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RESTRUCTURING AND INTEGRATION

12 Months Ended

Dec. 31, 2011

6. RESTRUCTURING AND INTEGRATION

Merger-Related Cost-Rationalization and Integration Initiatives

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

•

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, 2011:

	Employee Termination Costs

	Employee Termination Costs									Contract Termination, Facility Closure and Other Costs
	Severance and Related Benefits			Share-Based Compensation			IPR&D Termination Costs⁽¹⁾			Contract Termination, Facility 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

(1)

As described below under "— Research and Development Pipeline Rationalization".

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

Employee Termination Costs

The Company recognized employee termination costs of $14.5 million and $58.7 million in the years ended 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, 2011, $72.1 million of the termination costs had been paid with the balance payable in the first quarter of 2012.

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 (as described in note 3).

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, 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 our vacated Mississauga, Ontario corporate office facility and a charge of $1.4 million related to a lease termination payment on our 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 Merger-related initiatives, the Company incurred $50.9 million of integration-related costs in the year ended December 31, 2011, of which $37.5 million had been paid as of December 31, 2011. These costs were primarily related to the integration of operations following the acquisitions of Afexa, PharmaSwiss, Dermik, Ortho Dermatologics, Sanitas and iNova, the consolidation of the Company manufacturing facilities in Brazil, and worldwide systems integration initiatives.

Pre-Merger Cost-Rationalization Initiatives

In May 2008, the Company initiated restructuring measures that were intended to rationalize its manufacturing operations, pharmaceutical sciences operations, and general and administrative expenses. The following costs were incurred in connection with these initiatives during the three years ended December 31, 2011:

	Asset Impairments									Employee Termination Costs						Contract Termination, Facility Closure and Other Costs

	Manufacturing			Pharmaceutical Sciences			Corporate			Manufacturing			Pharmaceutical Sciences			Contract Termination, Facility Closure and Other Costs			Total
Balance, January 1, 2009	$	—		$	—		$	—		$	3,309		$	—		$	3,346		$	6,655
Costs incurred and charged to expense		7,591			2,784			10,968			4,942			1,441			2,307			30,033
Cash payments		—			—			—			(2,041	)		(1,278	)		(1,321	)		(4,640	)
Non-cash adjustments		(7,591	)		(2,784	)		(10,968	)		—			71			—			(21,272	)

Balance, December 31, 2009		—			—			—			6,210			234			4,332			10,776

Costs incurred and charged to expense		400			—			—			1,330			1,924			2,365			6,019
Cash payments		—			—			—			(7,540	)		(2,057	)		(3,017	)		(12,614	)
Non-cash adjustments		(400	)		—			—			—			(101	)		—			(501	)

Balance, December 31, 2010		—			—			—			—			—			3,680			3,680

Costs incurred and charged to expense		—			—			—			—			—			(356	)		(356	)
Cash payments		—			—			—			—			—			(1,078	)		(1,078	)
Non-cash adjustments		—			—			—			—			—			(2,246	)		(2,246	)

Balance, December 31, 2011	$	—		$	—		$	—		$	—		$	—		$	—		$	—

Manufacturing Operations

On January 15, 2010, the Company completed the sale of its Dorado, Puerto Rico manufacturing facility for net cash proceeds of $8.5 million.

As of September 30, 2010, the Company completed the transfer of remaining manufacturing processes from its Carolina, Puerto Rico manufacturing facility to its plant in Steinbach, Manitoba. Following the end of production, the Company incurred internal and external costs of $1.3 million directly associated with the final shutdown of the Carolina facility, which costs have been recognized as restructuring costs in 2010. The Company also recorded an impairment charge of $0.4 million in 2010 to write off the remaining carrying value of the Carolina facility after unsuccessful efforts to locate a buyer for the facility.

The Company incurred employee termination costs of $9.6 million in total in 2010 for severance and related benefits payable to the approximately 240 employees terminated as a result of the closure of the Dorado and Carolina facilities. As these employees were required to provide service during the shutdown period in order to be eligible for termination benefits, the Company was recognizing the cost of those termination benefits ratably over the estimated future service period.

In 2009, the Company recorded impairment charges of $7.6 million to write down the carrying value of the property, plant and equipment located in Puerto Rico to its estimated fair value.

Pharmaceutical Sciences Operations

On July 23, 2010, the Company completed the sale of CRD to Lambda Therapeutic Research Inc. ("Lambda") for net cash proceeds of $6.4 million. The Company no longer considered CRD a strategic fit as a result of its pre-Merger transition from reformulation programs to the in-licensing, acquisition and development of specialty CNS products. CRD has not been treated as a discontinued operation for accounting purposes, on the basis that its operations were immaterial and incidental to the Company's core business.

The net assets of CRD at the date of disposal comprised net current assets and liabilities of $1.6 million and property, plant and equipment of $4.8 million. The Company recognized employee termination costs of $1.9 million for the approximately 70 CRD employees not offered employment by Lambda.

The consolidated statements of income (loss) for the years ended December 31, 2010 and 2009 included the following revenue and expenses of CRD, which, as described above, have not been segregated from continuing operations:

	2010			2009

Service and other revenues	$	5,642		$	12,027

Cost of services		7,211			13,849
Selling, general and administrative expenses		2,328			3,718

Total operating expenses		9,539			17,567

Operating loss		(3,897	)		(5,540	)
Foreign exchange gain (loss)		(102	)		93

Net loss	$	(3,999	)	$	(5,447	)

In 2009, the Company incurred employee termination costs of $1.4 million for severance and related benefits payable to the approximately 50 employees terminated as a result of the closure of its Mississauga, Ontario research and development facility and the consolidation of its previous Chantilly, Virginia research and development operations. In addition, the Company recorded an impairment charge of $0.5 million related to the write-down of the carrying value of the equipment and leasehold improvements located at the Mississauga facility to their estimated fair value. The Company also recognized $1.6 million of accelerated depreciation arising from the reduced useful life of the leasehold improvements located at the Chantilly facility, and incurred lease termination costs of $1.4 million as a result of vacating one of its premises in Chantilly in 2009.

In addition, in 2009, the Company completed the sale of its Dublin, Ireland research and development facility for net cash proceeds of $5.2 million, which resulted in a write-down of $9.9 million to the carrying value of this facility.

Corporate Headquarters

On November 4, 2009, the Company completed the sale and leaseback of its corporate headquarters in Mississauga, Ontario for net proceeds of $17.8 million. The Company recognized a loss on disposal of $11.0 million. In June 2011, the Company vacated this facility. Refer to above under "Merger-Related Cost-Rationalization and Integration Initiatives — Contract Termination, Facility Closure and Other Costs", for further discussion.

- Definition

The entire disclosure for restructuring and related activities. Description of restructuring activities such as exit and disposal activities, include facts and circumstances leading to the plan, the expected plan completion date, the major types of costs associated with the plan activities, total expected costs, the accrual balance at the end of the period, and the periods over which the remaining accrual will be settled.

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