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 160,817 shares were available for future grants as of December 31, 2013. 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:



	2013		2012		2011
Stock options⁽¹⁾	$	17,317	$	21,739	$	45,465
RSUs	28,161		44,497		48,558
Share-based compensation expense	$	45,478	$	66,236	$	94,023

Cost of goods sold⁽¹⁾	$	—	$	—	$	1,330
Research and development expenses⁽¹⁾	—		764		1,329
Selling, general and administrative expenses⁽¹⁾⁽²⁾	45,478		65,472		90,379
Restructuring, integration and other costs (as described in note 6)	—		—		985
Share-based compensation expense	$	45,478	$	66,236	$	94,023

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(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)	During 2013 and 2012, the Company recorded an incremental charge of $4.3 million and $4.8 million, respectively, 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.

In the second quarter of 2013, certain equity awards held by current non-management directors were modified from units settled in common shares to units settled in cash, which changed the classification from equity awards to liability awards. The resulting reduction in share-based compensation expense of $5.8 million was more than offset by incremental compensation expense of $21.3 million recognized in the second quarter of 2013, which represents the fair value of the awards settled in cash. As the modified awards were fully vested and paid out, no additional compensation expense will be recognized in subsequent periods.

The decrease in share-based compensation expense for the year ended December 31, 2013 was also driven by the impact of forfeitures and the accelerated vesting that was triggered in the prior year related to certain performance-based RSU awards.

The Company recognized $24.2 million, $12.5 million, and $26.5 million of tax benefits from stock options exercised in the year ended December 31, 2013, 2012 and 2011 respectively.

Stock Options

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. 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, 2013, 2012 and 2011 were estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	2013		2012		2011
Expected stock option life (years)⁽¹⁾	4.0		4.0		4.0
Expected volatility⁽²⁾	40.1	%	44.9	%	42.8	%
Risk-free interest rate⁽³⁾	1.0	%	0.5	%	1.4	%
Expected dividend yield⁽⁴⁾	—	%	—	%	—	%

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(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, 2013:



	Options (000s)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding, January 1, 2013	8,506		$	18.97
Granted	1,582		93.60
Exercised	(478	)	20.76
Expired or forfeited	(983	)	39.74
Outstanding, December 31, 2013	8,627		$	30.19	5.5	$	754,356
Vested and exercisable, December 31, 2013	5,174		$	11.68	4.5	$	547,033

The weighted-average fair values of all stock options granted in 2013, 2012 and 2011 were $30.47, $19.57 and $13.65, respectively. The total intrinsic values of stock options exercised in 2013, 2012 and 2011 were $30.4 million, $25.1 million and $31.7 million, respectively. Proceeds received on the exercise of stock options in 2013, 2012 and 2011 were $10.0 million, $23.0 million and $41.7 million, respectively.

As of December 31, 2013, the total remaining unrecognized compensation expense related to non-vested stock options amounted to $61.8 million, which will be amortized over the weighted-average remaining requisite service period of approximately 3.2 years. The total fair value of stock options vested in 2013 was $26.0 million (2012 — $36.1 million; 2011 — $35.4 million).

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2013:



Range of Exercise Prices	Outstanding (000s)	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Exercisable (000s)	Weighted- Average Exercise Price
$4.20 - $6.30	3,222	4.1	$	4.29	3,222	$	4.29
$6.39 - $9.59	139	3.2	6.61		139	6.61
$10.54 - $15.81	1,959	5.2	12.97		1,032	12.99
$16.71 - $25.07	12	6.6	19.71		2	20.42
$25.42 - $38.13	442	1.9	25.42		310	25.42
$39.35 - $59.03	1,415	6.6	51.06		459	51.86
$59.15 - $88.73	384	7.5	69.35		10	59.15
$91.12 - $136.68	1,054	9.8	104.21		—	—
	8,627	5.5	$	30.19	5,174	$	11.68

RSUs

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 a 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, 2013:



	Time-Based RSUs (000s)		Weighted- Average Grant-Date Fair Value
Non-vested, January 1, 2013	1,310		$	33.43
Granted	129		84.01
Vested⁽¹⁾	(446	)	34.11
Forfeited	(109	)	44.40
Non-vested, December 31, 2013	884		$	39.11

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(1)	In the second quarter of 2013, 204,034 vested time-based RSUs held by current non-management directors were modified from units settled in common shares to units settled in cash, which changed the classification from equity awards to liability awards.

As of December 31, 2013, the total remaining unrecognized compensation expense related to non-vested time-based RSUs amounted to $13.0 million, which will be amortized over the weighted-average remaining requisite service period of approximately 1.4 years. The total fair value of time-based RSUs vested in 2013 was $15.2 million (2012 — $18.0 million; 2011 — $16.2 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, 2013, 2012 and 2011 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 during the years ended December 31, 2013, 2012 and 2011 were estimated with the following assumptions:



	2013	2012	2011
Contractual term (years)	2.8-4.3	2.9-4.3	3.0
Expected Company share volatility⁽¹⁾	36.1% - 44.4%	42.5% - 52.3%	34.6% - 60.8%
Risk-free interest rate⁽²⁾	0.5% - 1.3%	0.6% - 1.0%	1.0% - 1.9%

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(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, 2013:



	Performance- Based RSUs (000s)		Weighted- Average Grant-Date Fair Value
Non-vested, January 1, 2013	1,696		$	43.40
Granted	567		140.55
Vested	(884	)	22.85
Forfeited	(334	)	80.47
Non-vested, December 31, 2013	1,045		$	102.22

As of December 31, 2013, the total remaining unrecognized compensation expense related to the non-vested performance-based RSUs amounted to $76.8 million, which will be amortized over the weighted-average remaining requisite service period of approximately 2.7 years. A maximum of 2,832,187 common shares could be issued upon vesting of the performance-based RSUs outstanding as of December 31, 2013.

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 have been redeemed, entitling each departing director to a payment of the cash value of his DSUs.

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 were to 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 remaining 17,219 DSUs were redeemed for cash in February 2013.

The following table summarizes DSU activity during the year ended December 31, 2013:



	DSUs (000s)		Weighted- Average Grant-Date Fair Value
Outstanding, January 1, 2013	148		$	16.78
Granted	—		—
Settled⁽¹⁾	(145	)	16.08
Outstanding, December 31, 2013	3		$	50.56

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(1)	In the second quarter of 2013, 70,110 vested DSUs held by current non-management directors were modified from units settled in common shares to units settled in cash, which changed the classification from equity awards to liability awards.

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.