6. RESTRUCTURING, INTEGRATION AND OTHER CHARGES

Medicis Acquisition-Related Cost-Rationalization and Integration Initiatives

The Company has implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included:

· workforce reductions across the Company and other organizational changes;

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

· leveraging research and development spend; and

· procurement savings.

The Company estimated that it will incur total costs in the range of up to $275 million in connection with these cost-rationalization and integration initiatives, which are expected to be substantially completed by the end of 2013. $85.6 million has been incurred as of December 31, 2012. These costs include: employee termination costs payable to approximately 750 employees of the Company and Medicis who have been or will be terminated as a result of the Medicis acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. These estimates do not include a charge of $77.3 million recognized and paid in the fourth quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, and share appreciation rights for Medicis employees that was triggered by the change in control.

The following table summarizes the major components of costs incurred in connection with Medicis acquisition-related initiatives through December 31, 2012:

	Employee Termination Costs						IPR&D		Contract Termination,
	Severance and Related Benefits			Share-Based Compensation(1)			Termination Costs		Facility Closure and Other Costs			Total
Balance, January 1, 2012	$	—		$	—		$	—	$	—		$	—
Costs incurred and charged to expense	85,253			77,329			—		370			162,952
Cash payments	(77,975		)	(77,329		)	—		(5		)	(155,309		)
Non-cash adjustments	4,073			—			—		(162		)	3,911
Balance, December 31, 2012	$	11,351		$	—		$	—	$	203		$	11,554

(1) Relates to the acceleration of unvested stock options, restricted stock awards, and share appreciation rights for Medicis employees that was triggered by the change in control.

Merger-Related Cost-Rationalization and Integration Initiatives

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

· workforce reductions across the Company and other organizational changes;

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

· leveraging research and development spend; and

· procurement savings.

In connection with these cost-rationalization and integration initiatives, the Company has incurred costs including: employee termination costs (including related share-based payments) payable to approximately 500 employees of Biovail and Valeant who have been terminated as a result of the Merger; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with the Company’s research and development model; costs to consolidate or close facilities and relocate employees, asset impairments charges to write down property, plant and equipment to fair value; and contract termination and lease cancellation costs.

The following table summarizes the major components of costs incurred in connection with Merger-related initiatives through December 31, 2012:

	Employee Termination Costs						IPR&D			Contract Termination, Facility
	Severance and Related Benefits			Share-Based Compensation			Termination Costs(1)			Closure and Other Costs			Total
Balance, January 1, 2010	$	—		$	—		$	—		$	—		$	—
Costs incurred and charged to expense	58,727			49,482			13,750			12,862			134,821
Cash payments	(33,938		)	—			(13,750		)	(8,755		)	(56,443		)
Non-cash adjustments	—			(49,482		)	—			(2,437		)	(51,919		)
Balance, December 31, 2010	24,789			—			—			1,670			26,459
Costs incurred and charged to expense	14,548			3,455			—			28,938			46,941
Cash payments	(38,168		)	(2,033		)	—			(15,381		)	(55,582		)
Non-cash adjustments	989			(741		)	—			(4,913		)	(4,665		)
Balance, December 31, 2011	2,158			681			—			10,314			13,153
Costs incurred and charged to expense	1,654			—			—			12,769			14,423
Cash payments	(3,873		)	—			—			(22,767		)	(26,640		)
Non-cash adjustments	268			(681		)	—			227			(186		)
Balance, December 31, 2012	$	207		$	—		$	—		$	543		$	750

(1) As described below under “— Research and Development Pipeline Rationalization”.

As described in note 26, restructuring costs are not recorded in the Company’s reportable segments.

Employee Termination Costs

The Company recognized employee termination costs of $1.7 million, $14.5 million and $58.7 million in the years ended December 31, 2012, December 31, 2011 and December 31, 2010, respectively, for severance and related benefits payable to approximately 500 employees of Biovail and Valeant who have been terminated as a result of the Merger. These reductions primarily reflect the elimination of redundancies and consolidation of staff in the research and development, general and administrative, and sales and marketing functions. As of December 31, 2012, $76.0 million of the termination costs had been paid.

In addition, in the year ended December 31, 2010, the Company recognized incremental share-based compensation expense of $49.5 million related to the following stock options and RSUs held by terminated employees of Biovail and Valeant:

Stock options and time-based RSUs held by Biovail employees with employment agreements	$	9,622
Stock options held by Biovail employees without employment agreements	(492		)
Performance-based RSUs held by Biovail executive officers and selected employees	20,287
Stock options and RSUs held by former executive officers of Valeant	20,065
	$	49,482

The Company recognized an additional $3.5 million in share-based compensation expense in the year ended December 31, 2011, related to stock options and RSUs held by terminated employees of Biovail and Valeant.

Research and Development Pipeline Rationalization

Prior to the Merger, the Company’s product development and business development efforts were focused on unmet medical needs in specialty CNS disorders. Since the Merger, the Company has been employing a leveraged research and development model that allows it to progress development programs, while minimizing research and development expense, through partnerships and other means. In consideration of this model, following the Merger, the Company conducted a strategic and financial review of its product development pipeline and identified the programs that did not align with the Company’s new research and development model. These programs are outlined in the table below. In respect of the Staccato® loxapine, GDNF, tetrabenazine, fipamezole and pimavanserin programs, the Company provided notices of termination to, or entered into termination agreements with, the counterparties to the agreements. Regarding the Ampakine® program, the Company suspended development of these compounds and the program was sold back to Cortex on March 15, 2011 for an upfront fee of $0.2 million.

Program	Counterparty	Compound	Contingent Milestone Obligations Terminated(1)		IPR&D Termination Charges
AZ-004	Alexza	Staccato® loxapine	$	90,000	Nil
BVF-007	Cortex	AMPAKINE®	$	15,000	Nil
BVF-014	MedGenesis	GDNF	$	20,000	$	5,000	(2)
BVF-018	LifeHealth Limited	Tetrabenazine	Nil		$	28,000	(3)
BVF-025	Santhera	Fipamezole	$	200,000	Nil
BVF-036,-040, -048	ACADIA	Pimavanserin	$	365,000	$	8,750	(2)

(1) Represents the maximum amount of previously disclosed milestone payments the Company could have been required to make to the counterparty under each agreement. These milestone payments were contingent on the achievement of specific developmental, regulatory and commercial milestones. In addition, the Company could have been obligated to make royalty payments based on future net sales of the products if regulatory approval was obtained. As a consequence of the termination of these arrangements, the Company has no ongoing or future obligation in respect of these milestone or royalty payments.

(2) Represents the amount of negotiated settlements with each counterparty that was recognized and paid by the Company in the three-month period ended December 31, 2010.

(3) Represents the carrying amount of the related acquired IPR&D asset capitalized in connection with the tetrabenazine acquisition in June 2009.

In addition to the settlement payments identified in the table above, the Company incurred internal and external costs of $5.3 million in the fourth quarter of 2010 that were directly associated with the fulfillment of its remaining contractual obligations under these terminated arrangements, which costs have been recognized as restructuring costs.

Contract Termination, Facility Closure and Other Costs

Facility closure costs incurred in the year ended December 31, 2012 included an incremental $10.2 million charge for the remaining operating lease obligations related to the Company’s vacated Mississauga, Ontario corporate office facility.

Facility closure costs incurred in the year ended December 31, 2011 included a $9.8 million charge for the remaining operating lease obligations (net of estimated sublease rentals that could be reasonably obtained) related to the Company’s vacated Mississauga, Ontario corporate office facility and a charge of $1.4 million related to a lease termination payment on the Company’s Aliso Viejo, California corporate office facility. The Company has transitioned a number of its corporate office functions to Bridgewater, New Jersey. As a result, a portion of the previously vacated space in the Bridgewater facility have been reoccupied, resulting in a $2.0 million reversal of a previously recognized restructuring accrual related to that space.

In addition to costs associated with the Company’s Medicis acquisition-related and Merger-related initiatives shown in the tables above, the Company incurred an additional $167.0 million of other restructuring, integration-related and other costs in the year ended December 31, 2012, including (i) $73.5 million of integration consulting, duplicate labor, transition service, and other, (ii) $57.6 million of severance costs, (iii) $17.6 million of facility closure costs and (iv) $18.3 million of other costs, including non-personnel manufacturing integration costs. The Company also made payments of $147.5 million during the year ended December 31, 2012. In the year ended December 31, 2011, the Company incurred $50.9 million of integration-related costs, of which $37.5 million had been paid as of December 31, 2011. The costs in 2012 and 2011 were primarily related to the acquisitions of Medicis, Dermik, iNova, Sanitas, OraPharma, Ortho Dermatologics, Afexa, PharmaSwiss, and a U.S. restructuring in 2012 focused primarily on a reduction in the prescription dermatology field force, the global consolidation of the Company’s manufacturing facilities, and systems integration initiatives.