BUSINESS COMBINATIONS

6 Months Ended

Jun. 30, 2011

BUSINESS COMBINATIONS

BUSINESS COMBINATIONS

3.     BUSINESS COMBINATIONS

• Biovail Merger With Valeant

  Description of the Transaction

  On September 28, 2010, a wholly-owned subsidiary of Biovail acquired all of the outstanding equity of Valeant in a share transaction, in which each share of Valeant common stock was cancelled and converted into the right to receive 1.7809 Biovail common shares. The fair value of the consideration transferred as of the Merger Date to effect the acquisition of Valeant amounted to $3.9 billion in the aggregate. As a result of the Merger, Valeant became a wholly-owned subsidiary of the Company.

  Basis of Presentation

  The transaction has been accounted for as a business combination under the acquisition method of accounting, which requires, among other things, the share consideration transferred be measured at the acquisition date based on the then-current market price and that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Acquisition-related transaction costs and certain acquisition-related restructuring charges are not included as a component of the acquisition accounting, but are accounted for as expenses in the periods in which the costs are incurred.

  Assets Acquired and Liabilities Assumed

  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the Merger Date, as well as measurement period adjustments to the amounts originally recorded in 2010. The measurement period adjustments did not have a material impact on the Company's previously reported results of operations or financial position in any period subsequent to the Merger Date and, therefore, the Company has not retrospectively adjusted its consolidated financial statements.

	Amounts Recognized as of Merger Date (as previously reported)(a)			Measurement Period Adjustments(b)			Amounts Recognized as of June 30, 2011 (as adjusted)
Cash and cash equivalents	$	348,637		$	—		$	348,637
Accounts receivable		194,930			—			194,930
Inventories		208,874			—			208,874
Other current assets		30,869			—			30,869
Property, plant and equipment		184,757			—			184,757
Identifiable intangible assets, excluding acquired IPR&D(c)		3,844,310			(224,939	)		3,619,371
Acquired IPR&D(d)		1,404,956			(4,195	)		1,400,761
Other non-current assets		6,108			—			6,108
Current liabilities		(385,574	)		874			(384,700	)
Long-term debt, including current portion		(2,913,614	)		—			(2,913,614	)
Deferred income taxes, net		(1,467,791	)		157,816			(1,309,975	)
Other non-current liabilities		(149,307	)		(46,022	)		(195,329	)
Total indentifiable net assets		1,307,155			(116,466	)		1,190,689
Equity component of convertible debt		(225,971	)		—			(225,971	)
Call option agreements		(28,000	)		—			(28,000	)
Goodwill		2,878,856			116,466			2,995,322
Total fair value of consideration transferred	$	3,932,040		$	—		$	3,932,040

(a)

As previously reported in the 2010 Form 10-K.

(b)

The measurement period adjustments primarily reflect: (i) changes in the estimated fair values of certain identifiable intangible assets to better reflect the competitive environment, market potential and economic lives of certain products; and (ii) the tax impact of pre-tax measurement period adjustments and resolution of certain tax aspects of the transaction. The measurement period adjustments were made to reflect market participant assumptions about facts and circumstances existing as of the Merger Date, and did not result from intervening events subsequent to the Merger Date.

(c)

The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:

	Weighted- Average Useful Lives (Years)		Amounts Recognized as of Merger Date (as previously reported)		Measurement Period Adjustments			Amounts Recognized as of June 30, 2011 (as adjusted)
Product brands		16	$	3,114,689	$	(190,779	)	$	2,923,910
Corporate brands		20		168,602		98			168,700
Product rights		9		360,970		(52,949	)		308,021
Out-licensed technology and other		7		200,049		18,691			218,740
Total identifiable intangible assets acquired		15	$	3,844,310	$	(224,939	)	$	3,619,371

(d)

The following table summarizes the amounts assigned to acquired IPR&D assets:

	Amounts Recognized as of Merger Date (as previously reported)		Measurement Period Adjustments			Amounts Recognized as of June 30, 2011 (as adjusted)
Ezogabine/retigabine(1)	$	891,461	$	—		$	891,461
Dermatology products		431,323		(3,100	)		428,223
Other		82,172		(1,095	)		81,077
Total IPR&D assets acquired	$	1,404,956	$	(4,195	)	$	1,400,761

(1)

Refer to note 5 — Collaboration Agreement.

• PharmaSwiss

  Description of the Transaction

  On March 10, 2011, the Company acquired all of the issued and outstanding stock of PharmaSwiss S.A. ("PharmaSwiss"), a privately-owned branded generics and over-the-counter ("OTC") pharmaceutical company based in Zug, Switzerland. The total consideration transferred to effect the acquisition of PharmaSwiss comprised cash paid of $491.2 million (€353.1 million) and the rights to contingent payments of up to $41.7 million (€30.0 million) if certain net sales milestones of PharmaSwiss are achieved for the 2011 calendar year. The fair value of the contingent payments was determined to be $27.5 million as of the acquisition date.

  In connection with the transaction, in February 2011, the Company entered into foreign currency forward-exchange contracts to buy €130.0 million, which were settled on March 9, 2011. The Company recorded a $5.1 million gain on the settlement of these contracts, which was partially offset by a foreign exchange loss of $2.4 million recognized on the remaining €220.0 million bought to finance the transaction. The net foreign exchange gain of $2.7 million was recognized in earnings in the three-month period ended March 31, 2011.

  PharmaSwiss is an existing partner to several large pharmaceutical and biotech companies offering regional expertise in such functions as regulatory, compliance, sales, marketing and distribution, in addition to developing its own product portfolio. Through its business operations, PharmaSwiss offers a broad product portfolio in seven therapeutic areas and operations in 19 countries throughout Central and Eastern Europe, including Serbia, Hungary, the Czech Republic and Poland, as well as in Greece and Israel.

  Assets Acquired and Liabilities Assumed

  The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:

  •

  amounts and useful lives for identifiable intangible assets and property, plant and equipment, pending the finalization of valuation efforts;

  •

  amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction, and the filing of PharmaSwiss's pre-acquisition tax returns; and

  •

  amount of goodwill pending the completion of the allocation of the consideration transferred to the assets acquired and liabilities assumed.

  The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. The Company expects to finalize these amounts no later than one year from the acquisition date.

	Amounts Recognized as of Acquisition Date (as previously reported)(a)			Measurement Period Adjustments(b)			Amounts Recognized as of June 30, 2011 (as adjusted)
Cash and cash equivalents	$	43,940		$	—		$	43,940
Accounts receivable(c)		63,509			(1,880	)		61,629
Inventories(d)		72,144			(1,410	)		70,734
Other current assets		14,429			—			14,429
Property, plant and equipment		9,737			—			9,737
Identifiable intangible assets(e)		202,071			7,169			209,240
Other non-current assets		3,122			—			3,122
Current liabilities		(46,866	)		—			(46,866	)
Deferred income taxes, net		(18,176	)		(518	)		(18,694	)
Other non-current liabilities		(720	)		—			(720	)
Total indentifiable net assets		343,190			3,361			346,551
Goodwill(f)		171,105			1,052			172,157
Total fair value of consideration transferred	$	514,295		$	4,413		$	518,708

(a)

As previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.

(b)

The measurement period adjustments primarily reflect: (i) an increase in the total fair value of consideration transferred pursuant to a working capital adjustment provision of the purchase agreement; (ii) changes in the estimated fair value of certain intangible assets; and (iii) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company's previously reported consolidated financial statements for the quarter ended March 31, 2011 and, therefore, the Company has not retrospectively adjusted those financial statements.

(c)

The fair value of trade accounts receivable acquired was $61.6 million, with the gross contractual amount being $66.8 million, of which the Company expects that $5.2 million will be uncollectible.

(d)

Includes $18.2 million to record PharmaSwiss's inventory at its estimated fair value.

(e)

The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:

	Weighted- Average Useful Lives (Years)		Amounts Recognized as of Acquisition Date (as previously reported)		Measurement Period Adjustments		Amounts Recognized as of June 30, 2011 (as adjusted)
Partner relationships(1)		7	$	130,183	$	—	$	130,183
Product brands		9		71,888		7,169		79,057
Total identifiable intangible assets acquired		7	$	202,071	$	7,169	$	209,240

(1)

The partner relationships intangible asset represents the value of existing arrangements with various pharmaceutical and biotech companies, for whom PharmaSwiss provides regulatory, compliance, sales, marketing and distribution functions.

(f)

Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the provisional values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:

•

cost savings, operating synergies and other benefits expected to result from combining the operations of PharmaSwiss with those of the Company;

•

the value of the going-concern element of PharmaSwiss's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and

•

intangible assets that do not qualify for separate recognition (for instance, PharmaSwiss's assembled workforce).

• The provisional amount of goodwill has been allocated to the Company's Branded Generics — Europe business segment as indicated in note 10.

• Acquisition-Related Costs

  As of June 30, 2011, the Company had incurred $1.4 million of transaction costs directly related to the PharmaSwiss acquisition, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.

  Revenue and Earnings of PharmaSwiss

  The revenues of PharmaSwiss for the period from the acquisition date to June 30, 2011 were $81.6 million and earnings were $10.8 million, excluding the effects of the acquisition accounting adjustments.

  Elidel®/Xerese™

  On June 29, 2011, the Company entered into a license agreement with Meda Pharma SARL ("Meda") to acquire the exclusive rights to commercialize both Elidel® Cream and Xerese™ Cream in the U.S., Canada and Mexico. In addition, the Company and Meda have the right to undertake development work in respect of Elidel® and Xerese™ products. The Company made an upfront payment to Meda of $76.0 million, and the Company will pay a series of potential milestones of up to $16.0 million and guaranteed royalties totaling $120.0 million in the aggregate through 2011 and 2012. Thereafter, the Company will pay a double-digit royalty to Meda on net sales of Elidel®, Xerese™ and Zovirax®, including additional minimum royalties of $120.0 million in the aggregate during 2013-2015. The Company acquired the U.S. and Canadian rights to non-ophthalmic topical formulations of Zovirax® in the first quarter of 2011 (as described in note 4).

  The Elidel®/Xerese™ transaction has been accounted for as a business combination under the acquisition method of accounting. The fair value of the upfront and contingent consideration, inclusive of royalty payments, was determined to be $437.7 million as of the acquisition date. The total fair value of the consideration transferred has been provisionally assigned (pending the finalization of a definitive valuation) to product brands intangible assets ($406.4 million), acquired IPR&D assets ($33.5 million) and a net deferred income tax liability ($(2.2) million). The product brands intangible assets have an estimated weighted-average useful life of approximately eight years. The acquired IPR&D assets relate to the development of a Xerese® life-cycle product. As of June 30, 2011, the Company had incurred $0.6 million of transaction costs directly related to the license agreement, which have been expensed as acquisition-related costs. In the period from the acquisition date to June 30, 2011, the revenue and earnings from the sale of Elidel® and Xerese™ products under the license agreement were not material to the Company's consolidated results of operations.

  Pro Forma Impact of Material Business Combinations

  The following table presents unaudited pro forma consolidated results of operations for the three-month and six-month periods ended June 30, 2011 and 2010, as if the PharmaSwiss acquisition had occurred as of January 1, 2010 and the Merger had occurred as of January 1, 2009. The unaudited pro forma information does not include the license agreement to acquire the rights to Elidel® and Xerese™, as the impact is immaterial to these pro forma results and it was impracticable to obtain the necessary historical information as discrete financial statements for these product lines were not prepared.

	Three Months Ended June 30					Six Months Ended June 30
	2011		2010			2011		2010
Revenues	$	609,387	$	546,421		$	1,217,485	$	1,051,535
Net income (loss)		71,410		(6,464	)		98,757		(49,490	)
Basic earnings (loss) per share	$	0.24	$	(0.02	)	$	0.33	$	(0.17	)
Diluted earnings (loss) per share	$	0.22	$	(0.02	)	$	0.30	$	(0.17	)

• The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company, Valeant and PharmaSwiss. Except to the extent realized in the three-month and six-month periods ended June 30, 2011, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of the Merger or PharmaSwiss acquisition, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the three-month and six-month periods ended June 30, 2011, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with Valeant and PharmaSwiss.

  The unaudited pro forma information is not necessarily indicative of what the Company's consolidated results of operations actually would have been had the PharmaSwiss acquisition and the Merger been completed on January 1, 2010 and January 1, 2009, respectively. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily adjustments consistent with the unaudited pro forma information related to the Merger as reported in the 2010 Form 10-K and the following unaudited pro forma adjustments related to PharmaSwiss:

  •

  elimination of PharmaSwiss's historical intangible asset amortization expense;

  •

  additional amortization expense related to the provisional fair value of identifiable intangible assets acquired; and

  •

  the exclusion from pro forma earnings in the three-month and six-month periods ended June 30, 2011 of the acquisition accounting adjustments on PharmaSwiss's inventory that was sold subsequent to the acquisition date of $15.3 million and $18.8 million, respectively, and the exclusion of acquisition-related costs of $1.4 million in the six-month period ended June 30, 2011, and the inclusion of those amounts in pro forma earnings for the corresponding periods of 2010.

  In addition, all of the above adjustments were adjusted for the applicable tax impact.

  Other

  In the six-month period ended June 30, 2011, the Company acquired Ganehill Pty Limited ("Ganehill"), an Australian company engaged in the marketing and distribution of skin care products under the Invisible Zinc™ brand. The fair value of the total cash and contingent consideration transferred to effect the acquisition of Ganehill was $19.4 million, which was allocated primarily to product brands intangible assets ($12.7 million) and goodwill ($5.4 million). In addition, the Company acquired certain other businesses, including the Canadian rights to ACZONE®, for $6.4 million in the aggregate, which was recorded to identifiable intangible assets. The Company does not consider these acquisitions to be material, individually or in the aggregate, to its consolidated results of operations and is therefore not presenting actual or pro forma financial information.