17. SHARE-BASED COMPENSATION

In May 2011, shareholders approved the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) which replaced the Company’s 2007 Equity Compensation Plan for future equity awards granted by the Company. The Company transferred the shares available under the Company’s 2007 Equity Compensation Plan to the Plan under which the Company is authorized to grant up to 6,846,310 shares of its common stock and approximately 4,142,666 shares were available for future grants as of December 31, 2012. The Company uses reserved and unissued common shares to satisfy its obligation under its share-based compensation plan.

The following table summarizes the components and classification of share-based compensation expense related to stock options and RSUs:

	2012		2011		2010
Stock options(1)	$	21,739	$	45,465	$	56,851
RSUs	44,497		48,558		41,182
Share-based compensation expense	$	66,236	$	94,023	$	98,033

Cost of goods sold(1)(2)	$	—	$	1,330	$	1,258
Research and development expenses(1)(2)	764		1,329		2,487
Selling, general and administrative expenses(1)(2)(3)	65,472		90,379		44,806
Restructuring, integration and other costs (as described in note 6)	—		985		49,482
Share-based compensation expense	$	66,236	$	94,023	$	98,033

(1) On March 9, 2011, the Company’s compensation committee of the board of directors approved an equitable adjustment to all stock options outstanding as of that date for employees and directors as of such date, in connection with the post-Merger special dividend of $1.00 per common share declared on November 4, 2010 and paid on December 22, 2010. As the Company’s stock option awards do not automatically adjust for dividend payments, this adjustment was treated as a modification of the terms and conditions of the outstanding options. The incremental fair value of the modified awards was determined to be $15.4 million, of which $9.2 million related to vested options, which was expensed as of March 9, 2011 as follows: cost of goods sold ($0.2 million), selling, general and administrative expenses ($8.8 million) and research and development expenses ($0.2 million). The remaining $6.2 million is being recognized over the remaining requisite service period of the unvested options.

(2) Includes the excess of the fair value of Biovail stock options and time-based RSUs over the fair value of the vested and partially vested Valeant stock options and time-based RSUs of $20.9 million (as described in note 3), which was recognized immediately as post-Merger compensation expense and allocated as follows: cost of goods sold ($0.4 million), research and development expenses ($0.4 million), and selling, general and administrative expenses ($20.1 million).

(3) During the third quarter of 2012, the Company recorded an incremental charge of $4.8 million to selling, general and administrative expenses as some of the Company’s performance-based RSU grants triggered a partial payout as a result of achieving certain share price appreciation conditions.

The Company recognized $12.5 million and $26.5 million of tax benefits from stock options exercised in the year ended December 31, 2012 and 2011, respectively. The Company did not recognize any tax benefits for the share-based compensation expense for the year ended December 31, 2010.

Treatment of Biovail Stock Options and RSUs Following the Merger

In accordance with the Merger agreement, each unvested stock option and time-based RSU award held by Biovail employees with employment agreements accelerated and became 100% vested upon involuntary termination following the Merger. As of the Merger Date, the Company calculated incremental compensation expense of $9.6 million to reflect an increase in the fair value of the stock options and time-based RSUs held by Biovail employees with employment agreements due to the acceleration of the vesting condition. This amount was recognized over the requisite service period of the terminated employees, which ended prior to December 31, 2010.

Unvested stock option awards held by Biovail employees without employment agreements are forfeited if the employee is involuntarily terminated following the Merger. As of the Merger Date, the Company reversed $0.5 million of previously recognized compensation expense related to unvested stock options held by terminated employees without employment agreements. Unvested time-based RSU awards held by such Biovail employees vest on a pro-rata basis if the employee is involuntarily terminated following the Merger. Accordingly, no additional compensation expense related to the pro-rata vesting of time-based RSUs was required to be recognized by the Company post-Merger.

Prior to the completion of the Merger, the board of directors of Biovail resolved that each performance-based RSU award held by Biovail executive officers and selected employees would immediately accelerate and become 100% vested on the Merger Date. The number of such performance-based RSUs to be settled would be determined based on Biovail’s performance through the Merger Date. Based on such performance, each performance-based RSU vested upon the closing of the Merger at 200% of target. As of the Merger Date, the Company recorded incremental compensation expense of $20.3 million to reflect an increase in the fair value of the performance-based RSUs due to the acceleration of the vesting condition. The common shares of the Company underlying the performance-based RSUs were delivered, net of income tax withholdings, to the applicable employees within 60 days of the Merger Date.

Treatment of Valeant Continuing Stock Options and RSUs Following the Merger

As of the Merger Date, the Company recorded compensation expense of $20.1 million to reflect the acceleration of the vesting term related to stock options and RSUs held by former executive officers of Valeant.

Upon the closing of the Merger, each outstanding Valeant stock option and RSU that did not provide for vesting was converted into an option or RSU to acquire or receive common shares of the Company, after taking account of the pre-Merger special dividend and the exchange ratio for the Merger, on the same terms and conditions as were applicable to the stock option or RSU prior to the Merger. Valeant stock option grants generally vested ratably over a four-year period from the date of grant and had a term not exceeding 10 years. Valeant RSU grants vested based on the satisfaction of service conditions or on both service conditions and either the achievement of certain stock price appreciation conditions or the achievement of certain strategic initiatives.

In total, 12,464,417 Biovail stock options were issued to replace Valeant stock options, and respectively 2,217,003 and 1,211,833 time-based RSUs and performance-based RSUs of Biovail were issued to replace equivalent awards of Valeant. As described in note 3, the fair values of the vested portions of the Valeant stock options and Valeant RSUs were recognized as components of the purchase price or immediately as compensation expense as of the Merger Date. The following table summarizes, as of the Merger Date, the compensation cost and weighted-average service periods related to the unvested portions of the Valeant stock options and RSUs:

	Stock Options		Time-Based RSUs		Performance- Based RSUs
Number of awards issued (000s)	12,464		2,217		1,212
Total compensation cost related to unvested awards to be recognized	$	66,520	$	30,558	$	24,998
Weighted-average service period over which compensation cost is expected to be recognized (months)	18		25		34

Stock Options

With the exception of Biovail stock options issued to replace Valeant stock options in connection with the Merger, all stock options granted by the Company under its 2007 Equity Compensation Plan expire on the fifth anniversary of the grant date. The exercise price of any stock option granted under its 2007 Equity Compensation Plan is not to be less than the volume-weighted average trading price of the Company’s common shares for the five trading days immediately preceding the date of grant (or, for participants subject to U.S. taxation, on the single trading day immediately preceding the date of grant, whichever is greater). All stock options granted by the Company under the 2011 Plan expire on the tenth anniversary of the grant date. The exercise price of any stock option granted under the 2011 Plan will not be less than the closing price per common share on the national securities exchange on which the common shares are principally traded (currently, the NYSE) for the last preceding date on which there was a sale of such common shares on such exchange. Prior to the Merger, stock option grants typically vested ratably on the first, second and third anniversaries of the stock option grant. Following the Merger, stock options granted will vest 25% on each of the first, second, third and fourth anniversaries from the date of grant.

The fair values of all stock options granted during the years ended December 31, 2012, 2011 and 2010 were estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2012		2011		2010
Expected stock option life (years)(1)	4.0		4.0		4.0
Expected volatility(2)	44.9	%	42.8	%	37.1	%
Risk-free interest rate(3)	0.5	%	1.4	%	1.5	%
Expected dividend yield(4)	—		—		1.5	%

(1) Determined based on historical exercise and forfeiture patterns.

(2) Effective January 1, 2012, expected volatility was determined based on implied volatility in the market traded options of the Company’s common stock. Prior to 2012, expected volatility was determined based on historical volatility of the Company’s common shares over the expected life of the stock option.

(3) Determined based on the rate at the time of grant for zero-coupon U.S. or Canadian government bonds with maturity dates equal to the expected life of the stock option.

(4) Determined based on the stock option’s exercise price and expected annual dividend rate at the time of grant.

The Black-Scholes option-pricing model used by the Company to calculate stock option values was developed to estimate the fair value of freely tradeable, fully transferable stock options without vesting restrictions, which significantly differ from the Company’s stock option awards. This model also requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values.

The following table summarizes stock option activity during the year ended December 31, 2012:

	Options (000s)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding, January 1, 2012	10,480		$	15.10
Granted	750		55.16
Exercised	(1,802	)	12.78
Expired or forfeited	(922	)	16.62
Outstanding, December 31, 2012	8,506		$	18.97	6.0	$	347,068
Vested and exercisable, December 31, 2012	4,491		$	9.23	5.3	$	226,960

The weighted-average fair values of all stock options granted in 2012, 2011 and 2010 were $19.57, $13.65 and $5.46, respectively. The total intrinsic values of stock options exercised in 2012, 2011 and 2010 were $25.1 million, $31.7 million and $28.5 million, respectively. Proceeds received on the exercise of stock options in 2012, 2011 and 2010 were $23.0 million, $41.7 million and $58.4 million, respectively.

As of December 31, 2012, the total remaining unrecognized compensation expense related to non-vested stock options amounted to $38.1 million, which will be amortized over the weighted-average remaining requisite service period of approximately 2.5 years. The total fair value of stock options vested in 2012 was $36.1 million (2011 — $35.4 million; 2010 — $39.1 million).

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2012:

Range of Exercise Prices	Outstanding (000s)	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Exercisable (000s)	Weighted- Average Exercise Price
$3.46 - $5.19	3,097	5.0	$	4.22	3,097	$	4.22
$5.33 - $8.00	367	4.8	6.39		270	5.97
$8.03 - $12.05	40	3.1	9.47		35	9.52
$12.87 - $19.31	2,382	7.0	13.04		586	13.04
$20.42 - $30.63	760	3.1	25.17		269	25.39
$39.95 - $54.76	1,860	7.7	51.26		234	51.14
	8,506	6.0	$	18.97	4,491	$	9.23

RSUs

With the exception of Biovail RSUs issued to replace Valeant RSUs in connection with the Merger, RSUs vest on the third anniversary date from the date of grant, unless provided otherwise in the applicable unit agreement, subject to the attainment of any applicable performance goals specified by the board of directors. If the vesting of the RSUs is conditional upon the attainment of performance goals, any RSUs that do not vest as a result of a determination that a holder of RSUs has failed to attain the prescribed performance goals will be forfeited immediately upon such determination. RSUs are credited with dividend equivalents, in the form of additional RSUs, when dividends are paid on the Company’s common shares. Such additional RSUs will have the same vesting dates and will vest under the same terms as the RSUs in respect of which such additional RSUs are credited.

To the extent provided for in an RSU agreement, the Company may, in lieu of all or a portion of the common shares which would otherwise be provided to a holder, elect to pay a cash amount equivalent to the market price of the Company’s common shares on the vesting date for each vested RSU. The amount of cash payment will be determined based on the average market price of the Company’s common shares on the vesting date. The Company’s current intent is to settle vested RSUs through the issuance of common shares.

Time-Based RSUs

Each vested RSU without performance goals (“time-based RSU”) represents the right of a holder to receive one of the Company’s common shares. The fair value of each RSU granted is estimated based on the trading price of the Company’s common shares on the date of grant.

The following table summarizes non-vested time-based RSU activity during the year ended December 31, 2012:

	Time-Based RSUs (000s)		Weighted- Average Grant-Date Fair Value
Non-vested, January 1, 2012	1,829		$	29.47
Granted	222		50.44
Vested	(646	)	28.00
Forfeited	(95	)	33.84
Non-vested, December 31, 2012	1,310		$	33.43

As of December 31, 2012, the total remaining unrecognized compensation expense related to non-vested time-based RSUs amounted to $15.6 million, which will be amortized over the weighted-average remaining requisite service period of approximately 1.7 years. The total fair value of time-based RSUs vested in 2012 was $18.0 million (2011 — $16.2 million; 2010 — $11.6 million).

Performance-Based RSUs

Each vested RSU with performance goals (“performance-based RSU”) represents the right of a holder to receive a number of the Company’s common shares up to a specified maximum. For performance-based RSUs issued prior to the Merger, performance was measured based on shareholder return relative to an industry comparator group. For performance-based RSUs issued subsequent to the Merger, performance is determined based on the achievement of certain share price appreciation conditions. If the Company’s performance is below a specified performance level, no common shares will be paid.

The fair value of each performance-based RSU granted during the years ended December 31, 2012, 2011 and 2010 was estimated using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that the performance condition will be achieved. The fair values of performance-based RSUs granted prior to the Merger were estimated with the following weighted-average assumptions:

	2010
Contractual term (years)	5.0
Expected Company share volatility(1)	43.2	%
Average comparator group share price volatility(1)	34.7	%
Risk-free interest rate(2)	2.4	%

(1) Determined based on historical volatility over the contractual term of the performance-based RSU.

(2) Determined based on the rate at the time of grant for zero-coupon U.S. government bonds with maturity dates equal to the contractual term of the performance-based RSUs.

The fair values of performance-based RSUs granted in the year ended December 31, 2012, 2011 and in the post-Merger period ended December 31, 2010 were estimated with the following assumptions:

	2012	2011	2010
Contractual term (years)	2.9 - 4.3	3.0	4.1-4.6
Expected Company share volatility(1)	42.5% - 52.3%	34.6% - 60.8%	32.4% - 33.2%
Risk-free interest rate(2)	0.6% - 1.0%	1.0% - 1.9%	1.2% - 2.3%

(1) Determined based on historical volatility over the contractual term of the performance-based RSU.

(2) Determined based on the rate at the time of grant for zero-coupon U.S. government bonds with maturity dates equal to the contractual term of the performance-based RSUs.

The following table summarizes non-vested performance-based RSU activity during the year ended December 31, 2012:

	Performance- Based RSUs (000s)		Weighted- Average Grant-Date Fair Value
Non-vested, January 1, 2012	2,060		$	31.24
Granted	334		81.55
Vested	(603	)	47.91
Forfeited	(95	)	27.21
Non-vested, December 31, 2012	1,696		$	43.40

As of December 31, 2012, the total remaining unrecognized compensation expense related to the non-vested performance-based RSUs amounted to $40.3 million, which will be amortized over the weighted-average remaining requisite service period of approximately 2.3 years. A maximum of 3,602,281 common shares could be issued upon vesting of the performance-based RSUs outstanding as of December 31, 2012.

DSUs

Prior to May 2011, non-management directors received non-cash compensation in the form of DSUs, which entitled non-management directors to receive a lump-sum cash payment in respect of their DSUs either following the date upon which they cease to be a director of the Company or, with respect to DSUs granted after the Merger Date as part of the annual retainer, one year after such date. The amount of compensation deferred was converted into DSUs based on the volume-weighted average trading price of the Company’s common shares for the five trading days immediately preceding the date of grant (for directors subject to U.S. taxation, the calculation may be based on the greater of the five-day or one-day volume-weighted trading price). The Company recognizes compensation expense throughout the deferral period to the extent that the trading price of its common shares increases, and reduces compensation expense throughout the deferral period to the extent that the trading price of its common shares decreases.

Following the Merger, the DSUs previously granted to non-management directors who did not remain on the board of directors of the Company will be redeemed, entitling each departing director to a payment of the cash value of his DSUs. Prior to December 31, 2010, cash payments of $2.3 million were made to settle 84,888 of such DSUs, with another 218,123 of such DSUs valued at $6.2 million remaining to be settled as of December 31, 2010.

Effective May 16, 2011 (the “Modification Date”), the board of directors of the Company modified the existing DSUs held by current directors from units settled in cash to units settled in common shares, which changed these DSUs from a liability award to an equity award. Accordingly, as of the Modification Date, the Company reclassified the $9.3 million aggregate fair value of the 182,053 DSUs held by current directors from accrued liabilities to additional paid-in capital. In the period from January 1, 2011 to the Modification Date, the Company recorded $3.6 million of compensation expense related to the change in the fair value of the DSUs held by current directors. As the modified DSUs were fully vested, no additional compensation expense will be recognized after the Modification Date. The DSUs held by former directors of Biovail were not affected by the modification and will continue to be cash settled. During the year ended December 31, 2011, the Company recognized $0.8 million of compensation expense in restructuring and integration costs related to the change in the fair value of DSUs still held by former directors of Biovail. As of December 31, 2012, there were 17,219 DSUs still held by former directors of Biovail. The Company recorded compensation expense related to DSUs of $8.5 million in 2010. The remaining 17,219 DSUs were redeemed for cash in February 2013.

The following table summarizes DSU activity during the year ended December 31, 2012:

	DSUs (000s)	Weighted- Average Grant-Date Fair Value
Outstanding, January 1, 2012	148	$	16.78
Granted	—	—
Settled for cash	—	—
Outstanding, December 31, 2012	148	$	16.78

Effective May 16, 2011, in lieu of grants of DSUs, unless the Company determines otherwise, non-management directors will receive their annual equity compensation retainer in the form of stock units, which will vest immediately upon grant and will be settled in common shares of the Company on the first anniversary of the date upon which the director ceases to be a director of the Company. In addition, a non-management director may elect to receive some or all of his or her cash retainers in additional units, which will be vested upon grant and will be settled in common shares of the Company when the director ceases to be a director of the Company (unless a different payment is elected in accordance with the procedures established by the Company).

Effective May 30, 2012, the Company changed the vesting and settlement features of stock units granted to non-management directors, such that, for all new stock units granted to non-management directors after such date, such stock units will vest on the one year anniversary of the date of grant and will be settled in common shares of the Company upon vesting. In addition, for stock units awarded to non-management directors prior to May 30, 2012 in connection with such directors’ annual equity compensation, the settlement date was changed and such stock units will now be settled in common shares of the Company on May 30, 2013.