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Valeant Pharmaceuticals International, Inc. 20-F 2007

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F/A
(Amendment No. 1)

o
Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934

OR

ý
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006

OR

o
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

OR

o
Shell Company Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

    Commission file number 001-14956

    BIOVAIL CORPORATION
    (Exact Name of Registrant as Specified in its Charter)

    Not Applicable
    (Translation of Registrant's Name into English)

    Canada
    (Jurisdiction of incorporation or organization)

    7150 Mississauga Road
    Mississauga, Ontario
    CANADA, L5N 8M5
    (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of Each Exchange on Which Registered

Common Shares, No Par Value

 

New York Stock Exchange
Toronto Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 160,444,070 common shares, no par value, as of December 31, 2006.

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     Yes    ý                  No    o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes    o                No    ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    ý                No    o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 20-F or any amendment to this Form 20-F. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer    ý   Accelerated filer    o   Non-accelerated filer    o

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17    o                 Item 18    ý

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    o                No    ý





TABLE OF CONTENTS

GENERAL INFORMATION

 
   
   
  Page
             
    PART I    
Item 1   Identity of Directors, Senior Management and Advisors   1
    A.   Directors and Senior Management   1
    B.   Advisers   1
    C.   Auditors   1
Item 2   Offer Statistics and Expected Timetable   1
    A.   Offer Statistics   1
    B.   Method and Expected Timetable   1
Item 3   Key Information   1
    A.   Selected Financial Data   1
    B.   Capitalization and Indebtedness   3
    C.   Reasons for the Offer and Use of Proceeds   3
    D.   Risk Factors   3
Item 4   Information on the Company   17
    A.   History and Development of the Company   17
    B.   Business Overview   18
    C.   Organizational Structure   44
    D.   Property, Plant and Equipment   44
Item 4A   Unresolved Staff Comments   46
Item 5   Operating and Financial Review and Prospects   46
Item 6   Directors, Senior Management and Employees   89
    A.   Directors and Senior Management   89
    B.   Compensation   95
    C.   Board Practices   117
    D.   Employees   120
    E.   Share Ownership   121
Item 7   Major Shareholders and Related Party Transactions   122
    A.   Major Shareholders   122
    B.   Related Party Transactions   122
    C.   Interests of Experts and Counsel   123
Item 8   Financial Information   123
    A.   Consolidated Statements and Other Financial Information   123
    B.   Significant Changes   123
Item 9   The Offer and Listing   130
    A.   Offer and Listing Details   130
    B.   Plan of Distribution   131
    C.   Markets   131
    D.   Selling Shareholders   131
    E.   Dilution   131
    F.   Expenses of the Issue   132
Item 10   Additional Information   132
             

i


    A.   Share Capital   132
    B.   Memorandum and Articles of Association   132
    C.   Material Contracts   133
    D.   Exchange Controls   133
    E.   Taxation   135
    F.   Dividends and Paying Agents   138
    G.   Statements by Experts   138
    H.   Documents on Display   138
    I.   Subsidiary Information   139
Item 11   Quantitative and Qualitative Disclosures About Market Risk   139
Item 12   Description of Securities Other Than Equity Securities   139
    A.   Debt Securities   139
    B.   Warrants and Rights   139
    C.   Other Securities   139
    D.   American Depository Shares   139

 

 

PART II

 

 
Item 13   Defaults, Dividend Arrearages and Delinquencies   140
Item 14   Material Modification to the Rights of Security Holders and Use of Proceeds   140
Item 15   Controls and Procedures   140
Item 16   [RESERVED]   141
Item 16A   Audit Committee Financial Expert   141
Item 16B   Code of Ethics   141
Item 16C   Principal Accounting Fees and Services   141
Item 16D   Exemptions from the Listing Standards for Audit Committee   141
Item 16E   Purchases of Equity Securities by the Issuer and Affiliated Purchases   141

 

 

PART III

 

 
Item 17   Financial Statements   142
Item 18   Financial Statements   142
Item 19   Exhibits   142

ii


Explanatory Note

Overview

        This Amendment No. 1 on Form 20-F/A (the "Form 20-F") amends and restates the Annual Report on Form 20-F for the fiscal year ended December 31, 2006 (the "Original Form 20-F"). In this Form 20-F, Biovail Corporation (the "Company") is restating its consolidated financial statements and other financial information for each of the fiscal years 2006, 2005 and 2004, and for each of the quarters in fiscal years 2006 and 2005, as well as other financial information for fiscal year 2003. Previously filed annual reports on Form 20-F and quarterly reports on Form 6-K affected by the restatements have not been amended and should not be relied upon.

Background

        As previously disclosed in the Company's quarterly report on Form 6-K for the three months ended March 31, 2007, during the 2007 first quarter financial statement close process, management detected a data error in a supporting schedule used to (a) track quantities of Zovirax® products that the Company may purchase at reduced supply prices from GlaxoSmithKline plc ("GSK"), and (b) calculate amortization expense on a related long-term asset that is being amortized to cost of goods sold. As a result of the error, cost of goods sold has been adjusted for an overstatement of amortization expense. At December 31, 2006, the cumulative effect of this adjustment was an increase of $17.3 million to previously reported net income. The reversal of the cumulative adjustment will affect net income negatively over the period that the long-term asset is being amortized, which is based on a revised amortization schedule that commences in fiscal 2007.

        The restatement resulted from material weaknesses in internal control over financial reporting, namely, that the Company did not have adequate internal controls around the development and usage of spreadsheets in the location where the data error occurred, and around the review and related analysis of those spreadsheets by local management.

        As a result of the preceding restatement, the Company is required to correct other known errors in prior periods that were previously deemed to be immaterial. Management identified two such instances — one related to Cardizem® LA revenue recognition and the other related to foreign currency translation.

        The Company has revised its previous accounting for a cumulative pricing adjustment related to Cardizem® LA sold to Kos Pharmaceuticals, Inc. ("Kos"). That adjustment resulted from price increases implemented by Kos during the period from May 2, 2005 to September 30, 2006. As previously disclosed, the Company originally recorded the entire amount of that adjustment in product sales revenue in the third quarter of 2006. The Company has now reallocated a share of that adjustment to each of the affected interim periods. At December 31, 2006, the cumulative effect of this reallocation on previously reported net income was zero.

        The Company has also corrected the classification of certain foreign currency translation gains and losses from accumulated other comprehensive income to net income. Those gains and losses were primarily related to long-term intercompany balances between the Company and its Irish subsidiary group. At December 31, 2006, the cumulative effect of this correction was a decrease of $3.5 million to previously reported net income.

        There was no income tax impact resulting from the foregoing adjustments.

Impacts of Adjustments

        The following tables set forth the impacts of the foregoing adjustments on affected line items within the Company's previously reported net income or loss for each of the fiscal years 2006, 2005, 2004 and 2003, and for each of the quarters in fiscal years 2006 and 2005. The restatement has no effect on the Company's cash flows or

iii



liquidity, and its impact on the Company's financial position at the end of each of the restated periods is immaterial.

 
  Cumulative
Effect
Through
December 31,
2006

  2006
  2005
  2004
  2003
 
 
  ($ in 000s; Income (Expense))

 
Product sales revenue   $   $ (2,807 ) $ 2,807   $   $  
Cost of goods sold     17,330     12,129     5,201          
Foreign exchange     (3,485 )   (1,644 )   2,211     (1,195 )   (2,857 )
   
 
 
 
 
 
Impact on net income or loss   $ 13,845   $ 7,678   $ 10,219   $ (1,195 ) $ (2,857 )
   
 
 
 
 
 
 
  2006
  2005
 
  Q1
  Q2
  Q3
  Q4
  Total
  Q1
  Q2
  Q3
  Q4
  Total
 
  ($ in 000s; Income (Expense))

Product sales revenue   $ 2,106   $ 2,337   $ (7,250 ) $   $ (2,807 ) $   $ 981   $ 1,162   $ 664   $ 2,807
Cost of goods sold     2,137     3,251     3,523     3,218     12,129         242     1,598     3,361     5,201
Foreign exchange     (293 )   (905 )   115     (561 )   (1,644 )   778     1,175     63     195     2,211
   
 
 
 
 
 
 
 
 
 
Impact on net income or loss   $ 3,950   $ 4,683   $ (3,612 ) $ 2,657   $ 7,678   $ 778   $ 2,398   $ 2,823   $ 4,220   $ 10,219
   
 
 
 
 
 
 
 
 
 

iv


Consolidated Balance Sheets

        The following tables set forth the Company's previously reported and restated consolidated balance sheets for each of the quarters in fiscal years 2006 and 2005:

 
  At March 31, 2006
  At June 30, 2006
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
ASSETS                                      

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash and cash equivalents   $ 512,819   $   $ 512,819   $ 571,326   $   $ 571,326  
Accounts receivable     105,523     4,913     110,436     121,009     7,250     128,259  
Inventories     91,654         91,654     87,650         87,650  
Deposits and prepaid expenses     11,815         11,815     8,081         8,081  
   
 
 
 
 
 
 
      721,811     4,913     726,724     788,066     7,250     795,316  
   
 
 
 
 
 
 
Marketable securities     7,620         7,620     5,627         5,627  
Long-term investments     68,983         68,983     67,024         67,024  
Property, plant and equipment, net     210,066         210,066     221,478         221,478  
Intangible assets, net     893,158         893,158     876,040         876,040  
Goodwill     100,294         100,294     100,294         100,294  
Other assets, net     56,694     7,338     64,032     53,595     10,589     64,184  
   
 
 
 
 
 
 
    $ 2,058,626   $ 12,251   $ 2,070,877   $ 2,112,124   $ 17,839   $ 2,129,963  
   
 
 
 
 
 
 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Accounts payable   $ 37,199   $   $ 37,199   $ 40,974   $   $ 40,974  
Accrued liabilities     110,328         110,328     92,482         92,482  
Income taxes payable     38,609         38,609     41,882         41,882  
Deferred revenue     52,627         52,627     61,905         61,905  
Current portion of long-term obligations     24,654         24,654     17,848         17,848  
   
 
 
 
 
 
 
      263,417         263,417     255,091         255,091  
   
 
 
 
 
 
 
Deferred revenue     112,327         112,327     94,633         94,633  
Deferred leasehold inducements     5,366         5,366     5,757         5,757  
Accrued contract losses                 4,500         4,500  
Long-term obligations     401,464         401,464     400,546         400,546  
   
 
 
 
 
 
 
      782,574         782,574     760,527         760,527  
   
 
 
 
 
 
 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Common shares     1,464,072         1,464,072     1,472,661         1,472,661  
Additional paid-in capital     7,250         7,250     10,139         10,139  
Deficit     (245,733 )   10,117     (235,616 )   (185,165 )   14,800     (170,365 )
Accumulated other comprehensive income     50,463     2,134     52,597     53,962     3,039     57,001  
   
 
 
 
 
 
 
      1,276,052     12,251     1,288,303     1,351,597     17,839     1,369,436  
   
 
 
 
 
 
 
    $ 2,058,626   $ 12,251   $ 2,070,877   $ 2,112,124   $ 17,839   $ 2,129,963  
   
 
 
 
 
 
 

v


 
  At September 30, 2006
  At December 31, 2006
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
ASSETS                                      

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash and cash equivalents   $ 629,500   $   $ 629,500   $ 834,540   $   $ 834,540  
Accounts receivable     200,737         200,737     129,247         129,247  
Inventories     81,255         81,255     78,781         78,781  
Deposits and prepaid expenses     14,659         14,659     15,056         15,056  
   
 
 
 
 
 
 
      926,151         926,151     1,057,624         1,057,624  
   
 
 
 
 
 
 
Marketable securities     5,676         5,676     5,677         5,677  
Long-term investments     59,228         59,228     56,442         56,442  
Property, plant and equipment, net     221,209         221,209     211,979         211,979  
Intangible assets, net     711,922         711,922     697,645         697,645  
Goodwill     100,294         100,294     100,294         100,294  
Other assets, net     49,288     14,112     63,400     45,451     17,330     62,781  
   
 
 
 
 
 
 
    $ 2,073,768   $ 14,112   $ 2,087,880   $ 2,175,112   $ 17,330   $ 2,192,442  
   
 
 
 
 
 
 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Accounts payable   $ 36,762   $   $ 36,762   $ 44,988   $   $ 44,988  
Dividends payable                 80,222         80,222  
Accrued liabilities     103,576         103,576     115,619         115,619  
Accrued contract losses     6,800         6,800     54,800         54,800  
Income taxes payable     38,010         38,010     41,596         41,596  
Deferred revenue     69,968         69,968     61,916         61,916  
Current portion of long-term obligations     18,048         18,048     11,146         11,146  
   
 
 
 
 
 
 
      273,164         273,164     410,287         410,287  
   
 
 
 
 
 
 
Deferred revenue     78,979         78,979     73,621         73,621  
Deferred leasehold inducements     5,740         5,740     5,632         5,632  
Accrued contract losses     44,500         44,500              
Long-term obligations     400,585         400,585     400,645         400,645  
   
 
 
 
 
 
 
      802,968         802,968     890,185         890,185  
   
 
 
 
 
 
 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Common shares     1,473,057         1,473,057     1,476,930         1,476,930  
Additional paid-in capital     13,017         13,017     14,952         14,952  
Deficit     (261,645 )   11,188     (250,457 )   (246,578 )   13,845     (232,733 )
Accumulated other comprehensive income     46,371     2,924     49,295     39,623     3,485     43,108  
   
 
 
 
 
 
 
      1,270,800     14,112     1,284,912     1,284,927     17,330     1,302,257  
   
 
 
 
 
 
 
    $ 2,073,768   $ 14,112   $ 2,087,880   $ 2,175,112   $ 17,330   $ 2,192,442  
   
 
 
 
 
 
 

vi


 
  At March 31, 2005
  At June 30, 2005
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
ASSETS                                      

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash and cash equivalents   $ 83,922   $   $ 83,922   $ 245,443   $   $ 245,443  
Marketable securities     1,933         1,933     1,257         1,257  
Accounts receivable     115,383         115,383     99,017     981     99,998  
Inventories     118,834         118,834     101,195         101,195  
Deposits and prepaid expenses     11,679         11,679     7,995         7,995  
   
 
 
 
 
 
 
      331,751         331,751     454,907     981     455,888  
   
 
 
 
 
 
 
Long-term investments     65,557         65,557     67,043         67,043  
Property, plant and equipment, net     184,950         184,950     179,625         179,625  
Intangible assets, net     961,771         961,771     892,819         892,819  
Goodwill     100,294         100,294     100,294         100,294  
Other assets, net     59,324         59,324     121,755     242     121,997  
   
 
 
 
 
 
 
    $ 1,703,647   $   $ 1,703,647   $ 1,816,443   $ 1,223   $ 1,817,666  
   
 
 
 
 
 
 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Accounts payable   $ 37,792   $   $ 37,792   $ 33,885   $   $ 33,885  
Accrued liabilities     92,733         92,733     120,417         120,417  
Income taxes payable     22,761         22,761     22,732         22,732  
Deferred revenue     6,963         6,963     20,530         20,530  
Current portion of long-term obligations     33,829         33,829     24,396         24,396  
   
 
 
 
 
 
 
      194,078         194,078     221,960         221,960  
   
 
 
 
 
 
 
Deferred revenue     15,500         15,500     103,881         103,881  
Deferred leasehold inducements     5,075         5,075     4,955         4,955  
Long-term obligations     430,722         430,722     423,997         423,997  
   
 
 
 
 
 
 
      645,375         645,375     754,793         754,793  
   
 
 
 
 
 
 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Common shares     1,457,072         1,457,072     1,457,264         1,457,264  
Additional paid-in capital     1,450         1,450     1,450         1,450  
Deficit     (435,552 )   (3,274 )   (438,826 )   (431,845 )   (876 )   (432,721 )
Accumulated other comprehensive income     35,302     3,274     38,576     34,781     2,099     36,880  
   
 
 
 
 
 
 
      1,058,272         1,058,272     1,061,650     1,223     1,062,873  
   
 
 
 
 
 
 
    $ 1,703,647   $   $ 1,703,647   $ 1,816,443   $ 1,223   $ 1,817,666  
   
 
 
 
 
 
 

vii


 
  At September 30, 2005
  At December 31, 2005
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
ASSETS                                      

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash and cash equivalents   $ 326,727   $   $ 326,727   $ 445,289   $   $ 445,289  
Marketable securities     931         931     505         505  
Accounts receivable     125,716     2,143     127,859     132,699     2,807     135,506  
Inventories     88,103         88,103     89,473         89,473  
Deposits and prepaid expenses     11,042         11,042     14,923         14,923  
Assets of discontinued operation held for sale     3,865         3,865     1,893         1,893  
   
 
 
 
 
 
 
      556,384     2,143     558,527     684,782     2,807     687,589  
   
 
 
 
 
 
 
Marketable securities                 6,859         6,859  
Long-term investments     76,014         76,014     66,421         66,421  
Property, plant and equipment, net     187,678         187,678     199,567         199,567  
Intangible assets, net     874,670         874,670     910,276         910,276  
Goodwill     100,294         100,294     100,294         100,294  
Other assets, net     117,309     1,840     119,149     59,506     5,201     64,707  
Long-term assets of discontinued operation held for sale     375         375     1,107         1,107  
   
 
 
 
 
 
 
    $ 1,912,724   $ 3,983   $ 1,916,707   $ 2,028,812   $ 8,008   $ 2,036,820  
   
 
 
 
 
 
 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Accounts payable   $ 36,852   $   $ 36,852   $ 61,453   $   $ 61,453  
Accrued liabilities     89,728         89,728     88,870         88,870  
Income taxes payable     30,431         30,431     37,713         37,713  
Deferred revenue     23,367         23,367     61,160         61,160  
Current portion of long-term obligations     24,691         24,691     24,360         24,360  
Liabilities of discontinued operation held for sale     1,240         1,240              
   
 
 
 
 
 
 
      206,309         206,309     273,556         273,556  
   
 
 
 
 
 
 
Deferred revenue     97,581         97,581     117,119         117,119  
Deferred leasehold inducements     5,171         5,171     5,273         5,273  
Long-term obligations     422,648         422,648     412,508         412,508  
   
 
 
 
 
 
 
      731,709         731,709     808,456         808,456  
   
 
 
 
 
 
 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Common shares     1,458,183         1,458,183     1,461,077         1,461,077  
Additional paid-in capital     1,450         1,450     377         377  
Deficit     (330,182 )   1,947     (328,235 )   (290,242 )   6,167     (284,075 )
Accumulated other comprehensive income     51,564     2,036     53,600     49,144     1,841     50,985  
   
 
 
 
 
 
 
      1,181,015     3,983     1,184,998     1,220,356     8,008     1,228,364  
   
 
 
 
 
 
 
    $ 1,912,724   $ 3,983   $ 1,916,707   $ 2,028,812   $ 8,008   $ 2,036,820  
   
 
 
 
 
 
 

viii


Consolidated Statements of Income (Loss)

        The following table sets forth the Company's previously reported and restated consolidated statements of income for each of the fiscal years 2006, 2005 and 2004:

 
  Year Ended
December 31, 2006

  Year Ended
December 31, 2005

  Year Ended
December 31, 2004

 
 
  ($ in 000s, except per share data)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
REVENUE                                                        
Product sales   $ 1,024,085   $ (2,807 ) $ 1,021,278   $ 884,267   $ 2,807   $ 887,074   $ 837,102   $   $ 837,102  
Research and development     21,593         21,593     27,949         27,949     19,279         19,279  
Royalty and other     24,851         24,851     23,320         23,320     22,775         22,775  
   
 
 
 
 
 
 
 
 
 
      1,070,529     (2,807 )   1,067,722     935,536     2,807     938,343     879,156         879,156  
   
 
 
 
 
 
 
 
 
 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cost of goods sold     223,281     (12,129 )   211,152     206,531     (5,201 )   201,330     221,935         221,935  
Research and development     95,479         95,479     88,437         88,437     68,382         68,382  
Selling, general and administrative     238,441         238,441     227,394         227,394     253,531         253,531  
Amortization     56,457         56,457     62,260         62,260     64,704         64,704  
Asset impairments, net of gain
on disposal
    143,000         143,000     29,230         29,230     40,685         40,685  
Restructuring costs     15,126         15,126     19,810         19,810              
Contract losses     54,800         54,800                          
Litigation settlements     14,400         14,400                          
Aquired research and development                             8,640         8,640  
   
 
 
 
 
 
 
 
 
 
      840,984     (12,129 )   828,855     633,662     (5,201 )   628,461     657,877         657,877  
   
 
 
 
 
 
 
 
 
 
Operating income     229,545     9,322     238,867     301,874     8,008     309,882     221,279         221,279  
Interest income     29,199         29,199     7,175         7,175     1,034         1,034  
Interest expense     (35,203 )       (35,203 )   (37,126 )       (37,126 )   (40,104 )       (40,104 )
Foreign exchange gain (loss)     (716 )   (1,644 )   (2,360 )   (1,417 )   2,211     794     (564 )   (1,195 )   (1,759 )
Equity loss and other     (529 )       (529 )   (1,160 )       (1,160 )   (6,486 )       (6,486 )
   
 
 
 
 
 
 
 
 
 
Income from continuing operations before provision for income taxes     222,296     7,678     229,974     269,346     10,219     279,565     175,159     (1,195 )   173,964  
Provision for income taxes     14,500         14,500     22,550         22,550     8,950         8,950  
   
 
 
 
 
 
 
 
 
 
Income from continuing operations     207,796     7,678     215,474     246,796     10,219     257,015     166,209     (1,195 )   165,014  
Loss from discontinued operation     (3,848 )       (3,848 )   (10,575 )       (10,575 )   (5,215 )       (5,215 )
   
 
 
 
 
 
 
 
 
 
Net income   $ 203,948   $ 7,678   $ 211,626   $ 236,221   $ 10,219   $ 246,440   $ 160,994   $ (1,195 ) $ 159,799  
   
 
 
 
 
 
 
 
 
 

Basic and diluted earnings
per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 1.30   $ 0.05   $ 1.35   $ 1.55   $ 0.06   $ 1.61   $ 1.04   $ (0.01 ) $ 1.04  
Net income   $ 1.27   $ 0.05   $ 1.32   $ 1.48   $ 0.06   $ 1.54   $ 1.01   $ (0.01 ) $ 1.00  
   
 
 
 
 
 
 
 
 
 

ix


        The following tables set forth the Company's previously reported and restated consolidated statements of income (loss) for each of the quarters in fiscal years 2006 and 2005:

 
  Q1 2006
  Q2 2006
 
 
  ($ in 000s, except per share data)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
REVENUE                                      
Product sales   $ 209,705   $ 2,106   $ 211,811   $ 241,118   $ 2,337   $ 243,455  
Research and development     4,909         4,909     3,951         3,951  
Royalty and other     5,909         5,909     7,737         7,737  
   
 
 
 
 
 
 
      220,523     2,106     222,629     252,806     2,337     255,143  
   
 
 
 
 
 
 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cost of goods sold     49,329     (2,137 )   47,192     61,819     (3,251 )   58,568  
Research and development     22,328         22,328     18,402         18,402  
Selling, general and administrative     56,550         56,550     66,670         66,670  
Amortization     14,824         14,824     14,825         14,825  
Contract losses                 4,500         4,500  
   
 
 
 
 
 
 
      143,031     (2,137 )   140,894     166,216     (3,251 )   162,965  
   
 
 
 
 
 
 
Operating income     77,492     4,243     81,735     86,590     5,588     92,178  
Interest income     5,196         5,196     6,116         6,116  
Interest expense     (9,024 )       (9,024 )   (8,485 )       (8,485 )
Foreign exchange gain (loss)     (590 )   (293 )   (883 )   1,401     (905 )   496  
Equity income (loss)     (318 )       (318 )   50         50  
   
 
 
 
 
 
 
Income from continuing operations before provision for income taxes     72,756     3,950     76,706     85,672     4,683     90,355  
Provision for income taxes     4,150         4,150     5,350         5,350  
   
 
 
 
 
 
 
Income from continuing operations     68,606     3,950     72,556     80,322     4,683     85,005  
Income (loss) from discontinued operation     (4,120 )       (4,120 )   272         272  
   
 
 
 
 
 
 
Net income   $ 64,486   $ 3,950   $ 68,436   $ 80,594   $ 4,683   $ 85,277  
   
 
 
 
 
 
 

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 0.43   $ 0.02   $ 0.45   $ 0.50   $ 0.03   $ 0.53  
Net income   $ 0.40   $ 0.02   $ 0.43   $ 0.50   $ 0.03   $ 0.53  
   
 
 
 
 
 
 

x


 
  Q3 2006
  Q4 2006
 
 
  ($ in 000s, except per share data)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
REVENUE                                      
Product sales   $ 277,265   $ (7,250 ) $ 270,015   $ 295,997   $   $ 295,997  
Research and development     5,691         5,691     7,042         7,042  
Royalty and other     6,596         6,596     4,609         4,609  
   
 
 
 
 
 
 
      289,552     (7,250 )   282,302     307,648         307,648  
   
 
 
 
 
 
 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cost of goods sold     59,332     (3,523 )   55,809     52,801     (3,218 )   49,583  
Research and development     26,350         26,350     28,399         28,399  
Selling, general and administrative     50,168         50,168     65,053         65,053  
Amortization     14,824         14,824     11,984         11,984  
Restructuring costs                 15,126         15,126  
Asset impairments, net of gain on disposal     143,000         143,000              
Contract losses     46,800         46,800     3,500         3,500  
Litigation settlements                 14,400         14,400  
   
 
 
 
 
 
 
      340,474     (3,523 )   336,951     191,263     (3,218 )   188,045  
   
 
 
 
 
 
 
Operating income (loss)     (50,922 )   (3,727 )   (54,649 )   116,385     3,218     119,603  
Interest income     7,577         7,577     10,310         10,310  
Interest expense     (8,951 )       (8,951 )   (8,743 )       (8,743 )
Foreign exchange loss     (250 )   115     (135 )   (1,277 )   (561 )   (1,838 )
Equity loss     (205 )       (205 )   (56 )       (56 )
   
 
 
 
 
 
 
Income (loss) from continuing operations before provision for income taxes     (52,751 )   (3,612 )   (56,363 )   116,619     2,657     119,276  
Provision for income taxes     3,700         3,700     1,300         1,300  
   
 
 
 
 
 
 
Income (loss) from continuing operations     (56,451 )   (3,612 )   (60,063 )   115,319     2,657     117,976  
Loss from discontinued operation                          
   
 
 
 
 
 
 
Net income (loss)   $ (56,451 ) $ (3,612 ) $ (60,063 ) $ 115,319   $ 2,657   $ 117,976  
   
 
 
 
 
 
 

Basic and diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income (loss) from continuing operations   $ (0.35 ) $ (0.02 ) $ (0.37 ) $ 0.72   $ 0.02   $ 0.74  
Net income (loss)   $ (0.35 ) $ (0.02 ) $ (0.37 ) $ 0.72   $ 0.02   $ 0.74  
   
 
 
 
 
 
 

xi


 
  Q1 2005
  Q2 2005
 
 
  ($ in 000s, except per share data)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
REVENUE                                      
Product sales   $ 160,531   $   $ 160,531   $ 204,519   $ 981   $ 205,500  
Research and development     7,200         7,200     6,369         6,369  
Royalty and other     5,955         5,955     5,290         5,290  
   
 
 
 
 
 
 
      173,686         173,686     216,178     981     217,159  
   
 
 
 
 
 
 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cost of goods sold     41,101         41,101     59,872     (242 )   59,630  
Research and development     19,954         19,954     22,268         22,268  
Selling, general and administrative     74,694         74,694     57,167         57,167  
Amortization     15,966         15,966     15,409         15,409  
Restructuring costs                 18,607         18,607  
Asset impairments, net of gain on disposal                 26,560         26,560  
   
 
 
 
 
 
 
      151,715         151,715     199,883     (242 )   199,641  
   
 
 
 
 
 
 
Operating income     21,971         21,971     16,295     1,223     17,518  
Interest income     378         378     912         912  
Interest expense     (8,897 )       (8,897 )   (9,574 )       (9,574 )
Foreign exchange gain (loss)     (538 )   778     240     (153 )   1,175     1,022  
Equity loss     (270 )       (270 )   (263 )       (263 )
   
 
 
 
 
 
 
Income from continuing operations before provision for income taxes     12,644     778     13,422     7,217     2,398     9,615  
Provision for income taxes     585         585     2,295         2,295  
   
 
 
 
 
 
 
Income from continuing operations     12,059     778     12,837     4,922     2,398     7,320  
Loss from discontinued operation     (927 )       (927 )   (1,215 )       (1,215 )
   
 
 
 
 
 
 
Net income   $ 11,132   $ 778   $ 11,910   $ 3,707   $ 2,398   $ 6,105  
   
 
 
 
 
 
 

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 0.08   $   $ 0.08   $ 0.03   $ 0.02   $ 0.05  
Net income   $ 0.07   $   $ 0.07   $ 0.02   $ 0.02   $ 0.04  
   
 
 
 
 
 
 

xii


 
  Q3 2005
  Q4 2005
 
 
  ($ in 000s, except per share data)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
REVENUE                                      
Product sales   $ 244,455   $ 1,162   $ 245,617   $ 274,762   $ 664   $ 275,426  
Research and development     7,647         7,647     6,733         6,733  
Royalty and other     5,956         5,956     6,119         6,119  
   
 
 
 
 
 
 
      258,058     1,162     259,220     287,614     664     288,278  
   
 
 
 
 
 
 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cost of goods sold     51,991     (1,598 )   50,393     53,567     (3,361 )   50,206  
Research and development     19,913         19,913     26,302         26,302  
Selling, general and administrative     42,402         42,402     53,131         53,131  
Amortization     15,443         15,443     15,442         15,442  
Restructuring costs     1,118         1,118     85         85  
Asset impairments, net of gain on disposal                 2,670         2,670  
   
 
 
 
 
 
 
      130,867     (1,598 )   129,269     151,197     (3,361 )   147,836  
   
 
 
 
 
 
 
Operating income     127,191     2,760     129,951     136,417     4,025     140,442  
Interest income     2,386         2,386     3,499         3,499  
Interest expense     (9,450 )       (9,450 )   (9,205 )       (9,205 )
Foreign exchange gain (loss)     (1,462 )   63     (1,399 )   736     195     931  
Equity loss     (271 )       (271 )   (356 )       (356 )
   
 
 
 
 
 
 
Income from continuing operations before provision for income taxes     118,394     2,823     121,217     131,091     4,220     135,311  
Provision for income taxes     9,095         9,095     10,575         10,575  
   
 
 
 
 
 
 
Income from continuing operations     109,299     2,823     112,122     120,516     4,220     124,736  
Loss from discontinued operation     (7,636 )       (7,636 )   (797 )       (797 )
   
 
 
 
 
 
 
Net income   $ 101,663   $ 2,823   $ 104,486   $ 119,719   $ 4,220   $ 123,939  
   
 
 
 
 
 
 

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 0.69   $ 0.02   $ 0.70   $ 0.75   $ 0.03   $ 0.78  
Net income   $ 0.64   $ 0.02   $ 0.65   $ 0.75   $ 0.03   $ 0.77  
   
 
 
 
 
 
 

xiii


Consolidated Statements of Cash Flows

        The following table sets forth the Company's previously reported and restated consolidated statements of cash flows for each of the fiscal years 2006 and 2005:

 
  Year Ended
December 31, 2006

  Year Ended
December 31, 2005

  Year Ended
December 31, 2004

 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES                                                        
Net income   $ 203,948   $ 7,678   $ 211,626   $ 236,221   $ 10,219   $ 246,440   $ 160,994   $ (1,195 ) $ 159,799  

Adjustments to reconcile net income to net cash provided by continuing operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation and amortization     104,279     (12,129 )   92,150     101,842     (5,201 )   96,641     86,137         86,137  
Amortization and write-down of deferred financing costs     2,300         2,300     3,445         3,445     4,322         4,322  
Amortization and write-down of discounts on long-term obligations     1,291         1,291     2,420         2,420     3,218         3,218  
Stock-based compensation     14,794         14,794                          
Asset impairments     151,140         151,140     29,230         29,230     42,156         42,156  
Gain on disposal of intangible assets     (4,000 )       (4,000 )               (1,471 )       (1,471 )
Accrued contract losses     54,800         54,800                          
Equity loss     529         529     1,160         1,160     4,179         4,179  
Loss from discontinued operation     3,848         3,848     10,575         10,575     5,215         5,215  
Receipt of leasehold inducements     835         835     805         805     5,232         5,232  
Acquired research and development                             8,640         8,640  
Other     (396 )   1,644     1,248     (1,063 )   (2,211 )   (3,274 )   1,688     1,195     2,883  
Changes in operating assets and liabilities:                                                        
  Accounts receivable     1,881     2,807     4,688     15,582     (2,807 )   12,775     28,413         28,413  
  Inventories     10,906         10,906     16,624         16,624     (26,466 )       (26,466 )
  Deposits and prepaid expenses     (311 )       (311 )   1,101         1,101     (539 )       (539 )
  Accounts payable     (12,999 )       (12,999 )   17,027         17,027     (25,240 )       (25,240 )
  Accrued liabilities     28,094         28,094     5,605         5,605     (21,645 )       (21,645 )
  Income taxes payable     3,897         3,897     13,343         13,343     428         428  
  Deferred revenue     (42,319 )       (42,319 )   47,962         47,962     4,305         4,305  
   
 
 
 
 
 
 
 
 
 
Net cash provided by continuing operating activities     522,517         522,517     501,879         501,879     279,566         279,566  
   
 
 
 
 
 
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash provided by (used in) continuing investing activities     (40,447 )       (40,447 )   31,825         31,825     (42,258 )       (42,258 )
   
 
 
 
 
 
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing financing activities     (92,256 )       (92,256 )   (119,095 )       (119,095 )   (334,526 )       (334,526 )
   
 
 
 
 
 
 
 
 
 

CASH FLOWS FROM DISCONTINUED OPERATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in discontinued operation     (558 )       (558 )   (3,817 )       (3,817 )   (2,481 )       (2,481 )
   
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents     (5 )       (5 )   173         173     762         762  
   
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents     389,251         389,251     410,965         410,965     (98,937 )       (98,937 )
Cash and cash equivalents, beginning of year     445,289         445,289     34,324         34,324     133,261         133,261  
   
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of year   $ 834,540   $   $ 834,540   $ 445,289   $   $ 445,289   $ 34,324   $   $ 34,324  
   
 
 
 
 
 
 
 
 
 

xiv


        The following tables set forth the Company's previously reported and restated consolidated statements of cash flows for each of the quarters in fiscal years 2006 and 2005:

 
  Q1 2006
  Q2 2006
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES                                      
Net income   $ 64,486   $ 3,950   $ 68,436   $ 80,594   $ 4,683   $ 85,277  
Adjustments to reconcile net income to net cash provided by continuing operating activities                                      
Depreciation and amortization     25,115     (2,137 )   22,978     26,567     (3,251 )   23,316  
Amortization and write-down of deferred financing costs     622         622     615         615  
Amortization and write-down of discounts on long-term obligations     491         491     302         302  
Stock-based compensation     6,873         6,873     2,889         2,889  
Equity loss (income)     318         318     (50 )       (50 )
Loss (income) from discontinued operation     4,120         4,120     (272 )       (272 )
Receipt of leasehold inducements     211         211     511         511  
Other     (196 )   293     97     239     905     1,144  
Changes in operating assets and liabilities:                                      
  Accounts receivable     25,991     (2,106 )   23,885     (15,885 )   (2,337 )   (18,222 )
  Inventories     (2,201 )       (2,201 )   4,042         4,042  
  Deposits and prepaid expenses     3,087         3,087     3,578         3,578  
  Accounts payable     (22,918 )       (22,918 )   6,441         6,441  
  Accrued liabilities     966         966     6,092         6,092  
  Income taxes payable     886         886     3,302         3,302  
  Deferred revenue     (13,159 )       (13,159 )   (8,159 )       (8,159 )
   
 
 
 
 
 
 
Net cash provided by continuing operating activities     94,692         94,692     110,806         110,806  
   
 
 
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing investing activities     (18,212 )       (18,212 )   (12,690 )       (12,690 )
   
 
 
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing financing activities     (8,357 )       (8,357 )   (39,517 )       (39,517 )
   
 
 
 
 
 
 

CASH FLOWS FROM DISCONTINUED OPERATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash provided by (used in) discontinued operation     (580 )       (580 )   22         22  
   
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents     (13 )       (13 )   (114 )       (114 )
   
 
 
 
 
 
 
Net increase in cash and cash equivalents     67,530         67,530     58,507         58,507  
Cash and cash equivalents, beginning of period     445,289         445,289     512,819         512,819  
   
 
 
 
 
 
 
Cash and cash equivalents, end of period   $ 512,819   $   $ 512,819   $ 571,326   $   $ 571,326  
   
 
 
 
 
 
 

xv


 
  Q3 2006
  Q4 2006
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES                                      
Net income (loss)   $ (56,451 ) $ (3,612 ) $ (60,063 ) $ 115,319   $ 2,657   $ 117,976  

Adjustments to reconcile net income (loss) to net cash provided by continuing operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation and amortization     27,642     (3,523 )   24,119     24,955     (3,218 )   21,737  
Amortization and write-down of deferred financing costs     532         532     531         531  
Amortization and write-down of discounts on long-term obligations     297         297     201         201  
Stock-based compensation     2,878         2,878     2,154         2,154  
Asset impairments     147,000         147,000     4,140         4,140  
Gain on disposal of intangible assets     (4,000 )       (4,000 )            
Accrued contract losses     46,800         46,800     3,500         3,500  
Equity loss     205         205     56         56  
Receipt of leasehold inducements     113         113              
Other     124     (115 )   9     (563 )   561     (2 )
Changes in operating assets and liabilities:                                      
  Accounts receivable     (79,766 )   7,250     (72,516 )   71,541         71,541  
  Inventories     6,378         6,378     2,687         2,687  
  Deposits and prepaid expenses     (6,579 )       (6,579 )   (397 )       (397 )
  Accounts payable     (4,458 )       (4,458 )   7,936         7,936  
  Accrued liabilities     12,148         12,148     13,388         13,388  
  Income taxes payable     (3,891 )       (3,891 )   3,600         3,600  
  Deferred revenue     (7,590 )       (7,590 )   (13,411 )       (13,411 )
   
 
 
 
 
 
 
Net cash provided by continuing operating activities     81,382         81,382     235,637         235,637  
   
 
 
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing investing activities     (2,469 )       (2,469 )   (7,076 )       (7,076 )
   
 
 
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing financing activities     (20,980 )       (20,980 )   (23,402 )       (23,402 )
   
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents     241         241     (119 )       (119 )
   
 
 
 
 
 
 
Net increase in cash and cash equivalents     58,174         58,174     205,040         205,040  
Cash and cash equivalents, beginning of period     571,326         571,326     629,500         629,500  
   
 
 
 
 
 
 
Cash and cash equivalents, end of period   $ 629,500   $   $ 629,500   $ 834,540   $   $ 834,540  
   
 
 
 
 
 
 

xvi


 
  Q1 2005
  Q2 2005
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES                                      
Net income   $ 11,132   $ 778   $ 11,910   $ 3,707   $ 2,398   $ 6,105  

Adjustments to reconcile net income to net cash provided by continuing operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation and amortization     22,564         22,564     27,350     (242 )   27,108  
Amortization and write-down of deferred financing costs     812         812     1,262         1,262  
Amortization and write-down of discounts on long-term obligations     784         784     560         560  
Asset impairments                 26,560         26,560  
Equity loss     270         270     263         263  
Loss from discontinued operation     927         927     1,215         1,215  
Other     (221 )   (778 )   (999 )   (136 )   (1,175 )   (1,311 )
Changes in operating assets and liabilities:                                      
  Accounts receivable     32,332         32,332     15,576     (981 )   14,595  
  Inventories     (8,286 )       (8,286 )   14,657         14,657  
  Deposits and prepaid expenses     4,691         4,691     3,366         3,366  
  Accounts payable     (2,970 )       (2,970 )   (3,824 )       (3,824 )
  Accrued liabilities     9,937         9,937     1,288         1,288  
  Income taxes payable     (1,833 )       (1,833 )   (48 )       (48 )
  Deferred revenue     (2,343 )       (2,343 )   (3,549 )       (3,549 )
   
 
 
 
 
 
 
Net cash provided by continuing operating activities     67,796         67,796     88,247         88,247  
   
 
 
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash provided by (used in) continuing investing activities     (5,981 )       (5,981 )   91,989         91,989  
   
 
 
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing financing activities     (11,715 )       (11,715 )   (17,886 )       (17,886 )
   
 
 
 
 
 
 

CASH FLOWS FROM DISCONTINUED OPERATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in discontinued operation     (453 )       (453 )   (707 )       (707 )
   
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents     (49 )       (49 )   (122 )       (122 )
   
 
 
 
 
 
 
Net increase in cash and cash equivalents     49,598         49,598     161,521         161,521  
Cash and cash equivalents, beginning of period     34,324         34,324     83,922         83,922  
   
 
 
 
 
 
 
Cash and cash equivalents, end of period   $ 83,922   $   $ 83,922   $ 245,443   $   $ 245,443  
   
 
 
 
 
 
 

xvii


 
  Q3 2005
  Q4 2005
 
 
  ($ in 000s)

 
 
  As Reported
  Adjustments
  As Restated
  As Reported
  Adjustments
  As Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES                                      
Net income   $ 101,663   $ 2,823   $ 104,486   $ 119,719   $ 4,220   $ 123,939  

Adjustments to reconcile net income to net cash provided by continuing operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation and amortization     25,070     (1,598 )   23,472     26,858     (3,361 )   23,497  
Amortization and write-down of deferred financing costs     597         597     774         774  
Amortization and write-down of discounts on long-term obligations     585         585     491         491  
Asset impairments                 2,670         2,670  
Equity loss     271         271     356         356  
Loss from discontinued operation     7,636         7,636     797         797  
Receipt of leasehold inducements                 805         805  
Other     205     (63 )   142     (911 )   (195 )   (1,106 )
Changes in operating assets and liabilities:                                      
  Accounts receivable     (26,587 )   (1,162 )   (27,749 )   (5,739 )   (664 )   (6,403 )
  Inventories     11,890         11,890     (1,637 )       (1,637 )
  Deposits and prepaid expenses     (3,253 )       (3,253 )   (3,703 )       (3,703 )
  Accounts payable     3,015         3,015     20,806         20,806  
  Accrued liabilities     (5,807 )       (5,807 )   187         187  
  Income taxes payable     10,214         10,214     5,010         5,010  
  Deferred revenue     (3,053 )       (3,053 )   56,907         56,907  
   
 
 
 
 
 
 
Net cash provided by continuing operating activities     122,446         122,446     223,390         223,390  
   
 
 
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing investing activities     (39,030 )       (39,030 )   (15,153 )       (15,153 )
   
 
 
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in continuing financing activities     (894 )       (894 )   (88,600 )       (88,600 )
   
 
 
 
 
 
 

CASH FLOWS FROM DISCONTINUED OPERATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash used in discontinued operation     (1,615 )       (1,615 )   (1,042 )       (1,042 )
   
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents     377         377     (33 )       (33 )
   
 
 
 
 
 
 
Net increase in cash and cash equivalents     81,284         81,284     118,562         118,562  
Cash and cash equivalents, beginning of period     245,443         245,443     326,727         326,727  
   
 
 
 
 
 
 
Cash and cash equivalents, end of period   $ 326,727   $   $ 326,727   $ 445,289   $   $ 445,289  
   
 
 
 
 
 
 

Quarterly Results of Operations For 2006 and 2005

        In each of fiscal years 2006 and 2005, the quarter-over-quarter increases in revenue were primarily due to the positive impact of the tiered supply price for Wellbutrin XL®, which is reset to the lowest tier at the start of each calendar year. In the second quarters in each of fiscal years 2006 and 2005, GSK's net sales of Wellbutrin XL® exceeded the sales-dollar threshold to increase the supply price from the first to second tier. Likewise, in the third quarters in each of fiscal years 2006 and 2005, GSK's net sales of Wellbutrin XL® exceeded the sales-dollar threshold to increase the supply price from the second to third and highest tier.

        Income from continuing operations and net income in the successive quarters in each of fiscal years 2006 and 2005 reflected an increasing gross profit on Wellbutrin XL® product sales due to the tiered supply price, as well as increasing interest income on surplus cash available for investment. In addition, commencing in May 2005, income from continuing operations and net income were positively impacted by lower sales force and marketing costs, as a result of the Company's decision to exit the United States ("U.S.") primary-care pharmaceutical market.

xviii


        The comparability of income from continuing operations and net income between each of the quarters of fiscal year 2006 was impacted by the following significant factors:

Fourth Quarter

    Costs incurred of $15.1 million related to the December 2006 restructuring of the Company's U.S. operations, which included the elimination of the Company's remaining U.S. specialty sales force;

    Litigation settlements of $14.4 million mainly related to a payment in respect to a patent infringement suit involving Wellbutrin XL®; and

    Estimated contract losses of $3.5 million for payments the Company is required to make to GSK as a result of the introduction of generic competition to Wellbutrin XL®, and to Kos for lost profits due to the Company's failure to supply minimum quantities of Cardizem® LA.

Third Quarter

    Asset impairments of $147.0 million related to the write-down of Vasotec® and Vaseretic® trademarks and product rights, and Glumetza™ product rights, partially offset by a $4.0 million gain recorded on the disposal of certain products; and

    Estimated contract losses of $46.8 million related to the aforementioned GSK and Kos payments.

Second Quarter

    Estimated contract loss of $4.5 million related to the aforementioned GSK payment.

        The comparability of income from continuing operations and net income between each of the quarters of fiscal year 2005 was impacted by the following significant factors:

Second Quarter

    Asset impairments of $26.6 million related to the Teveten and Teveten HCT product rights transferred to Kos;

    Costs incurred of $18.6 million related to the May 2005 restructuring of the Company's U.S. commercial operations, which included the elimination of the Company's U.S. primary-care sales force; and

    Write-off of $4.9 million of Cardizem® LA, Teveten and Teveten HCT inventories that were not purchased by Kos.

Amendments to the Original Form 20-F

        The following sections of the Original Form 20-F have been revised to reflect the restatement: Item 3.A. — Selected Financial Data; Item 3.D.III.1.j — Risk Factors; Item 4.B. — Business Overview (only the tables summarizing (i) revenues by category of activity and geographic market for each of the last three fiscal years, and (ii) product revenues for the fiscal years of 2006 and 2005); Item 5 — Operating and Financial Review and Prospects (Management's Discussion and Analysis of Results of Operations and Financial Condition, insofar as it relates to the restatement); Item 15 — Controls and Procedures; and Item 18 — Financial Statements ("Revised Report of Management on Financial Statements and Internal Control over Financial Reporting", "Reports of Independent Registered Public Accounting Firm", "Consolidated Balance Sheets", "Consolidated Statements of Income", "Consolidated Statements of Shareholders' Equity", Consolidated Statements of Cash Flows", Note 3 "Restatement", Note 6 "Accounts Receivable", Note 11 "Other Assets", Note 16 "Shareholders' Equity", Note 20 "Income Taxes", Note 22 "Earnings Per Share", Note 27 "Segment Information" and Note 30 "Canadian GAAP Supplemental Information" only).

        Except as related to the restatement of the Company's financial statements and other financial and other information described in the above-referenced sections of this Form 20-F, this Form 20-F: (i) does not amend or update any results or information from that contained in the Original Form 20-F, (ii) speaks only as of the filing date of the Original Form 20-F and (iii) does not reflect any events or developments that have occurred

xix



subsequent to the Original Form 20-F filing date. Accordingly, you should read this Form 20-F together with other documents that we have filed with and furnished to the Canadian securities regulators and the U.S. Securities and Exchange Commission subsequent to the filing date of the Original Form 20-F. Information in such documents updates and supersedes certain information contained in the Original Form 20-F and this Form 20-F. In addition, in accordance with U.S. Securities and Exchange Commission and Canadian Securities Administrators' requirements, this Form 20-F includes updated certifications from the Company's Chief Executive Officer and Chief Financial Officer as Exhibits 12.1, 12.2, 13.1, and 13.2. The filing of this Form 20-F shall not be deemed an admission that the Original Form 20-F, when made, included any known, untrue statement of material fact or knowingly omitted to state a material fact required to be stated or necessary to make a statement not misleading in the light of the circumstances in which it was made.

Basis of Presentation

General

        Except where the context otherwise requires, all references in this Form 20-F to the "Company", "Biovail", "we", "us", "our" or similar words or phrases are to Biovail Corporation and its subsidiaries, taken together. In this Form 20-F, references to "$" and "US$" are to United States dollars and references to "C$" are to Canadian dollars. Unless otherwise indicated, the statistical and financial data contained in this Form 20-F are presented as at December 31, 2006.

        Unless otherwise noted, prescription and market data are derived from information provided by IMS Health Inc. ("IMS") and are as of its December 31, 2006 report. IMS is a provider of information solutions to the pharmaceutical and health-care industries, including market intelligence and performance statistics.

Trademarks

        The following words are trademarks of the Company and are subject of either registration, or application for registration, in one or more of Canada, the U.S. or certain other jurisdictions: Attenade®, A Tablet Design (Apex Down)®, A Tablet Design (Apex Up)®, Aplezin, Ativan®, Asolza, Biovail®, Biovail Corporation International®, Biovail & Swoosh Design®, BPI®, BVF®, Cardizem®, Ceform, Crystaal Corporation & Design®, Crystaal Pharmaceuticals, Ditech, Flash Dose®, Flashdose, Glumetza, Instatab, Isordil®, Jovola, Jublia, Mivura, Onelza, Onexten, Oramelt, Palvata, Smartcoat, Solbri, Tesivee, Tiazac®, Tovalt, Upzimia, Upziva, Vaseretic®, Vasocard, Vasotec®, Vemreta, Volzelo, Z-Flakes and Zileran.

        Wellbutrin®, Wellbutrin® SR, Wellbutrin XL® (a once daily formulation of bupropion developed by Biovail), Zovirax®, and Zyban® are trademarks of The GlaxoSmithKline Group of Companies ("GSK") and are used by the Company under license. Ultram®, Ultram® ER, and Ultram® ODT are trademarks of Ortho-McNeil, Inc. and are used by the Company under license.

        In addition, the Company has filed trademark applications for many of its other trademarks in the United States and Canada and has implemented on an ongoing basis a trademark protection program for new trademarks.

Forward-Looking Statements

        Caution regarding forward-looking information and statements and "Safe Harbor" statement under the U.S. Private Securities Litigation Reform Act of 1995:

        To the extent any statements made in this Form 20-F contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning of the "safe harbour" provisions of applicable Canadian securities legislation (collectively "forward-looking statements"). These forward-looking statements relate to, among other things, our objectives, goals, strategies, beliefs, intentions, plans, estimates and outlook, including, without limitation, statements concerning the commercialization strategy in the U.S. and the increased focus on research and development, our manufacturing ability, the expected launch of Wellbutrin XR in Europe, the results of the Company's development efforts, the anticipated manufacturing and commercializing of all pipeline products that are successfully developed, including select products in global

xx



markets, the expected finalization of supply contracts and the expected results of certain litigation, and can generally be identified by the use of words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. An MD&A by its nature has many forward-looking statements and although we have indicated above certain of these statements set out herein, all of the statements in this Form 20-F that contain forward-looking statements are qualified by these cautionary statements. Although Biovail believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding prescription trends, pricing and the formulary and/or Medicare/Medicaid positioning for our products; the competitive landscape in the markets in which we compete, including, but not limited to, the availability or introduction of generic formulations of our products; timelines associated with the development of, and receipt of regulatory approval for, our new products; and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things: the difficulty of predicting U.S. Food and Drug Administration ("FDA") and Canadian Therapeutic Products Directorate ("TPD") approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, uncertainties associated with the development, acquisition and launch of new products, reliance on key strategic alliances, availability of raw materials and finished products, the regulatory environment, the unpredictability of protection afforded by our patents, successful challenges to our generic products, unanticipated interruptions in our manufacturing operations, the expense and uncertain outcome of legal proceedings, consolidated tax-rate assumptions, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the U.S. Securities and Exchange Commission ("SEC"), the Ontario Securities Commission ("OSC"), and other securities regulatory authorities in Canada, as well as the Company's ability to anticipate and manage the risks associated with the foregoing. Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found in the body of this document, and in particular under the heading "Risk Factors" under Item 3, Sub-Part D. Biovail cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We undertake no obligation to update or revise any forward-looking statement.

xxi



PART I

Item 1 Identity of Directors, Senior Management and Advisors

A.    Directors and Senior Management

        Not applicable

B.    Advisers

        Not applicable

C.    Auditors

        Not applicable

Item 2 Offer Statistics and Expected Timetable

A.    Offer Statistics

        Not applicable

B.    Method and Expected Timetable

        Not applicable

Item 3 Key Information

A.    Selected Financial Data

        The following table of selected consolidated financial data of the Company has been derived from financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The data is qualified by reference to, and should be read in conjunction with, the consolidated financial statements and related notes thereto prepared in accordance with U.S. GAAP (See Item 18, "Financial Statements").

1




In accordance with U.S. GAAP
(All dollar amounts are expressed in thousands of U.S. dollars,
except per share data)

 
  Years ended December 31
 
 
  2006
  2005
  2004
  2003
  2002
 
 
  As Restated(1)

  As Restated(1)

  As Restated(1)

  As Restated(1)

   
 
Consolidated operating data:                                
Revenue   $ 1,067,722   $ 938,343   $ 879,156   $ 811,750   $ 783,688  
Operating income     238,867 (2)   309,882 (5)   221,279 (8)   17,415 (10)   136,539 (12)
  Income (loss) from continuing operations     215,474 (3)   257,015 (6)   165,014 (9)   (29,643) (11)   90,750 (12)
  Net income (loss)     211,626 (4)   246,440 (7)   159,799 (9)   (30,122) (11)   87,795 (12)
Basic earnings (loss) per share:                                
  Income (loss) from continuing operations   $ 1.35 (3) $ 1.61 (6) $ 1.04 (9) $ (0.19) (11) $ 0.60 (12)
  Net Income (loss)   $ 1.32 (4) $ 1.54 (7) $ 1.00 (9) $ (0.19) (11) $ 0.58 (12)
Diluted earnings (loss) per share:                                
  Income (loss) from continuing operations   $ 1.35 (3) $ 1.61 (6) $ 1.04 (9) $ (0.19) (11) $ 0.57 (12)
  Net income (loss)   $ 1.32 (4) $ 1.54 (7) $ 1.00 (9) $ (0.19) (11) $ 0.55 (12)
Cash dividends declared per share   $ 1.00   $ 0.50              
 
  At December 31
 
 
  2006
  2005
  2004
  2003
  2002
 
 
  As Restated(1)

  As Restated(1)

   
   
   
 
Consolidated balance sheet:                                
Cash and cash equivalents   $ 834,540   $ 445,289   $ 34,324   $ 133,261   $ 56,080  
Working capital     647,337     414,033     124,414     149,884     (23,527 )
Total assets     2,192,442     2,036,820     1,711,060     1,922,774     1,833,804  
Long-term obligations     411,791     436,868     478,936     822,927     747,350  
Shareholders' equity   $ 1,302,257   $ 1,228,364   $ 1,053,913   $ 881,595   $ 845,686  
Number of common shares issued and outstanding (000s)     160,444     159,588     159,383     158,797     158,120  

(1)
See the "Explanatory Note" preceding Part I, Item 1 of this Form 20-F.

(2)
Includes charges of $143,000 for asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; and $14,400 for litigation settlements.

(3)
Includes charges of $143,000 for asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; $14,400 for litigation settlements; and an equity loss of $529.

(4)
Includes charges of $143,000 for asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; $14,400 for litigation settlements; an equity loss of $529; and $1,084 for asset impairments of discontinued operation.

(5)
Includes charges of $34,092 for asset impairments; and $19,810 for restructuring costs.

(6)
Includes charges of $34,092 for asset impairments; $19,810 for restructuring costs; and an equity loss of $1,160.

(7)
Includes charges of $34,092 for asset impairments; $19,810 for restructuring costs; an equity loss of $1,160; and $5,570 for asset impairments of discontinued operation.

(8)
Includes charges of $40,685 for asset impairments (net of gain on disposal of $1,471); and $8,640 for acquired research and development.

(9)
Includes charges of $40,685 for asset impairments (net of gain on disposal of $1,471); $8,640 for acquired research and development; and an equity loss of $4,179.

2


(10)
Includes charges of $7,539 for relocation costs; $45,081 for asset impairments; $124,720 for acquired research and development; and $61,348 for the extinguishment of a royalty obligation.

(11)
Includes charges of $7,539 for relocation costs; $45,081 for asset impairments; $124,720 for acquired research and development; $61,348 for the extinguishment of a royalty obligation; $13,061 for a foreign exchange loss on a long-term obligation; an equity loss of $1,010; and a reduction in the provision for tax contingencies of $12,000.

(12)
Includes charges of $31,944 for asset impairments; and $167,745 for acquired research and development.

B.    Capitalization and Indebtedness

        Not applicable.

C.    Reasons for the Offer and Use of Proceeds

        Not applicable.

D.    Risk Factors

        Investment in our common stock involves a degree of risk. These risks should be carefully considered before any investment is made. The following are some of the key risk factors generally associated with our business. However, the risks described below are not the only ones that we face. Additional risks not currently known to us or that we currently deem immaterial may also impair our business operations.

I.     COMPANY-SPECIFIC RISKS

1.     Product Development

a.     We are not assured of the successful development or acquisition of new products.

        Our future financial position depends significantly on our ability to develop or acquire new products.

        New product development is subject to a great deal of uncertainty, risk and expense. Development of pharmaceutical candidates may fail at various stages of the research and development process, often after substantial financial and other resources have been invested in their exploration and development. We have a number of products at various stages of development or which are not yet marketed. We have filed — or intend to file — several products for approval with U.S. and Canadian regulators. Approval may not be granted for any or all of these products and we may not be successful in submitting additional applications or obtaining regulatory approvals for the remaining pipeline products with the regulatory authorities. Once approved, the success of any new product will depend greatly on the ability to secure a third party marketing partner in the United States. Further, commercial success of the Company's new products will depend on their approval and acceptance by physicians, patients and other key decision- makers. The timing of the receipt of marketing approvals, relative to competitors in the same therapeutic areas, will also impact the viability of a new product. The scope of marketing approval as reflected in the product's label, the countries in which such approvals are obtained, the acceptance of price in those countries where price is negotiated, and safety, efficacy, convenience, and cost-effectiveness of the product as compared to competitive products will also have an impact on the ability to commercialize new products. If the Company is unable to commercialize new products successfully, there may be a material adverse effect on the Company's revenues, financial condition and results of operations. (See "Information on the Company — Business Overview — Product Development Pipeline").

        Beyond our internal research-and-development efforts, we depend, and in future may continue to depend, on the acquisition, licensing or other access to products or technologies from third-party drug-development companies. Supplementing our product portfolio in this manner requires the commitment of substantial effort and expense in seeking out, evaluating and negotiating collaboration agreements. Competition for attractive product opportunities is intense, and may require us to devote substantial resources, both human and financial, to an opportunity with no assurance that such effort will result in a successfully developed, or commercialized product.

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2.     Intellectual Property

        Inability on our part to establish or protect our intellectual property rights could result in significant negative impact on our profitability.

a.     Our patents are subject to challenges.

        There has been substantial litigation concerning the manufacture, use and sale of new products that are the subject of conflicting rights. When a third party files an Abbreviated New Drug Application ("ANDA") for a bioequivalent version of a drug for which a New Drug Application ("NDA") exists, they are required to certify to the FDA that any patent which has been listed with the FDA as covering the branded product has expired, or the date any such patent will expire, or that any such patent is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the application is submitted. Final FDA approval of an ANDA is not effective until each listed patent expires, unless the applicant certifies that the patents at issue are not infringed or are invalid and so notifies the patent owner and the holder of the branded product NDA. A patent owner may challenge a notice of non-infringement or invalidity by suing for patent infringement within 45 days of receiving notice. Such a challenge prevents FDA approval for a period that ends up to 30 months after the receipt of notice, or sooner, if an appropriate court rules that the patent is invalid or not infringed. From time to time, in the ordinary course of business, we also face such challenges.

b.     Wellbutrin XL

        Biovail's product sales for Wellbutrin XL® were $450.3 million in fiscal 2006, representing approximately 42% of Biovail's overall revenues. In 2006, the Company was engaged in patent litigation proceedings against, Anchen Pharmaceuticals LLP ("Anchen"), Impax Laboratories, Inc. ("Impax"), Watson Pharmaceuticals, Inc. ("Watson") and Abrika Pharmaceuticals LLP ("Abrika") who filed ANDAs for generic equivalents to Wellbutrin XL®. A final decision of non-infringement or invalidity would have a material adverse impact on the financial results of the Company. On August 1, 2006, Judge James V. Selna of the United States District Court for the Central District of California issued an order granting Anchen's Motion for Summary Judgment holding that Anchen's product does not infringe the patent claims of the Company, but denied Anchen's motion alleging invalidity of the Company's patents. The Company has appealed the decision. In December 2006, the FDA issued final approval to Anchen for its generic equivalents of the 150 mg and 300 mg generic tablets of Wellbutrin XL and on December 15, 2006 to Impax on its 300 mg strength. Anchen forfeited its first-filer market exclusivity to Impax to market the 300 mg tablet. Teva Pharmaceuticals Industries Ltd. ("Teva"), in agreement with Impax and Anchen, subsequently launched Impax's 300 mg generic equivalent to Wellbutrin, XL in mid-December, 2006. In February, 2007, as a result of comprehensive settlements with Anchen, Impax, Watson, and Teva, the lawsuits against Impax and Watson have been dismissed. With certain defined exceptions, none of Teva, Anchen, Impax or Watson may market a generic version of the 150 mg dosage strength of Wellbutrin XL® until 2008. The launch of a generic equivalent to the 300 mg in December 2006 will have an adverse impact on Biovail's results going forward. The possibility of the launch of a 150 mg dosage strength of Wellbutrin XL® in 2007 would substantially erode revenue from this key product and have a material adverse impact on Biovail's financial condition and results. (See "Information on the Company — Business Overview — U.S. Regulation — Abbreviated New Drug Application" and "— Patent Certification and Exclusivity Issues" and "Financial Information — Significant Changes — Legal Proceedings — Intellectual Property")

c.     Patent protection is unpredictable and uncertainty can arise regarding the protection afforded by our patents.

        Our success will depend, in part, on our ability in the future to obtain patents and to operate without infringing on the proprietary rights of others. To the extent we are unable to do so, it is likely to have a material adverse effect on our business, results of operations and financial condition. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes competitive with those we are developing. Alternatively, our patent applications for a product or process may not be approved or may not be approved as desired. The patents of our competitors may impair our ability to do business in a particular area. Others may independently develop similar products or duplicate any of our unpatented products.

4



d.     The generic portion of our business is subject to challenges.

        In those instances where we develop generic versions of existing drugs, we similarly must file an ANDA and are subject to challenges by the patent owners and NDA holders for those existing products. The loss of such a challenge could adversely affect our ability to market such a generic product. (See "Financial Information — Significant Changes — Legal Proceedings — Intellectual Property").

e.     Patent litigation is expensive.

        The expense of patent litigation, whether or not we are successful, could have an adverse effect on our business, results of operations, financial condition and cash flows. Regardless of FDA approval, should anyone commence a lawsuit with respect to any alleged patent infringement by us, whether because of the filing of an ANDA, challenging a third party's ANDA or otherwise, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. Such lawsuits may be brought and the ultimate outcome of such litigation, if commenced, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

f.      Proprietary information may be accessed by third parties.

        We rely on trade secrets, know-how and other proprietary information to provide additional legal protection to various aspects of our business, including information about our formulations, manufacturing methods, and analytical procedures, as well as information contained in our company documents and regulatory filings. Although we require our employees and other vendors and suppliers to sign confidentiality agreements, these confidentiality agreements may be breached, and we may not have adequate remedies for such breaches. Also, other persons may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to our proprietary information and adopt it in a competitive manner. Our success will depend, in part, on our ability in the future to protect our trade secrets and other proprietary information. (See "Information on the Company — Business Overview — Patents and Proprietary Rights").

3.     Manufacturing Operations

a.     Interruption of our manufacturing operations.

        Our manufacturing and other processes utilize sophisticated equipment, which sometimes requires a significant amount of time to obtain and install. Although we endeavour to properly maintain our equipment and have key spare parts on hand, our business could suffer if certain manufacturing or other equipment, or a portion of our facilities, were to become inoperable for a period of time. This could occur for various reasons, including catastrophic events, such as a hurricane or other natural disaster, an explosion, an environmental accident, equipment failures and/or delays in obtaining components or replacements, construction delays or defects and other events, both within and outside of our control. Any interruption in our manufacture of high-volume products, such as Wellbutrin® XL or Ultram® ER, could have a material adverse effect on our business and cash flows.

        A portion of our pharmaceutical manufacturing capacity, as well as other critical business functions, are located in areas subject to hurricane and earthquake casualty risks. Although we have certain limited protection afforded by insurance, our business and our earnings could be materially adversely affected in the event of a major weather-related or catastrophic event.

b.     We may have difficulty optimizing the utilization of our manufacturing facilities to meet market demand for our products.

        We have, at times, operated some of our manufacturing facilities on a 24-hour-a-day, seven-day-a-week production cycle to meet the market demand for current in-market products and anticipated product launches. Operating on that basis and meeting the anticipated market demand requires minimal equipment failures and product rejections, but there can be no guarantee that these will not occur. In addition, we manufacture products that employ a variety of technology platforms. Some of our manufacturing capabilities may at times be

5



over-utilized, while others may be under-utilized, resulting in inefficiencies, equipment failures and rejection of lots. Until our manufacturing processes are fully optimized, and/or our manufacturing facilities are expanded, we may have difficulty at times fulfilling all of the market demand for our existing and future products, which could adversely affect our results of operations, financial condition and cash flows.

c.     Our manufacture of products is subject to interruption and the risk of recall.

        Although we endeavour to manufacture our pharmaceutical products to meet good manufacturing practices ("GMP") requirements, it is possible that there may be supply interruptions in our manufacture of products or that the product(s) we manufacture may need to be recalled and removed from the market. These circumstances could occur for various reasons, including failure of the product to meet and/or maintain specifications; stability issues; and/or our becoming aware of a product causing an adverse drug reaction(s) in patient(s). In turn, a supply interruption or the removal of a product from the market for any one of these reasons, or any combination thereof, could have a material adverse impact on the Company's financial results (See "— Nature of Our Industry and Our Business"). The impact of this risk will vary based on the importance of the product recalled. For example, a recall of Wellbutrin XL® or Ultram® ER would have a more significant impact than in the case of a lower volume product.

d.     Risks associated with product delivery could affect our financial results.

        The supply of our product to our customers is subject to and dependent upon the use of transportation services. Disruption of transportation services could have a material adverse impact on our financial results.

        A number of products that we sell are manufactured and supplied to us by third parties. Disruption in the supply of these products could have a material adverse impact on the Company's financial results.

        As our manufacturing facilities are located primarily outside the continental U.S. and most of our sales are within the U.S., any change in policy or policy implementation relating to U.S. border controls may have an adverse impact on our ease of access to the U.S. marketplace and in turn, could cause a material adverse impact on our business, results of operations and financial condition.

e.     Future inability to obtain components and raw materials or products could affect our operations.

        Some components and raw materials used in our manufactured products, and some products sold by us, are currently available only from one or a limited number of domestic or foreign suppliers. In the event an existing supplier becomes unavailable or loses its regulatory status as an approved source and we do not have a second supplier, we will attempt to locate a qualified alternative; however, we may be unable to obtain the required components, raw materials or products on a timely basis or at commercially reasonable prices. To the extent such difficulties cannot be resolved within a reasonable time, and at a reasonable cost, or we are required to qualify a new supplier, our business, financial condition, results of operation and cash flows could be materially adversely affected.

        Our arrangements with foreign suppliers are subject to certain additional risks, including the availability of government clearances, export duties, transport issues, political instability, currency fluctuations and restrictions on the transfer of funds. Arrangements with international raw material suppliers are subject to, among other things, FDA and TPD regulation, various import duties and required government clearances. Acts of governments outside the U.S. and Canada may affect the price or availability of raw materials needed for the development or manufacture of our products. Again, the degree of impact such a situation could have would in part depend on the product affected and, as such, interruption of supply for Wellbutrin® XL or Ultram® ER would have a more significant adverse impact than in the case of a less important product.

f.      We may be unable to complete expansion and conversion projects, or adequately equip our facilities in a timely manner, or we may be subject to delays in receiving FDA and TPD approvals.

        The continued increase in the number of our products in the market, and the NDAs and New Drug Submissions ("NDSs") we submit to or may have pending at the FDA and TPD, respectively — may require us to continue to expand our manufacturing capabilities, including making changes to our manufacturing facilities

6



in Steinbach, Manitoba and Dorado, Puerto Rico. The timely completion of these efforts is necessary for us to have sufficient manufacturing capacity for the anticipated quantities of our existing products and the products we expect to manufacture for marketing by us or for supply to strategic partners in the future, and will require significant levels of capital investment. Our inability to complete our expansion and conversion projects, or adequately equip the facilities in a timely manner, or delays in receiving FDA and TPD approvals, could materially adversely affect our results of operations, financial condition and cash flows. (See "Information on the Company — Property, Plant and Equipment — Manufacturing Facilities").

g.     Regulatory inspections could result in compliance actions that could interrupt continuity of supply of current products manufactured at Biovail's manufacturing facilities.

        Regulatory inspections could result in compliance actions that could interrupt continuity of supply of current products manufactured at Biovail's manufacturing facilities. This interruption of supply could have a material adverse effect on our operations.

4.     Income Tax

a.     Our effective tax rates may increase.

        We have operations in various countries that have differing tax laws and rates. A significant portion of our revenue and income are earned in a foreign country with low domestic tax rates. Dividends from such after-tax business income are received tax-free in Canada. Our tax structure is supported by current domestic tax laws in the countries in which we operate and the application of tax treaties between the various countries in which we operate. The effective tax rate may change from year to year based on the mix of income among the different jurisdictions in which we operate; changes in tax laws in these jurisdictions; changes in the tax treaties between various countries in which we operate; and changes in the estimated values of deferred tax assets and liabilities. (See "Information on the Company — Business Overview — Taxation").

        Our provision for income taxes is based on certain estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of net income earned in our various operating jurisdictions and the rate of taxes payable in respect of that income. We enter into many transactions and arrangements in the ordinary course of business in which the tax treatment is not entirely certain. We must therefore make estimates and judgments based on our knowledge and understanding of local and international tax rules determining our consolidated tax provision. For example, certain countries in which we operate could seek to tax a greater share of income than has been provided for by us. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions we have used in determining our consolidated tax provisions and accruals. This could result in a material adverse effect on our consolidated income tax provision, financial position and the net income for the period in which such determinations are made.

        We have recorded a valuation allowance on deferred tax assets primarily relating to operating losses, future tax depreciation and tax credit carry forwards. We have assumed that these deferred tax assets are more likely than not to remain unrealized. Significant judgment is applied to determine the appropriate amount of valuation allowance to record. Changes in the amount of the valuation allowance required could materially increase or decrease the provision for income taxes in a given period.

5.     Dependencies on Third Parties

a.     A relatively small group of products and customers represent a significant portion of our net revenues and net earnings from time to time, making us dependent on the activities and success of third parties over which we have no control.

        Sales of a limited number of our products represent a significant portion of our net revenues and net earnings, with Wellbutrin® XL being the most significant of these (See "Wellbutrin XL®" under "Information on the Company — Business Overview — Revenue Sources Products"). If the volume or pricing of our most significant products decline in the future, our business, financial condition, cash flows and results of operations could be materially adversely affected.

7



        A significant portion of our net revenues is derived from sales to a limited number of customers or third parties and is therefore dependent on the activities and success of such customers or third parties. Any significant reduction or loss of business with one or more of these customers could have a material adverse effect on our business, financial condition, cash flows and results of operations.

b.     Our business could suffer as a result of actions by third parties who have marketing rights to our products.

        Our recently announced restructuring makes us more dependent on third parties to commercialize our products. Actions by third parties who control the pricing, trade rebate levels, product availability and other items for products we have licensed to them could have a material adverse impact on our financial results. Similarly, we have appointed Sciele Pharma Inc. ("Sciele") as the exclusive promoter of our Zovirax® product line; making us dependent on Sciele's performance for the continued success of those products and upon its compliance with contractual requirements.

c.     We rely on various third-party estimates in our financial reporting.

        We are dependent upon third parties to provide us with various estimates as a basis for our financial reporting. While we undertake certain procedures to review the reasonability of this information, we cannot obtain absolute assurance over the accounting methods and controls over the information provided to us by third parties. As a result, we are at risk of third parties providing us with erroneous data, which data could then result in errors in our financial reporting, which could have a material adverse impact on our business.

d.     For certain products we rely on third party suppliers.

        For certain products that we market and distribute, including Cardizem® CD, Vasotec®, Zovirax®, Ativan® and Isordil®, we rely on third parties to supply such product. As a result, we are vulnerable to an interruption of supply to us should our manufacturers suffer an interruption for any reason, including without limitation, due to manufacturing or shipping problems, regulatory inspections or difficulty in sourcing components or raw materials. We are also vulnerable to a supply interruption should we be unable to renew or replace, or successfully transfer, such supply arrangements when our current agreements expire. Any such supply interruption could have an adverse impact on our operations.

6.     Litigation

a.     We are subject to claims under U.S. and Canadian securities laws.

        The Company — and certain of our officers and directors — are defendants in various securities actions, which may be certified as class actions in 2007 (See "Financial Information — Significant Changes — Legal Proceedings — Securities Class Actions"). We and the other defendants believe that there are meritorious defenses to the claims asserted in these actions and we, together with the other defendants, intend to defend ourselves vigorously. However, it is possible that these actions could result in the award of substantial monetary damages against the Company. The outcomes of these actions could negatively impact the market price of our securities. In addition, we expect to continue to incur expenses associated with the defense of these actions, regardless of the outcome, and the pending actions may divert the efforts and attention of our management team from normal business operations.

        We are also a party to several other actions that could similarly impact our business (See "Financial Information — Significant Changes — Legal Proceedings").

b.     We could be subject to counterclaims or other suits in response to our complaint against various parties alleging a stock market manipulation scheme.

        On February 22, 2006, Biovail filed a lawsuit, seeking $4.6 billion in damages, from 22 defendants who, the complaint alleges, participated in a stock-market manipulation scheme. The defendants in this complaint may file counterclaims or take other actions in their defence that may require us to respond and which could have an adverse impact on Biovail.

8



c.     We could be subject to counterclaims or other suits in response to other actions the Company may initiate.

        From time to time, the Company also initiates actions or files counterclaims. We could be subject to counterclaims or other suits in response to other actions the Company may initiate. The Company believes that the prosecution of these actions and counterclaims is important to preserve and protect the Company, its reputation and its assets. The Company cannot reasonably predict the outcome of these proceedings, some of which can involve significant legal fees.

7.     Regulatory Investigations

a.     We could be subject to fines, penalties, or other sanctions as a result of ongoing investigations and inquiries by the SEC, the OSC and the United States Attorney's office for the Eastern District of New York.

        On November 20, 2003, we received a letter from the SEC indicating that the SEC would be conducting an informal inquiry relating to our financial performance and certain accounting matters for the fiscal year 2003. In March 2005, the SEC advised us that it had issued a formal order of investigation related to the previously disclosed informal inquiry initiated in November 2003 which sought historical financial and related information, including, but not limited to, the Company's accounting and financial disclosure practices. The formal investigation continues to focus primarily on accounting practices; however, the scope of the investigation is broader than it was initially and includes certain transactions associated with a corporate entity that was subsequently acquired by the Company in 2002. The period under review is January 2001 through May 2004. On March 17, 2006, the Company received a subpoena from the SEC related to, among other things, the trading and ownership of Biovail shares, which appears to be consistent with matters the OSC is investigating as previously disclosed and described below. The Company has received additional subpoenas from the SEC requesting additional documents, including documents relating to the Company's production of documents to date.

        On Sept. 28, 2006, Dec 5, 2006, and Jan. 10, 2007, the Company signed tolling agreements (agreements to extend limitation periods) with the SEC. The current tolling period ends July 31, 2007. The Company continues to cooperate fully with the SEC by providing responsive documents and making Company representatives available.

        Biovail has been fully cooperating with the SEC, and will continue to do so in an effort to bring the investigation to a conclusion as expeditiously as possible though the outcome or timing of when this matter may be resolved cannot be predicted.

        Recently, the Company was contacted by the United States Attorney's Office for the Eastern District of New York, who informed the Company that they were conducting an investigation into the same matters that the SEC is investigating. The Company is cooperating fully with the investigation.

        Since 2003, the OSC has been conducting an ongoing review of our disclosure and a review of certain trading activities related to our common shares. OSC staff has now clarified that it is investigating, among other things, two issues relating to our accounting and disclosure matters in 2003. The first is whether we improperly recognized revenue for accounting purposes in relation to our interim financial statements for each of the four quarters in 2003. The second is whether we provided misleading disclosure in our press release, dated October 3, 2003, concerning the reasons for our forecast of a revenue shortfall in respect of the three-month period ending September 30, 2003. The OSC has further advised us that it is also investigating whether the Company has improperly recognized revenue for accounting purposes in relation to the financial statements filed by the Company in 2001 and 2002 and related disclosure items. We are co-operating fully with the OSC's investigations and will continue to do so though the outcome or timing of when these matters may be resolved cannot accurately be predicted.

        OSC staff has also advised that it is investigating four issues relating to trading in our common shares. These issues include whether certain of our insiders ("insiders") complied with insider reporting requirements, and whether persons in a special relationship with us may have traded in our shares with knowledge of undisclosed material information. OSC staff is also investigating whether certain transactions may have resulted in, or contributed to, a misleading appearance of trading activity in our securities during 2003 and 2004, and

9



whether certain registrants (who are our past, or present, officers and directors) may have been in a conflict of interest in relation to trading of our shares.

        On July 28, 2006, the OSC issued a Notice of Hearing and a Statement of Allegations to Mr. Melnyk, the Chairman of the Board of Directors and President of BLS, and another former director of Biovail, in respect of its investigations into trading issues and reporting and disclosure issues in relation to the trading of Biovail common shares in several accounts in which Mr. Melnyk may have direct or indirect beneficial ownership of, or control or direction over. A hearing on these issues is set to commence on May 23, 2007.

        Should any of these matters reach an adverse conclusion, the Company, or individual officers or directors we could be subject to fines, penalties or other sanctions which may have, or the reaching of such a conclusion could cause us to suffer, a material adverse effect on our business or financial condition. (See "Financial Information — Significant Changes — Legal Proceedings" and "Governmental and Regulatory Inquiries").

b.     We could be subject to fines, penalties, or other sanctions as a result of the Justice Department investigation into the PLACE program.

        In July 2003, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts requesting information related to the promotional and marketing activities surrounding the commercial launch of Cardizem® LA. In particular, the subpoena sought information relating to the Cardizem® LA Clinical Experience Trial, titled P.L.A.C.E. (Proving L.A. Through Clinical Experience). The Company believes it has acted properly in connection with the P.L.A.C.E. program and is working diligently to resolve this matter, although it cannot predict the outcome or the timing of when this matter may be resolved. Should this investigation reach an adverse conclusion, the Company could be subject to fines, penalties or other sanctions which may have a material adverse affect on our business, or financial condition. (See "Financial Information — Significant Changes — Legal Proceedings — Governmental and regulatory inquiries").

8.     Dividend Policy

a.     The payment of dividends is not guaranteed and will depend on various factors, many of which are beyond the Company's control.

        Despite current positive business trends and healthy cash flows, there can be no assurance regarding the amounts of future cash flows generated by the Company which would be available to support the payment of dividends, whether in accordance with the current dividend policy or otherwise. Our ability to pay dividends, and the actual amounts of the dividends, will be dependent on numerous factors, including:

    the Company's profitability;

    fluctuations in working capital and capital and operating expenditure requirements;

    the sustainability of margins;

    payment of income taxes;

    quarterly variations in operating results;

    obligations under applicable credit facilities;

    fines or litigation settlement payments;

    changes in the market price of the products the Company develops;

    restrictions on debt instruments;

    trends in the biotechnology and pharmaceuticals industry and the markets in which the Company operates;

    current events affecting the economic situation generally in Canada, Barbados, the United States and Europe; and

    applicable laws;

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many of which are beyond the Company's control and all of which are susceptible to a number of risks and other factors beyond the control of the Company.

b.     Restrictions on potential growth.

        The increased dividend payments made by the Company under the dividend policy may make the payment of capital and operating expenditures, including those required by the Company to execute on its strategy, dependent on increased cash flow or additional financing in the future. Lack of, or an inability to access, those funds could limit the future growth of the Company and its ability to execute on its strategy.

c.     Uncertainty concerning liquidity and capital requirements.

        As a result of the adoption of the new dividend policy, we may in the future need to incur debt or issue equity to satisfy the payment of dividends. We may be unable to renew our existing credit facility or to do so on terms as or more favourable to us or to otherwise raise new debt or capital, and, as a result, we may be unable to maintain the dividend policy. If we are only able to raise funds on less favorable and/or more restrictive terms, this may have a material adverse effect on our revenues, financial condition and results of operations. If we raise funds through the issuance of debt or equity, any debt securities or preferred shares issued will have rights and preferences and privileges senior to those of holders of our common shares. The terms of the debt securities may impose restrictions on our operations that may have an adverse impact on our financial condition. If we raise funds through the issuance of equity, the proportional ownership interests of our shareholders could be diluted.

d.     Requirements for additional capital.

        Although the increased dividend payout is not expected to impact our commitment to research and development, future cash flows may be less than we currently projected, in which case we may need to raise additional funds from lenders and equity markets. In addition, we may choose to raise additional funds in order to capitalize on perceived opportunities in the marketplace that may accelerate our growth objectives. Our ability to arrange such financing in the future will depend in part on the prevailing capital market conditions as well as our business performance. There can be no assurance that we will be successful in our efforts to arrange additional financing, if needed, on terms satisfactory to us. If additional financing is raised by the issuance of equity, our shareholders may experience dilution in their equity interest in the Company.

e.     The Board may make changes to or may discontinue the dividend policy.

        Although the Board of Directors currently intends to continue with the current dividend policy, there can be no assurance that the policy will continue on its present terms or at all. In the future, the Board of Directors may seek other ways by which to create or enhance value for shareholders and, as a result, dividend payments may be reduced, or even eliminated, at times when the Board of Directors determines it to be necessary or desirable to do so.

II.    NATURE OF OUR INDUSTRY AND OUR BUSINESS

1.     Pharmaceutical Industry Risks

a.     We face steep competition and rapid and significant technological change.

        The pharmaceutical industry is highly competitive and is subject to rapid and significant technological change that could render certain of Biovail's products obsolete or uncompetitive. Many of our competitors are conducting research and development activities in therapeutic areas targeted by our products and our product development candidates. The introduction of competitive therapies as alternatives to our existing products may negatively impact our revenues from those products, and the introduction of products that directly compete with products in development could dramatically reduce the value of those development projects or chances of successfully commercializing those products, which could have a material adverse affect on the long term financial success of the Company.

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b.     Our business could suffer as a result of adverse drug reactions ("ADRs").

        Unexpected ADRs by patients to any of our products could negatively impact utilization or market availability of our product and could result in product liability claims against the Company which could have material adverse impact on the Company. Similarly our Contract Research Division ("CRD") operations could suffer a loss of business or be subject to liability should a serious ADR occur during the course of their conduct of a study.

c.     We are subject to exposure relating to product liability claims.

        We face an inherent business risk of exposure to product liability and other claims in the event that the use of our products results, or is alleged to have resulted, in adverse effects. While we have taken, and will continue to take, what we believe are appropriate precautions, there can be no assurance that we will avoid significant product liability claims. Although we currently carry product liability insurance that we believe is appropriate for the risks that we face, there can be no assurance that we have sufficient coverage, or can in the future obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the growth of our business or the number of products we can successfully market. Our obligation to pay indemnities, the withdrawal of a product following complaints, or a product-liability claim could have a material adverse effect on our business, results of operations, cash flows and financial condition.

d.     Our ability to obtain third-party reimbursement for the cost of products and related treatment may not be adequate.

        Our ability to successfully commercialize our products and product candidates — even if FDA or TPD approval is obtained — depends, in part, on whether appropriate reimbursement levels for the cost of the products and related treatments are obtained from government authorities and private health insurers and other organizations, such as Health Maintenance Organizations ("HMOs"), Managed-Care Organizations ("MCOs") and provincial formularies.

        Third-party payors increasingly challenge the pricing of pharmaceutical products. In addition, the trend toward managed health-care in the U.S., the growth of organizations such as HMOs and MCOs, and legislative proposals to reform health-care and government insurance programs, could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Such cost-containment measures and health-care reform could affect our ability to sell our products and may have a material adverse effect on our business, financial condition, cash flows and results of operations.

        Uncertainty exists about the reimbursement status of newly approved pharmaceutical products. Reimbursement in the U.S., Canada or foreign countries may not be available for some of our products. Any reimbursement granted may not be maintained, or limits on reimbursement available from third-parties may reduce the demand for, or negatively affect the price of, those products. We are also unable to predict if additional legislation or regulation impacting the health-care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business. These issues could have a material adverse effect on our business, financial condition, cash flows and results of operations.

e.     The publication of negative results of studies or clinical trials may adversely impact our sales revenue.

        From time to time, studies or clinical trials on various aspects of pharmaceutical products are conducted by academics or others, including government agencies. The results of these studies or trials, when published, may have a dramatic effect on the market for the pharmaceutical product that is the subject of the study. The publication of negative results of studies — or clinical trials related to our products or the therapeutic areas in which our products compete — could adversely affect our sales, the prescription trends for our products and the reputation of our products. In the event of the publication of negative results of studies or clinical trials related to our products or the therapeutic areas in which our products compete, our business, financial condition, results of operation and cash flows could be materially adversely affected.

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2.     Competitive Environment

a.     The pharmaceutical industry is highly competitive and is subject to rapid and significant technological change, which could render our technologies and products obsolete or uncompetitive.

        Our products face competition from conventional forms of drug delivery and from controlled-release, drug-delivery systems developed, or under development, by other pharmaceutical companies. We compete with companies in North America and internationally, including major pharmaceutical and chemical companies, specialized contract research organizations, research-and-development firms, universities and other research institutions. Many of our competitors have greater financial resources and selling and marketing capabilities, have greater experience in clinical testing and human clinical trials of pharmaceutical products, and have greater experience in obtaining FDA, TPD and other regulatory approvals. Our competitors may succeed in developing technologies and products that are more effective or less expensive to use than any that we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which would have a material adverse effect on our business and financial results. (See "Information on the Company — Business Overview — Industry Overview").

3.     Regulation

a.     New legislation or regulatory proposals may adversely affect our revenues and profitability.

        A number of legislative and regulatory proposals aimed at changing the health-care system, and changes in the levels at which pharmaceutical companies are reimbursed for sales of their products, have been proposed. While we cannot predict when or whether any of these proposals will be adopted, or the effect these proposals may have on our business, the pending nature of these proposals, as well as the adoption of any proposal, may exacerbate industry-wide pricing pressures and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

        Changes to Medicare, Medicaid or similar governmental programs — or the amounts paid by those programs for our services — may adversely affect our earnings. These programs are highly regulated, and subject to frequent and substantial changes and cost-containment measures. In recent years, changes in these programs have limited and reduced reimbursement to providers. In the U.S., The Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"), created a new, voluntary prescription drug benefit under the Social Security Act. For the first time, a substantial drug benefit is now available to Medicare participants as of January 2006. This program enhancement utilizes commercial market entities to market Medicare Advantage and stand-alone, prescription drug-plan options to the approximately 40 million people eligible for Medicare. The impact of the MMA implementation remains uncertain and therefore its implementation could be adverse to our business.

b.     Our business is subject to limitations imposed by government regulations.

        Government agencies in the U.S., Canada and other countries in which we conduct business regulate pharmaceutical products intended for human use. Regulations require extensive clinical trials and other testing, and government review and final approval, before we can market these products. The cost of complying with government regulation can be substantial. Governmental authorities in the U.S. and Canada — and comparable authorities in foreign countries — regulate the research and development, manufacture, testing and safety of pharmaceutical products. The regulations applicable to our existing and future products may change. There can be long delays in obtaining required clearances from regulatory authorities in any country after applications are filed. (See also "Information on the Company — Business Overview — Regulation").

        Requirements for approval vary widely from country to country outside of the U.S. and Canada. Whether or not approved in the U.S. or Canada, regulatory authorities in other countries must approve a product prior to the commencement of marketing the product in those countries. The time required to obtain any such approval may be longer or shorter than in the U.S. or Canada.

        Any failure or delay in obtaining regulatory approvals could materially adversely affect the marketing of any products we develop and therefore our business, financial condition, cash flows and results of operations.

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        Similarly, our CRD business is subject to strict regulation by Canadian governmental authorities. These regulations may change and these regulatory bodies periodically conduct audits. The outcome of such an audit, should it be unfavourable, could result in an adverse affect on our CRD business including, without limitation, costs to remmediate deficiencies, reputational impact of an adverse audit and our ability to solicit work for our CRD business.

c.     We may incur significant liability if it is determined that we are promoting the "off-label" use of drugs.

        Companies may not promote drugs for "off-label" uses — that is, uses that are not described in the product's labelling and that differ from those approved by the FDA, TPD or other applicable regulatory agencies. Physicians may prescribe drug products for off-label uses, and such off-label uses are common across medical specialties. Although the FDA, TPD and other regulatory agencies do not regulate a physician's choice of treatments, the FDA, TPD and other regulatory agencies do restrict communications by pharmaceutical companies or their sales representatives on the subject of off-label use. The FDA, TPD and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. Notwithstanding the regulatory restrictions on off-label promotion, the FDA, TPD and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional speech concerning their products. Although we believe that all of our communications regarding all of our products are in compliance with the relevant regulatory requirements, the FDA, TPD or another regulatory authority may disagree, and we may be subject to significant liability, including civil and administrative remedies, as well as criminal sanctions. In addition, management's attention could be diverted from our business operations and our reputation could be damaged.

III.  GENERAL BUSINESS

1.     Ongoing Business Considerations

a.     There is no assurance that we will continue to experience success related to product development, supply and marketing.

        Certain of our products are marketed by third parties. Such third-party arrangements may not be successfully negotiated in the future. Any such arrangements may not be available on commercially reasonable terms. Even if acceptable and timely marketing arrangements are available, the products we develop may not be accepted in the marketplace, and even if such products are initially accepted, sales may thereafter decline. Additionally, our clients or marketing partners may make important marketing and other commercialization decisions with respect to products we develop that are not within our control. As a result, many of the variables that may affect our revenues, cash flows and net income are not exclusively within our control.

b.     The success of strategic investments, partnerships or development alliances we make depends upon the performance of the companies in which we invest, or with which we partner or co-develop product.

        Economic, governmental, industry and internal company factors outside our control affect each of the companies in which we may invest or with which we may partner or co-develop product. Some of the material risks relating to such companies include:

    the ability of these companies to successfully develop, manufacture and obtain necessary governmental approvals for the products which serve as the basis for our investments in, or relationship with, such companies;

    the ability of competitors of these companies to develop similar or more effective products, making the drugs developed by these companies difficult or impossible to market;

    the ability of these companies to adequately secure patents for their products and protect their proprietary information;

    the ability of these companies to enter the marketplace without infringing upon competitors' patents;

14


    the ability of these companies to remain technologically competitive; and

    the dependence of these companies upon key scientific and managerial personnel.

        We may have limited or no control over the resources that any such company may devote to develop the products for which we collaborate with them. Any such company may not perform as expected. These companies may breach or terminate their agreements with us or otherwise fail to conduct product discovery and development activities successfully, or in a timely manner. If any of these events occurs, it could have a material adverse effect on our business and our financial results.

c.     We are exposed to risks related to our investments in other companies.

        We are exposed to risks in the value of our investments in other companies. The fair value of our investments are subject to significant fluctuations due to stock market volatility and changes in general market conditions. We regularly review the carrying values of our investments and record losses whenever events and circumstances indicate that there have been other-than-temporary declines in their fair values. A significant change in the aggregate fair values of our investments could have a material effect on our consolidated results of operations; however, it would not have a material effect on our consolidated financial position or cash flows.

d.     We are subject to the risk of not being able to successfully integrate businesses or products we acquire or will acquire in the future.

        We pursue product or business acquisitions that could complement or expand our business. However, there can be no assurance that we will be able to identify appropriate acquisition candidates in the future. If an acquisition candidate is identified, there can be no assurance that we will be able to successfully negotiate the terms of any such acquisition, finance such acquisition or integrate such acquired product or business into our existing products and business. Furthermore, the negotiation of potential acquisitions and integration of acquired companies and product lines could divert management's time and resources, and require significant resources to consummate. If we consummate one or more significant acquisitions through the issuance of common shares, holders of our common shares could suffer significant dilution of their ownership interests.

e.     We depend on key scientific and managerial personnel for our continued success.

        Much of our success to date has resulted from the particular scientific and management skills of personnel available to us. If these individuals are not available, we might not be able to attract or retain employees with similar skills. In particular, our success to date in developing new products has resulted from the activities of a core group of research scientists. The continued availability of such a group is important to our ongoing success.

f.      We may not have sufficient cash and may be limited in our ability to access financing for future capital requirements, which may prevent us from expanding our business and our portfolio of products.

        We may in the future need to incur additional debt or issue equity to satisfy working capital and capital expenditure requirements, as well as to make acquisitions and other investments. To the extent we are unable to renew our existing credit facility or raise new capital, we may be unable to expand our business. If we raise funds through the issuance of debt or equity, any debt securities or preferred shares issued will have rights and preferences and privileges senior to those of holders of our common shares. The terms of the debt securities may impose restrictions on our operations that have an adverse impact on our financial condition. If we raise funds through the issuance of equity, the proportional ownership interests of our shareholders could be diluted.

g.     We are exposed to risks relating to foreign currencies.

        We operate internationally, but a majority of our revenue and expense activities and capital expenditures are denominated in U.S. dollars. Our only other significant transactions are in Canadian dollars. We do not have any material non-U.S. dollar denominated obligations. We also face foreign currency exposure on the translation of our operations in Canada, Ireland and France from their local currencies to the U.S. dollar. Currently, we do not utilize forward contracts to hedge against foreign currency risk. A significant change in foreign currency

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exchange rates may have a material effect on our consolidated results of operations, financial position or cash flows.

        On February 27, 2007, we issued a Notice of Redemption advising holders of our 77/8% Senior Subordinated Notes due April 1, 2010 (the "Notes") that we will redeem all outstanding Notes effective April 1, 2007. This redemption will result in a foreign exchange gain for Canadian income tax purposes. The amount of this gain will depend on the exchange rate between the U.S. and Canadian dollars at the time the Notes are redeemed. At March 19, 2007, the unrealized foreign exchange gain on the translation of the outstanding Notes to Canadian dollars for Canadian income tax purposes was approximately $141 million. If all of our outstanding Notes had been paid at March 19, 2007, one-half of this foreign exchange gain would be included in our taxable income for 2007, which would result in a corresponding reduction in our available Canadian net operating losses and tax credit carryforward balances (with an offsetting reduction to the valuation allowance provided against those balances).

h.     We are exposed to risks related to interest rates.

        The primary objective of our policy for the investment of temporary cash surpluses is the protection of principal and, accordingly, we invest in investment-grade securities with varying maturities, but typically less than 90 days. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk.

        Currently, we do not utilize interest rate swap contracts to hedge against interest rate risk. A significant change in interest rates could have a material impact on our consolidated results of operations, financial position or cash flows.

        We may be exposed to interest-rate risk on borrowings under our credit facility. This credit facility, which is currently undrawn, bears interest based on London Interbank Offering Rates, U.S. dollar base rate, Canadian dollar prime rate or Canadian dollar bankers' acceptance rates.

i.      Our securities are subject to price volatility.

        Market prices for the securities of pharmaceutical and biotechnology companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, concern as to the safety of drugs and general market conditions, can, among other things, have an adverse effect on the market price of our securities. Any inability to bring our pipeline products to market profitably may also have an adverse effect on the market price of our securities.

j.      We are exposed to risks if we are unable to comply with laws and future changes to laws affecting public companies, including the Sarbanes-Oxley Act of 2002, and also to increased costs associated with complying with such laws.

        Any future changes to the laws and regulations affecting public companies, as well as compliance with existing provisions of the Sarbanes Oxley Act of 2002 ("SOX") in the U.S. and Part XXIII.1 of the Securities Act (Ontario) and related rules, may cause us to incur increased costs as we evaluate the implications of new rules and respond to new requirements. Delays, or a failure to comply with the new laws, rules and regulations could result in enforcement actions, the assessment of other penalties and civil suits. The new laws and regulations make it more expensive for us under indemnities provided by the Company to our officers and directors and may make it more difficult for us to obtain certain types of insurance, including liability insurance for directors and officers; as such, we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, or as executive officers. We may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services — all of which could cause our general and administrative costs to increase beyond what we currently have planned. We are presently evaluating and monitoring developments with respect to these laws, rules and regulations, and we cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

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        The Company is required annually to review and report on the effectiveness of its internal control over financial reporting in accordance with SOX section 404 and Multilateral Instrument 52-109 of the Canadian Securities Administrators. The results of this review are reported in our Annual Report on Form 20-F and in our Management's Discussion and Analysis of Results of Operations and Financial Condition. Our registered public accounting firm is also required to report on the effectiveness of management's review and on the effectiveness of the Company's internal control over financial reporting.

        In connection with the restatement of the Company's previously issued financial statements (as described in the "Explanatory Note" preceding Part I, Item 1 of this Form 20-F), management has concluded that the Company's internal controls over financial reporting are ineffective as of December 31, 2006. Management's review is designed to provide reasonable assurance, not absolute assurance that all material weaknesses existing within the Company's internal controls are identified. Material weaknesses represent deficiencies existing in the Company's internal controls that may not prevent or detect a misstatement occurring which could have a material adverse affect on the quarterly or annual financial statements of the Company. In addition, management cannot assure you that the remedial actions being taken by the Company to address the material weaknesses identified will be successful, nor can management assure you that no further material weaknesses will be identified within its internal controls over financial reporting throughout 2007.

        If the Company fails to maintain effective internal controls over its financial reporting, there is the possibility of errors or omissions occurring or misrepresentations in the Company's disclosures which could have a material adverse effect on the Company's business, its financial statements, and the value of the Company's common shares.

k.     Environmental matters

        As a business, we are subject to the laws and regulations in the jurisdictions in which we carry on business, including environmental regulations. If our operations were found to have failed to comply with environmental standards or regulations, or are otherwise assessed by environmental authorities, such event could have a material adverse effect on the Company, including the cost of any remediation and any reputational impact.

l.      Rising insurance costs could adversely impact our business.

        The cost of insurance, including insurance for directors and officers, workers' compensation, property, product liability and general liability insurance, may increase in future years. In response, we may increase deductibles and/or decrease certain coverages to mitigate these costs. These increases, and our increased risk due to increased deductibles and reduced coverages, could have an adverse impact on our results of operations, financial condition and cash flows.

m.    Our operations could be disrupted if our information systems fail or if we are unsuccessful in implementing necessary upgrades.

        Our business depends on the efficient and uninterrupted operation of our computer and communications systems and networks, hardware and software systems and our other information technology. If our systems were to fail or we are unable to successfully expand the capacity of these systems, or we are unable to integrate new technologies into our existing systems, our operations and financial results could suffer.

Item 4 Information on the Company

A.    History and Development of the Company

        Biovail was formed under the Business Corporations Act (Ontario) on February 18, 2000 as a result of the amalgamation of TXM Corporation and Biovail Corporation International ("BCI"). The Company was continued under the Canada Business Corporations Act (the "CBCA") effective as of June 29, 2005.

        Our principal executive office is located at 7150 Mississauga Road, Mississauga, Ontario, Canada, L5N 8M5, telephone (905) 286-3000. Our agent for service in the U.S. is CT Corporation System, located at 111 Eighth Avenue, New York, New York, 10011, telephone number (212) 590-9338.

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        A description of our principal capital expenditures and divestitures and a description of acquisitions of material assets is found in our Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") and in the notes to our consolidated financial statements included elsewhere in this annual report.

B.    Business Overview

        We are a specialty pharmaceutical company that applies advanced drug-delivery technologies to improve the clinical effectiveness of medicines. We drive business growth by commercializing these products both directly (as is the case in Canada) and through strategic partners. Our main therapeutic areas of focus are central nervous system disorders ("CNS"), pain management and cardiovascular disease.

        Our core competency lies in our expertise in the development and large scale manufacturing of pharmaceutical products incorporating oral drug-delivery technologies. We have a broad portfolio of proprietary drug delivery technologies that represent the foundation upon which the Company's strategy is based. These drug-delivery technologies are used to develop (1) enhanced formulations of existing drugs that confer meaningful therapeutic benefits to patients, (2) combination products that incorporate two or more different therapeutic classes of drugs, and (3) difficult-to-manufacture generic pharmaceuticals. Enhancement of existing in-market products (or brands), also described as a product line-extension strategy, is currently being pursued by many large pharmaceutical companies as they look for ways to expand upon the significant clinical and marketing investments they have made in establishing high-value brands. Combination therapy is also gaining in prominence within the medical community, as physicians seek to capitalize on the synergistic effects and potential superior side effect profiles of combination products. In addition, these products provide the opportunity to lessen the 'pill burden' on patients. With respect to generic pharmaceuticals, Biovail focuses and intends to continue to focus its efforts exclusively on difficult-to-manufacture products, where competition is more limited, and consequently, commercial pricing and gross margins potentially higher.

        Our broad portfolio of oral drug-delivery technologies includes controlled release, graded release, enhanced absorption, rapid absorption, taste masking and oral disintegration, among others. These technologies can be combined to develop, for example, a controlled release, orally disintegrating, taste masked tablet. Our drug-delivery technologies are applicable to a wide range of molecules, and can, in many areas, address the pharmaceutical industry's more complex drug-delivery challenges.

        As a result, to prioritize those products with the highest market potential, we employ a market driven selection process for our drug-development pipeline candidates. We seek to identify disease states and medical disorders for which there are unmet medical needs, or in which therapeutic gaps exist in the treatment of those conditions. We then review the currently available treatment options, and in conjunction with our research-and-development team, assess the feasibility of using our drug-delivery technologies to develop a product that improves upon those options, potentially providing clinically meaningful benefits to patients. Product candidates that meet our screening criteria are then considered for addition to our development pipeline.

        We have historically spent between 8%-12% of our total revenues on research and development ("R&D") activities. However, going forward, we intend to increase our R&D spending, and are targeting a $500 million investment through 2010. (See "Company Strategy" and "Research and Development"). To this end, following a comprehensive review of all of our pipeline programs, we are focusing on a number of core research-and-development programs to drive business growth. These include novel formulations of bupropion and venlafaxine, combination products incorporating bupropion and tramadol, and a number of undisclosed, earlier stage programs.

        In 2006, our R&D efforts resulted in the submission of an NDA to the FDA for BVF-033, our novel bupropion salt formulation; and the initiation of the Phase III clinical program for BVF-146, a combination product incorporating our once-daily tramadol formulation with an undisclosed, non-steroidal anti-inflammatory drug, or NSAID.

        In an effort to remain at the forefront of the industry, in addition to our internal R&D efforts, we often seek to gain access to promising new and/or complementary technologies through agreements with third party,

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drug-development companies. To this end, we have an agreement with Ethypharm S.A. ("Ethypharm") (originally signed in 2002, and modified in December 2006) for the development of four undisclosed products, and a license agreement with Depomed, Inc. ("Depomed") (signed in February 2007) that provides Biovail with access to Depomed's proprietary AcuForm™ drug-delivery technology for the development of up to two undisclosed products.

Drug-Delivery Technologies

        Biovail regards its drug-delivery technologies as key differentiators and core competencies given our past success with the development, large-scale manufacture and commercialization of a number of products such as Wellbutrin® XL, Tiazac®, Tiazac® XC, Cardizem® LA and, more recently, Ultram® ER.

        Biovail has numerous and complementary drug delivery technologies that have enabled us to overcome significant product-development challenges. These technologies have in the past provided enhancements to existing compounds that have included reducing the number of doses a patient must take per day (once-daily dosing versus multiple doses per day), a reduction in potentially adverse side-effects and/or less variability of a drug in a patient's blood stream over the course of 24 hours. Once-daily dosing has been shown to provide higher levels of patient compliance due to a simplified dosage schedule as compared to that of medications that must be dosed multiple times per day. (See "— Industry Overview"). Beyond these benefits, the primary objective of our R&D efforts is to develop products with clinically meaningful benefits over existing treatment options.

Commercialization

        We continuously explore opportunities to further exploit our drug-delivery technologies through targeted product development activities. These products, if successfully developed, may then be commercialized in Canada through the Biovail Pharmaceuticals Canada ("BPC") sales force, or in the U.S. through strategic alliances with third parties that have established sales-and-marketing infrastructures. Outlined below are a number of examples of the successful execution of such commercialization.

        In November 2005, we entered into a 10-year supply agreement with Ortho-McNeil, Inc. ("OMI") for the distribution of our extended release and orally disintegrating formulations of Ultram®. With respect to the extended-release formulation (Ultram® ER), we manufacture and supply the product to OMI for distribution in the United States and Puerto Rico. Ultram® ER is the first once-daily tramadol product available in the United States for the treatment of moderate to moderately severe chronic pain. OMI launched Ultram® ER in the United States in February 2006. Our contractually determined supply prices range from 27.5% to 37.5% of OMI's net selling price for Ultram® ER, depending on the year of sale. The supply price was at the lowest end of the range in 2006, and is and will be at the highest end of the range in each of 2007 and 2008. Upon closing of the agreement, OMI paid us a supply prepayment of $60 million, which is being amortized through credits against one-third of the aggregate amount of our future invoices for product manufactured and supplied to OMI. At the end of 2006, $39.7 million remained to be amortized.

        Ultram® ODT (orally disintegrating tablet) has not yet been launched, as OMI focuses on driving growth for Ultram® ER.

        In May 2005, we entered into a strategic alliance with Kos Pharmaceuticals, Inc. ("Kos") for the distribution of Cardizem® LA in the U.S. (See "— Three-Year History — Material Developments"). We manufacture and supply Cardizem® LA to Kos at contractually determined supply prices (in excess of 30% of net sales) over an initial seven-year supply term. Kos was acquired by Abbott Laboratories in December 2006.

        In October 2001, GSK acquired the global marketing rights (excluding Canada) to our once-daily formulation of bupropion. We currently manufacture and supply our product to GSK pursuant to a tiered pricing supply agreement. GSK successfully launched the product in the U.S. in September 2003 under the brand name Wellbutrin XL®, with plans to launch in other markets as regulatory approvals are received. In February 2006, GSK announced that they had submitted applications for regulatory approval of Wellbutrin XL® in several European markets. In January 2007, GSK announced that Wellbutrin XR ® had been granted a marketing license in The Netherlands for the treatment of adult patients with major depressive episodes. The

19



medicine is also considered approvable by the regulatory agencies of 21 other countries under the decentralized procedure, a procedure that permits regulatory approval to be obtained from multiple members of the European Union ("EU"). Under this procedure, an application is filed seeking regulatory approval in several European Union member states. One member state is designated as the reference member state, which circulates its regulatory assessment to the other designated EU member states. Each designated EU member state generally adopts the assessment, thereby permitting regulatory approval in every designated EU member state without having to seek national approval in each EU member state. It is expected that Wellbutrin XR® could begin to be available to patients in Europe as early as April 2007.

        In 2006, Wellbutrin XL® was our key growth driver, accounting for approximately 42% of our overall revenues. In 2006, the Company was engaged in patent litigation proceedings against Anchen, Impax, Watson and Abrika, who filed ANDAs for generic equivalents to Wellbutrin XL®. On August 1, 2006, in the United States District Court for the Central District of California, Judge James V. Selna issued an order granting Anchen's Motion for Summary Judgment on the Wellbutrin XL® patent infringement case, and denied it on the invalidity issue. The Company appealed the decision. In December 2006, the FDA issued final approval to Anchen for it to market its generic equivalent of the 150mg and 300mg generic tablets of Wellbutrin XL® and to Impax to market the 300mg tablet. (See "Financial Information — Significant Changes — Legal Proceedings"). Subsequently, Teva, in agreement with Impax and Anchen, and as a result of Anchen's relinquishment in favour of Impax of its first-filer marketing exclusivity, launched Impax's 300mg generic equivalent to Wellbutrin, XL in mid-December, 2006. In February, 2007, as a result of comprehensive settlements with Anchen, Impax, Watson, and Teva, the lawsuits against Impax and Watson have been dismissed and, with certain defined exceptions, none of Teva/Anchen/Impax/Watson may market a generic version of the 150mg dosage strength of Wellbutrin XL® until 2008 (See "Financial Information — Significant Changes — Legal Proceedings").

        The Company has a manufacturing and distribution agreement, originally signed in 1997, with a subsidiary of Teva for a portfolio of bioequivalent (generic) products developed by us. We manufacture and sell these products to Teva for distribution in the U.S. In 2004, the agreement with Teva was expanded and extended by four years (on a product-by-product basis), and Biovail's share of the gross margins associated with the products was increased for the balance of the extended term. The key products of this agreement include generic formulations of Cardizem® CD , Procardia® XL and Adalat® CC.

        In September 1995, Forest Laboratories, Inc. ("Forest") acquired the U.S. marketing rights to a once-daily formulation of diltiazem developed by us. The product was launched in February 1996 under the brand name Tiazac®. In April 2003, upon the product's genericization, Forest ceased promotional support for Tiazac® and now distributes a Tiazac® generic on our behalf.

Biovail Pharmaceuticals, Inc.

        In the U.S., our wholly-owned subsidiary, Biovail Pharmaceuticals, Inc. ("BPI"), distributes a number of pharmaceutical products. Through most of 2006, BPI employed an 85-member specialty sales force that promoted certain products mainly to women's healthcare practitioners and dermatologists. However, in December 2006, we announced that we would leverage strategic partners to promote our products to specialist physicians in the U.S., which is consistent with our approach to commercializing products in the U.S. primary-care market since May 2005. As a result, the BPI specialty sales force and related support functions were eliminated. Following this decision, BPI ceased its promotion of Zovirax® and its co-promotional efforts for Ultram® ER and Zoladex® 3.6mg. On December 20, 2006, we entered into an exclusive promotional services agreement with Sciele whereby Sciele's sales force will promote Biovail's topical antiviral line, Zovirax® Ointment and Zovirax® Cream, to U.S. physicians.

        In May 2005, we had similarly realigned our U.S. marketing and sales operations, changing the manner in which we commercialized products to the primary-care segment of the U.S. market. Following this realignment, we ceased promoting our products directly to a broad audience of primary-care physicians in the U.S. and entered into a multi-faceted transaction with Kos with respect to certain products being promoted to the U.S. primary-care market. Under the agreements with Kos, Biovail manufactures, supplies and sells Cardizem® LA to Kos for distribution at contractually determined prices, which exceed 30% of Kos's net selling

20



price. Biovail also divested all of its rights to Teveten® and Teveten® HCT to Kos. (See "Three Year History — Material Developments — Kos Transaction").

        BPI also distributes a number of branded off-patent products. These products — which we refer to as our "Legacy products" — include the well-known brands Cardizem® CD, Ativan®, Vaseretic®, Vasotec® and Isordil®. These products are not actively promoted by Biovail and represent non-core assets for which patent protection has expired. While the products remain well-respected by the medical community, their prescription volumes are in decline due to the availability of several competing generic formulations.

Biovail Pharmaceuticals Canada

        In Canada, where the market dynamics are much different than in the U.S., we have maintained a direct-selling commercial presence through Biovail Pharmaceuticals Canada ("BPC") that successfully targets both specialist and primary-care physicians. BPC has established itself as a leading pharmaceutical marketing and sales operation in the Canadian market. Market research indicates that BPC is the largest independent pharmaceutical company that markets to physicians in Canada. In 2006, BPC expanded its sales force to 96 territories to support a number of new product launches. BPC currently promotes a well-respected portfolio of products to approximately 10,900 physicians across the country. Products include Tiazac® XC, Wellbutrin XL® and Glumetza™. BPC also promotes the Lescol® franchise, pursuant to an agreement entered into with Novartis Pharmaceuticals Canada, Inc. in May 2006. In addition, we are evaluating a number of product marketing opportunities and acquisitions that have a strategic fit for further growth to BPC's commercial operations.

Manufacturing

        We currently operate three pharmaceutical manufacturing facilities located in Steinbach, Manitoba; Dorado, Puerto Rico; and Carolina, Puerto Rico. All of these facilities meet FDA-mandated and TPD-mandated GMP. Through these facilities we manufacture branded products that are commercialized by our partners that include Wellbutrin XL®, Ultram® ER and Cardizem® LA and several branded products that are distributed by BPI and BPC, as applicable. We also manufacture generic products that are distributed by Teva and Forest in the United States and by Novopharm Limited ("Novopharm"), a subsidiary of Teva, in Canada.

        We maintain on site quality control and experienced manufacturing supervision at these sites so that manufacturing, packaging and shipping activities are undertaken in compliance with GMP requirements. Efforts are undertaken to maintain equipment parts or replacements so that they can be readily available to avoid any interruptions in supply where possible.

        We source raw materials for our manufacturing operations from various FDA-approved companies worldwide. It is our practice, wherever reasonably possible, to have a minimum of two suppliers for all major active pharmaceutical ingredients ("API") for our manufactured products. This facilitates both the continuity of supply of raw materials and best pricing from suppliers based on volume and time period.

Competitive Strengths

        The pharmaceutical industry is highly competitive and subject to rapid and significant technological change. Our products face competition from both conventional forms of drug delivery and controlled release drug-delivery systems developed, or under development, by other pharmaceutical companies. Many of these competitors have greater financial resources and marketing capabilities than us. Our competitors in the U.S. and abroad are numerous and include, among others, major pharmaceutical and chemical companies, specialized contract research and research-and-development firms, universities, and other research institutions. Additionally, we have, or may in the future have, manufacturing-and-supply agreements or other relationships with some of our competitors.

        Nevertheless, we believe that our portfolio of oral drug-delivery technologies is among the broadest in the industry, which provides us considerable flexibility when selecting pipeline candidates. Our drug-delivery technologies are applicable to a wide range of molecules, and have the potential, in many areas, to address the

21



pharmaceutical industry's more complex drug-delivery challenges. Our selection process is largely driven by intellectual property and market opportunity considerations. Our technologies include controlled release, graded release, enhanced absorption, rapid absorption, taste masking, and oral disintegration, among others. Importantly, these can be combined to develop, for example, a controlled release, orally disintegrating, taste masked tablet. Our technology portfolio also includes those that are amenable to combination products, by allowing for, among other advantages, a high payload of active ingredient, which minimizes the required tablet size. Additionally, we have technologies that are generally resistant to interactions with alcohol, an issue that has increasingly gained in prominence in recent years.

        Biovail strives to be at the forefront of the industry through internal R&D, as well as through licensing agreements with third party drug-delivery companies, whereby we seek to gain access to promising new and/or complementary technologies. A recent example of this is the February 2007 license agreement with Depomed, that provides Biovail with access to Depomed's proprietary AcuForm™ drug-delivery technology for the development of up to two Biovail products.

        Since our R&D efforts are largely focused on developing novel formulations of existing drugs by providing clinically meaningful benefits and advantages to patients over existing formulations — where safety and efficacy profiles are well known and established — the development risk we face is typically lower relative to companies pursuing new chemical entities ("NCEs"). For the same reasons, the development costs we incur and our development timelines to bring products to market are also lower. Upon receiving approval from the FDA, the enhanced medication typically receives three years of market exclusivity (depending on the clinical program upon which approval was based), compared with NCEs, which typically receive five years of market exclusivity. Nevertheless, patents can often extend the lifecycles of these products beyond the expiry of exclusivity periods. (See "— U.S. Regulation" and "— Canadian Regulation").

        One of our competitive advantages, and what differentiates us from a number of our peers in the drug-delivery industry, is our demonstrated ability to transfer technologies from the concept stage to full-scale commercial manufacturing of products incorporating those drug-delivery technologies. Our record of success in this regard includes products such as those within our generic pharmaceuticals portfolio, and branded products, such as Cardizem® LA , Tiazac® and Tiazac XC® (anti-hypertensives), Wellbutrin XL® (anti-depressant) and more recently, Glumetza™ (diabetes) and Ultram® ER (chronic pain). We regard our manufacturing expertise as it relates to our drug-delivery technologies as an integral component of our success, and as such, we anticipate manufacturing and commercializing all of our pipeline products that are successfully developed.

Company Strategy

        As a result of Biovail's strategic planning process, the Company has developed a commercialization strategy that leverages relationships with strategic partners with established infrastructures and marketing capabilities to commercialize its products in the U.S. In Canada, our commercialization strategy is focused on marketing to specialists and high-prescribing primary-care physicians because we are able to effectively target a broad audience of physicians with relatively few sales representatives.

        Biovail has adopted a focus on driving business growth through a targeted investment in high-priority research-and-development programs and is no longer pursuing commercial product acquisitions for the U.S. market.

        Given this strategy and focus, and following a comprehensive review of associated spending requirements for the coming years, the Company decided in fiscal 2006 to return a significant portion of its excess cash to shareholders in the form of increased dividend payments. Biovail has adopted a new dividend policy that contemplates an annual dividend of $1.50 per common share (paid quarterly in increments of $0.375 per common share subject to Board approval).

Commercialization Strategy

        The implementation of our commercialization strategy to leverage relationships with strategic partners has been executed in multiple steps, including a sales force reduction in the U.S. primary-care market in May 2005 and a similar sales force reduction in the U.S. specialty products market in December 2006. This strategy

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provides us with operational flexibility and allows us to maximize our operating margins, as the sales and marketing costs are borne by our partners. At the same time, we retain control of the production of our products, which allows us to leverage our manufacturing expertise, which we regard as one of our core assets.

        Our commercialization strategy has been applied through our agreements with GSK for Wellbutrin® (a once-daily formulation of bupropion developed by Biovail), with OMI for Ultram® ER (a once-daily formulation of tramadol developed by Biovail), with Kos for Cardizem® LA (novel formulation of diltiazem developed by Biovail) and with Sciele for the promotion of Zovirax® (topical antiviral line). We are currently in active discussions with several other companies for the commercialization of several of our pipeline products.

        The market in Canada is very different than it is in the United States. In Canada, the BPC sales force, which currently includes 96 territories, is able to effectively target a broad audience of physicians. Our commercialization strategy in Canada is focused on marketing to specialists and high-prescribing primary-care physicians. The BPC sales force has a track record of success in promoting products over its ten-year history. Key successes include Tiazac®, Tiazac XC®, Celexa®, Wellbutrin SR®, and more recently, Wellbutrin® XL. We consider BPC a core asset, and are actively pursuing new-product acquisition opportunities for the division.

        BPI also distributes a number of branded off-patent products. These products — which we refer to as our "Legacy products" — include the well-known brands Cardizem® CD, Ativan®, Vaseretic®, Vasotec® and Isordil®. These products are not actively promoted by Biovail and represent non-core assets for which patent protection has expired. While the products remain well-respected by the medical community, their prescription volumes are in decline due to the availability of several competing generic formulations.

Research and Development

        Biovail is a specialty pharmaceutical company with a record of growth and innovation in developing controlled-release products. The application of our proprietary drug-delivery technologies to existing orally administered medications has provided us, together with our partners, the opportunity to extend product lifecycles through the development of novel formulations. Going forward, we are focusing on R&D to drive business growth, and are targeting a $500 million investment in R&D through 2010. Our R&D efforts are focused on three key areas: (1) enhanced formulations of existing drugs, (2) combination products incorporating two or more therapeutic classes of drugs, and (3) difficult-to-manufacture generic pharmaceuticals.

        We also generate revenues through the provision of developmental research services to third parties resulting in the use of our existing infrastructure more efficiently.

Dividend Policy

        Given the December 2006 restructuring of our U.S. commercial operations and the decision to focus on driving business growth through a targeted investment in high-priority research-and-development programs, we are no longer pursuing commercial-product acquisitions in the U.S. market. As a result of this change of focus, we undertook a comprehensive analysis of our research-and-development spending requirements for the coming years. Given our strong cash balances at the end of 2006, and the ongoing robust cash-flow generation of our business model, the Company concluded that there was likely to be significant excess cash on hand, even after fully funding the Company's growth strategy over the foreseeable future. Further to this conclusion, we adopted a new dividend policy that contemplates the payment of an annual dividend of $1.50 per common share (paid quarterly in increments of $0.375 per common share subject to Board approval). In addition, we may approve the payment of future special dividends, subject to positive business trends and at the discretion of the Board. For example, as a result of the strong financial performance in 2006, we declared the payment of a special cash dividend of $0.50 per share, which was paid in January 2007.

Industry Overview

        Over the past several years, the pharmaceutical industry has experienced change. This change is in response to factors such as increased enrolment in HMOs in the U.S., growth in managed care, an aging and more health aware population, introduction of several major new drugs that bring significant therapeutic benefits, and increased use of new marketing approaches such as direct-to-patient advertising.

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        IMS reports that the total U.S. prescription drug market was approximately $274.8 billion in 2006, an increase of 8% relative to 2005. IMS estimates that during the years 2007 to 2010, branded products with annual sales in excess of $50 billion will lose patent protection. In 2006, IMS estimates the loss of sales in such products due to losing patent protection was $18.2 billion.

        To replace these revenues and reduce their dependence on internal development programs, large pharmaceutical companies often enter into strategic licensing arrangements with specialty pharmaceutical companies, in addition to augmenting their product pipelines by acquiring smaller pharmaceutical companies with valuable research-and-development programs and technologies. Large pharmaceutical companies are also developing strategies to extend brand life-cycles and exclusivity periods and establish product differentiation.

        According to IMS, prescription growth for 2006 in the U.S. pharmaceutical market for all forms of controlled release drugs was approximately 4.5%. The oral-dosage, controlled release segment of the market generated approximately $24.1 billion in revenue in 2006, an increase of 6.4% over the prior year. The growth in this segment came from applications related to the proliferation of branded drugs at or near patent expiration, and new product launches, partially offset by increased generic competition.

        Controlled release products are formulated to, among other variations, release the drug's active ingredient gradually and predictably over a 12-hour to 24-hour period. These formulations typically provide for: (1) potentially greater effectiveness in the treatment of chronic conditions through more consistent delivery of the medication; (2) potentially reduced side effects; (3) greater convenience; and (4) potentially higher levels of patient compliance due to a simplified dosage schedule as compared to that of immediate release drugs.

        There are significant technical barriers to entry into the development of controlled release drugs, with only a limited number of companies possessing the requisite expertise and technology. Despite the therapeutic advantages of controlled release drugs versus their immediate release counterparts, many pharmaceutical companies have not made the additional investment to develop a controlled release version of a product while their immediate release version is under patent protection.

        The pharmaceutical industry is subject to ongoing political pressure to contain the growth in spending on drugs and to expedite and facilitate bioequivalent competition to branded products. In the U.S., changes to Medicare prescription drug coverage are being implemented. Companies oriented toward improved drug-delivery and bioequivalent medications may benefit from the focus on cost-containment and therapeutic value.

Priority Markets

        The primary markets for our products are the U.S. and Canada. The U.S. is the world's largest pharmaceutical market with total prescription spending of $274.8 billion in 2006. U.S. prescription spending in 2006 increased 6% relative to 2005. Within the U.S. and Canadian markets, our therapeutic focus areas are cardiovascular disease (including Type II diabetes), CNS disorders and pain management.

        Our current portfolio of commercial products includes a number of cardiovascular products, for the treatment of hypertension, angina, congestive heart failure and acute myocardial infarction. According to IMS, the U.S. market for cardiovascular products was valued at $42.0 billion in 2006, of which $19.5 billion was represented by anti-hypertensives. In 2006, our commercial portfolio of cardiovascular therapeutic products in the U.S. included Cardizem® LA (promoted by Kos), Cardizem® CD, Tiazac®, Vasotec®, Vaseretic®, Isordil®, and a number of generic pharmaceutical products.

        Our commercial portfolio also includes products targeting the herpes market — a market that was valued at $1.7 billion in 2006. Zovirax® Ointment and Zovirax® Cream (launched in 2004), are topical antiviral products indicated for genital herpes and cold sores, respectively. Effective December 20, 2006, this product line is being promoted to U.S. physicians by Sciele, pursuant to an exclusive promotional services agreement. Within the topical herpes market, Zovirax® held a 71.4% share at the end of 2006. However, oral therapeutic products for herpes represent the vast majority of the overall herpes market, with 2006 sales of $1.5 billion.

        We also have a presence in the pain market — a market that was valued at $10.7 billion in 2006 — through OMI's marketing of Ultram® ER, a once-daily formulation of tramadol hydrochloride developed by Biovail.

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Ultram® ER, which is indicated for moderate to moderately severe chronic pain, is the first extended-release tramadol product available in the U.S. market.

        CNS disorders represent another of our therapeutic focus areas. According to IMS, the U.S. market for the treatment of CNS was valued at $18 billion in 2006, with the majority — $13.5 billion — represented by anti-depressants. Our commercial portfolio in these markets includes a once-daily formulation of bupropion sold by GSK as Wellbutrin XL® and Ativan®.

        In Canada, we market products directly through BPC, our Canadian marketing and sales division. The Canadian pharmaceutical market was valued by IMS at C$17.8 billion in 2006. BPC's therapeutic focus lies in cardiovascular disease and depression, markets valued at C$3.0 billion and C$837.5 million, respectively. BPC's sales force structure includes 96 territories, which allow targeting of approximately 11,100 physicians across the country. During 2006, the Tiazac® franchise (Tiazac® and Tiazac® XC) was BPC's leading product line, representing approximately 46% of our total Canadian product revenues.

        We also have a significant presence in generic pharmaceuticals in the U.S., an industry valued by IMS at $47 billion in 2006, a 12% increase relative to 2005. Our focus in this segment has been on the development of generic formulations of branded controlled release products (which are typically more difficult to manufacture) where the competitiveness and price discounting is significantly less than in the immediate release generic market. Our generic pharmaceuticals, with the exception of generic Tiazac® (which is supplied to Forest in the U.S.), are distributed in the U.S. by a subsidiary of Teva, pursuant to an agreement originally signed in 1997, and extended and expanded in 2004. In Canada, our generic versions of Cardizem® CD and Tiazac® are distributed by Novopharm, a subsidiary of Teva. In recent years, as we pursued the development of branded products, generic pharmaceuticals were not a focus area for our R&D group. However, in December 2006, we announced that we would focus our R&D efforts on three key areas, one of which was on the development of difficult-to-manufacture generic pharmaceuticals.

        We own the U.S. rights to a number of pharmaceutical branded products that are not actively promoted. These are products that have been genericized and whose prescription volumes are declining at reasonably predictable rates. These products, known as Legacy products, include Cardizem® CD, Ativan®, Isordil®, Tiazac®, Vasotec® and Vaseretic®. Because of the lack of promotion, and the minimal resources that are required to support the distribution of these products, the operating margins and cash flows associated with them is significant.

        We currently have a number of pipeline products in various stages of development, primarily targeting the cardiovascular disease, CNS disorders and pain management markets. According to IMS, the U.S. market for these therapeutic areas were valued at $42 billion, $18 billion and $11 billion, respectively, for the 12 months ended December 31, 2006. As our drug-delivery technologies are not limited to specific therapeutic classes, we do have the flexibility to pursue pipeline products in other therapeutic areas, and we intend to be opportunistic in this regard.

        While our business focus is to develop products for the U.S. and Canadian markets, several of our products have been approved for sale and commercialized globally through licensing agreements with strategic marketing partners with expertise in their local markets. For example, in January 2007, GSK announced the first European approval for Wellbutrin XR® (the brand name that GSK will use in a number of countries for our once-daily formulation of bupropion). It is expected that the medicine could begin to be available to patients as early as April 2007. Going forward, we anticipate the commercialization of select pipeline products, including Ultram® ER, in global markets through strategic partners.

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        The following table summarizes our revenues by category of activity and geographic market for each of the last three fiscal years (all amounts expressed in thousands of U.S. dollars):

 
  2006
  2005
  2004
 
  Product Sales
  Research & Development
  Royalty
and Other

  Total
  Product Sales
  Research & Development
  Royalty
and Other

  Total
  Product Sales
  Research & Development
  Royalty
and Other

  Total
 
  As Restated(1)

   
   
  As Restated(1)

  As Restated(1)

   
   
  As Restated(1)

   
   
   
   
Canada   82,513   7,344   63   89,920   105,781   7,066     112,847   104,966   5,281   264   110,511
United States and Puerto Rico   938,765   11,739   15,708   966,212   781,293   20,308   13,741   815,342   732,136   13,074   14,965   760,175
Other countries     2,510   9,080   11,590     575   9,579   10,154     924   7,546   8,470
   
 
 
 
 
 
 
 
 
 
 
 
    1,021,278   21,593   24,851   1,067,722   887,074   27,949   23,320   938,343   837,102   19,279   22,775   879,156
   
 
 
 
 
 
 
 
 
 
 
 

(1)
See the "Explanatory Note" preceding Part I, Item 1 of this Form 20-F.

Revenue Sources and Products

        The following table summarizes our commercial product line:

Product

  Therapeutic Area
  Indications
  Therapeutic Market Size*
Promoted/Distributed by BPI            
Cardizem® CD   Cardiovascular   Hypertension/angina   $19.5 billion
Ativan®   CNS   Anxiety   $800 million
Vasotec®   Cardiovascular   Hypertension/congestive heart failure   $19.5 billion
Vaseretic®   Cardiovascular   Hypertension/congestive heart failure   $19.5 billion
Isordil®   Cardiovascular   Angina   $223 million
Zovirax® Cream(1)   Antiviral   Herpes labialis (cold sores)   $1.7 billion
Zovirax® Ointment(1)   Antiviral   Genital herpes   $1.7 billion

Promoted/Distributed by BPC

 

 

 

 

 

 
Tiazac®   Cardiovascular   Hypertension/angina   C$2.2 billion
Tiazac® XC   Cardiovascular   Hypertension   C$2.2 billion
Glumetza™   Cardiovascular   Type II diabetes   C$386 million
Wellbutrin® XL(2) and SR   CNS   Depression   C$837 million
Monocor®   Cardiovascular   Hypertension   C$2.2 billion
Retavase®   Cardiovascular   Acute myocardial infarction   C$45 million
Zyban®   CNS   Smoking cessation   C$98 million
Cardizem® CD   Cardiovascular   Hypertension/angina   C$2.2 billion

Distributed by Partners

 

 

 

 

 

 
Wellbutrin XL®   CNS   Depression   $13.5 billion
Cardizem® LA(3)   Cardiovascular   Hypertension/angina   $1.7 billion
Ultram® ER   Pain   Chronic Pain   $10.7 billion
Tiazac®(4)   Cardiovascular   Hypertension/angina   $19.5 billion

Bioequivalent (generic) Products

 

 

 

 

 

 
Adalat® CC (nifedipine extended release)(5)   Cardiovascular   Hypertension/angina   $19.5 billion
Cardizem® CD (diltiazem controlled release)(6)   Cardiovascular   Hypertension/angina   $19.5 billion
Procardia® XL (nifedipine extended release)(5)   Cardiovascular   Hypertension/angina   $19.5 billion
Tiazac® (diltiazem)(7)   Cardiovascular   Hypertension/angina   $19.5 billion
Trental® (pentoxifylline)(5)   Cardiovascular   Peripheral vascular disease   $66 million
Voltaren® XR (diclofenac controlled release)(5)   Inflammation   Arthritis   $7.9 billion

*
Market size for 2006 according to IMS.

(1)
As of December 2006, Zovirax® Ointment and Zovirax® Cream are promoted by Sciele for BPI.

(2)
Wellbutrin® XL was launched by BPC in Canada in April 2006.

(3)
As of May 2005, Cardizem® LA was promoted and distributed by Kos (Kos was acquired by Abbott Laboratories in December 2006).

(4)
Tiazac® is marketed by Forest Laboratories, Inc. in the U.S.

26


(5)
Distributed by Teva in the U.S.

(6)
Distributed by Teva in the U.S. and Novopharm, a subsidiary of Teva, in Canada.

(7)
Distributed by Forest in the U.S. and Novopharm in Canada.

        We have capabilities in all aspects of the drug-development process — from formulation and development of oral drugs to clinical testing, regulatory filing, manufacturing, marketing (in Canada) and distribution. This integrated approach results in operational synergies, increased flexibility and enhanced cost efficiencies. In 2006, we reported our product revenue based on the following categories:

1.
Wellbutrin XL® (U.S. market);

2.
Zovirax®;

3.
Cardizem® LA;

4.
Ultram® ER;

5.
BPC;

6.
Legacy products;

7.
Generic products; and

8.
Teveten.

        The following table summarizes our product revenues for the fiscal years of 2006 and 2005:

 
  Revenues
($000)

   
  % of
Product
Revenues

 
 
  Change
%

 
Product / Product Line
  2006
  2005
  2006
  2005
 
 
  As Restated(1)

  As Restated(1)