of our patients. And we thought it was prudent to pursue this course of action.

Now, the inventories. We have also made the decision to reduce our inventory levels at our wholesalers to industry standard levels. Specifically, over the next quarter, we will reduce our U.S. inventories from 1.8 months to 3 weeks. In Canada, we will reduce from 6 weeks to less than a month. And we will make a similar reduction in Mexico. This will obviously reduce our reported sales over the next quarter, but over the long-term, will improve our financial and help our P&L.

Now, let me turn the call over to Peter Blott to discuss our financial performance for the quarter.

Peter Blott

Thank you, Mike. Earnings from continuing operations adjusted to non-GAAP items was a loss of $0.04 per diluted share in the first quarter of 2008 compared to a net income of $0.21 per diluted share in the same period last year. Last year, our first quarter results benefited from a one-time milestone income of $19.2 million received from Schering-Plough related to pradefovir.

Product sales from continuing operations increased 8% in the 2008 first quarter compared to the same period last year. This increase was primarily due to currency gains in Europe with increased sales of Efudex, Cesamet and Bisocard, offset by a further decline in sales in Mexico. Quarter-over-quarter comparisons of product sales are also impacted by divestments since last year.

Ribavirin royalties were $12.8 million in the 2008 first quarter compared to $17.3 million in the same period last year, reflecting Schering-Plough's reduced sales of ribavirin and the discontinuation of Roche royalties we've discussed earlier from June 2007.

Our gross margin in 2008 first quarter was 70%, down from 72% recorded in the comparable period last year, driven by the impact of increased inventory reserves in Latin America in the quarter.

On May the 2nd, we announced headcount reductions of 130 in the U.S. and Mexico as Mike mentioned. The annual impact of these impacts is a further $20 million, but these do not impacts the G&A costs until later in the year and have no impact upon the first quarter results.

Research and development expense was $29.4 million in the first quarter of 2008, an increase of 40% over the previous year. This increase was due to the external clinical development spending on retigabine on the RESTORE trials.

Cash and marketable securities increased $158 million in the 2008 first quarter to over $0.5 billion, actually $519 million. This reflects $71 million we received from the sale of Infergen, $38 million that we received from the sale of Asia-Pacific and working capital improvements and cash generated from operations. Cash provided by continuing operating activities for the 2008 first quarter was $54 million. This reflects the continued strength in our base business to generate steady cash flow.

On a non-GAAP basis, EBITDA was $25.3 million in the first quarter. Restructuring recorded in the first quarter was a net gain of $12.7 million. This included $36.9 million net gain on the sale of our Asia-Pacific business, offset by other charges of $24.2 million, which included an impairment of $7.9 million relating to Argentinean sale, $4.8 million of professional and legal fees and $11.5 million employee severance costs. The severance costs are mainly attributed to six executives, including Tim Tyson, our former CEO.

Now, I will turn the call back to Mike for closing remarks.

Mike Pearson

Thank you, Peter. Over the next 12 months, we will be streamlining and simplifying this company and creating a profitable operating base from which to grow in 2009 and beyond. We will not be providing financial guidance or metrics for the foreseeable future, but we will be updating you on our six key initiatives over the next several quarters.

2008 will be a year in which we will do whatever it takes to put this company on track to be successful. And I believe that we have made solid progress towards this goal so far.


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