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Valeant Pharmaceuticals International, Inc. 20-F 2008

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F

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, 2007

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: 161,023,729 Common Shares, no par value, as of December 31, 2007.

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.   Advisors   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   18
    A.   History and Development of the Company   18
    B.   Business Overview   18
    C.   Organizational Structure   42
    D.   Property, Plant and Equipment   42
Item 4A   Unresolved Staff Comments   44
Item 5   Operating and Financial Review and Prospects   44
Item 6   Directors, Senior Management and Employees   86
    A.   Directors and Senior Management   86
    B.   Compensation   90
    C.   Board of Directors Practices   133
    D.   Employees   136
    E.   Share Ownership   136
Item 7   Major Shareholders and Related Party Transactions   137
    A.   Major Shareholders   137
    B.   Related Party Transactions   139
    C.   Interests of Experts and Counsel   139
Item 8   Financial Information   139
    A.   Consolidated Statements and Other Financial Information   139
    B.   Significant Changes   140
Item 9   The Offer and Listing   148
    A.   Offer and Listing Details   148
    B.   Plan of Distribution   148
    C.   Markets   148
    D.   Selling Shareholders   149
    E.   Dilution   149
    F.   Expenses of the Issue   149

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Item 10   Additional Information   149
    A.   Share Capital   149
    B.   Memorandum and Articles of Association   149
    C.   Material Contracts   151
    D.   Exchange Controls   151
    E.   Taxation   152
    F.   Dividends and Paying Agents   155
    G.   Statements by Experts   156
    H.   Documents on Display   156
    I.   Subsidiary Information   157
Item 11   Quantitative and Qualitative Disclosures About Market Risk   157
Item 12   Description of Securities Other Than Equity Securities   157
    A.   Debt Securities   157
    B.   Warrants and Rights   157
    C.   Other Securities   157
    D.   American Depository Shares   157
    PART II    
Item 13   Defaults, Dividend Arrearages and Delinquencies   158
Item 14   Material Modification to the Rights of Security Holders and Use of Proceeds   158
Item 15   Controls and Procedures   158
Item 16   [RESERVED]   158
Item 16A   Audit Committee Financial Expert   158
Item 16B   Code of Ethics   158
Item 16C   Principal Accounting Fees and Services   159
Item 16D   Exemptions from the Listing Standards for Audit Committee   159
Item 16E   Purchases of Equity Securities by the Issuer and Affiliated Purchases   159
    PART III    
Item 17   Financial Statements   160
Item 18   Financial Statements   160
Item 19   Exhibits   160

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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, 2007.

        Unless otherwise noted, prescription and market data are derived from information provided by IMS Health Inc. ("IMS") and are as of its December 31, 2007 report. IMS is a provider of information solutions to the pharmaceutical and healthcare industries, including market intelligence and performance statistics.

Trademarks

        The following words are trademarks of our Company and are the subject of either registration, or application for registration, in one or more of Canada, the United States of America (the "U.S.") or certain other jurisdictions: ATTENADE™, A Tablet Design (Apex Down)®, A Tablet Design (Apex Up)®, APLENZIN™, ATIVAN®, ASOLZA™, BIOVAIL®, BIOVAIL CORPORATION®, BIOVAIL & SWOOSH DESIGN®, BPI®, BVF®, CARDISENSE™, CARDIZEM®, CEFORM®, CRYSTAAL PHARMACEUTICALS™, DITECH™, FLASHDOSE®, GLUMETZA®, INSTATAB™, ISORDIL®, JOVOLA™, JUBLIA™, MIVURA™, ONELZA™, ONEXTEN™, ORAMELT™, PALVATA™, RALIVIA™, SMARTCOAT™, SOLBRI™, TESIVEE™, TIAZAC®, TITRADOSE™, TOVALT™, UPZIMIA™, VASERETIC®, VASOCARD™, VASOTEC®, VEMRETA™, VOLZELO™ and ZILERAN™.

        WELLBUTRIN®, WELLBUTRIN® SR, WELLBUTRIN XL® (a once daily formulation of bupropion developed by Biovail), WELLBUTRIN® XR, Zovirax® and Zyban® are trademarks of The GlaxoSmithKline Group of Companies ("GSK") and are used by us under license. ULTRAM® is a trademark of Ortho-McNeil, Inc. ("OMI") and is used by us under license.

        In addition, we have filed trademark applications for many of our other trademarks in the U.S. and Canada and have 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 defined under 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., the focus on research and development, the intent and ability to make changes to our strategies, our manufacturing ability, the timing of the launch of a generic version of the 150mg strength of Wellbutrin XL®, the tiered supply price to be received by GSK for Wellbutrin XL®, the supply price to be received by OMI for Ultram® ER, the availability of benefits under tax treaties, the timing, results and progress of our development efforts, the anticipated manufacturing and commercializing of all pipeline products that are successfully developed, including select products in global markets, the intent and ability to make future dividend payments, the expected finalization of supply contracts, the intent and timing of the liquidation of our auction rate securities, the expected results of certain litigation and regulatory proceedings and the outcome, amount and timing of the potential settlement of certain of these proceedings, the estimation of the amount of the U.S. securities class action settlement and the amount that our insurance carriers will pay, the availability of Director and Officer liability insurance as a result of the settlement of certain litigation, the anticipated amount of premiums to be paid in respect of Director and Officer liability insurance, the outcome of the U.S. Securities and Exchange Commission staff review of our amended Annual Report on Form 20-F/A for the fiscal year ended December 31, 2006, filed on May 23, 2007, the outcome of the continuous

iii



disclosure review by the Corporate Finance Branch of the Ontario Securities Commission. Forward-looking statements 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. 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 we believe 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; the resolution of insurance claims relating to certain litigation and regulatory proceedings; 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 substance of the FDA response on the April 23, 2008 action date for BVF-033, the difficulty of predicting U.S. Food and Drug Administration and Canadian Therapeutic Products Directorate approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the results of continuing safety and efficacy studies by industry and government agencies, uncertainties associated with the development, acquisition and launch of new products, contractual disagreements with third parties, reliance on key strategic alliances, our eligibility for benefits under tax treaties, availability of raw materials and finished products, the regulatory environment, the results of the upcoming U.S. presidential election, the unpredictability of protection afforded by our patents, the mix of activities and income in various jurisdictions in which we operate, successful challenges to our generic products, infringement or alleged infringement of the intellectual property rights of others, unanticipated interruptions in our manufacturing operations or transportation services, the expense and uncertain outcome of legal and regulatory proceedings and settlements thereto, payment by insurers of insurance claims, currency fluctuations, consolidated tax rate assumptions, fluctuations in operating results, the market liquidity and amounts realized for our auction rate securities held as investments and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators, as well our 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 Form 20-F, and in particular under the heading "Risk Factors" under Item 3, Sub-Part D. We caution 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 our 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.

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PART I

Item 1. Identity of Directors, Senior Management and Advisors

A.    Directors and Senior Management

        Not applicable.

B.    Advisors

        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 our 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

1



related notes thereto prepared in accordance with U.S. GAAP (See Item 18, "Financial Statements"). All dollar amounts are expressed in thousands of U.S. dollars, except per share data.

 
  Years Ended December 31
 
 
  2007
  2006
  2005
  2004
  2003
 
Consolidated operating data:                                
Revenue   $ 842,818   $ 1,067,722   $ 938,343   $ 879,156   $ 811,750  
Operating income(1)     188,014 (3)   238,867 (5)   313,279 (8)   259,081 (11)   17,415 (13)
  Income (loss) from continuing operations     195,539 (4)   215,474 (6)   257,015 (9)   165,014 (12)   (29,643) (14)
  Net income (loss)     195,539 (4)   211,626 (7)   246,440 (10)   159,799 (12)   (30,122) (14)
Basic and diluted earnings (loss) per share:                                
  Income (loss) from continuing operations   $ 1.22 (4) $ 1.35 (6) $ 1.61 (9) $ 1.04 (12) $ (0.19) (14)
  Net Income (loss)   $ 1.22 (4) $ 1.32 (7) $ 1.54 (10) $ 1.00 (12) $ (0.19) (14)
Cash dividends declared per share   $ 1.50   $ 1.00   $ 0.50          
 
 
  At December 31
 
  2007
  2006
  2005
  2004
  2003
Consolidated balance sheet:                              
Cash and cash equivalents   $ 433,641   $ 834,540   $ 445,289   $ 34,324   $ 133,261
Working capital     339,439     647,337     414,033     124,414     149,884
Total assets     1,782,115     2,192,442     2,036,820     1,711,060     1,922,774
Long-term obligations(2)         410,525     436,058     474,498     815,907
Common Shares     1,489,807     1,476,930     1,461,077     1,457,065     1,448,353
Shareholders' equity (net assets)   $ 1,297,819   $ 1,302,257   $ 1,228,364   $ 1,053,913   $ 881,595
Number of Common Shares issued and outstanding (000s)     161,023     160,444     159,588     159,383     158,797

(1)
Reflects the reclassification of losses on impairment of $3,397 and $37,802 in 2005 and 2004, respectively, from operating income to conform to the presentation adopted in 2007.

(2)
Reflects the reclassification of deferred compensation of $1,266, $810, $4,438 and $7,020 in 2006, 2005, 2004 and 2003, respectively, from long-term obligations to conform to the presentation adopted in 2007.

(3)
Includes charges of $95,114 for legal settlements (net of insurance recoveries); $9,910 for intangible asset impairments; and $668 for restructuring costs. Those charges were partially offset by a $1,735 contract recovery.

(4)
Includes charges of $95,114 for legal settlements (net of insurance recoveries); $9,910 for intangible asset impairments; $668 for restructuring costs; $12,463 for loss on early extinguishment of debt; $8,949 for loss on impairment of investments; and an equity loss of $2,528. Those changes were partially offset by a $1,735 contract recovery; and a gain of $24,356 on disposal of investments.

(5)
Includes charges of $143,000 for intangible asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; and $14,400 for legal settlements.

(6)
Includes charges of $143,000 for intangible asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; $14,400 for legal settlements; and an equity loss of $529.

(7)
Includes charges of $143,000 for intangible asset impairments (net of gain on disposal of $4,000); $54,800 for contract losses; $15,126 for restructuring costs; $14,400 for legal settlements; an equity loss of $529; and $1,084 for asset impairments of discontinued operation.

(8)
Includes charges of $25,833 for intangible asset impairments; $19,810 for restructuring costs; and $4,862 for write-off of inventory.

(9)
Includes charges of $25,833 for intangible asset impairments; $19,810 for restructuring costs; $4,862 for write-off of inventory; $3,397 for loss on impairment of investments; and an equity loss of $1,160.

(10)
Includes charges of $25,833 for intangible asset impairments; $19,810 for restructuring costs; $4,862 for write-off of inventory; $3,397 for loss on impairment of investments; an equity loss of $1,160; and $5,570 for asset impairments of discontinued operation.

(11)
Includes charges of $8,640 for acquired research and development; and $2,883 for intangible asset impairments (net of gain on disposal of $1,471).

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(12)
Includes charges of $8,640 for acquired research and development; $2,883 for intangible asset impairments (net of gain on disposal of $1,471); $37,802 for loss on impairment of investments; and an equity loss of $4,179.

(13)
Includes charges of $124,720 for acquired research and development; $61,348 for the extinguishment of a royalty obligation; $45,081 for intangible asset impairments; and $7,539 for relocation costs.

(14)
Includes charges of $124,720 for acquired research and development; $61,348 for the extinguishment of a royalty obligation; $45,081 for intangible asset impairments; $7,539 for relocation costs; $13,061 for a foreign exchange loss on long-term obligation; and an equity loss of $1,010. Those charges were partially offset by a reduction in tax contingency provision of $12,000.

B.    Capitalization and Indebtedness

        Not applicable.

C.    Reasons for the Offer and Use of Proceeds

        Not applicable.

D.    Risk Factors

        Investment in shares of our common stock ("Common Shares") 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 and Commercialization

a.
Our future revenue growth and profitability are dependent upon our ability to develop, license or otherwise acquire new commercially viable products and obtain associated regulatory approvals in multiple jurisdictions. Our failure to do so successfully could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Our future revenues, profitability and financial condition depend, to a significant extent, on our ability to successfully develop, license or otherwise acquire new commercially viable products.

        New product development is subject to a great deal of uncertainty, risk and expense. Development of pharmaceutical candidates may fail or be terminated at various stages of the research and development ("R&D") process, often after substantial financial and other resources have been invested in their exploration and development.

        Food and Drug Administration ("FDA") and Therapeutic Products Directorate ("TPD") approval is required before any prescription drug product, including generic drug products, can be sold in the U.S. and Canada, respectively. Other countries may also have similar regulatory approval requirements before products can be sold in those countries. The process of obtaining FDA, TPD and other regulatory approvals to manufacture and market new and generic pharmaceutical products is rigorous, time consuming, costly and largely unpredictable. The timing and cost of obtaining FDA, TPD and other regulatory approvals, or the failure to obtain such approvals, could adversely affect our product introduction plans, business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Beyond our internal research and development efforts, we rely, and in the future may continue to rely, on the acquisition, licensing or other access to products or technologies from third party drug-development companies. See Item 4.B, "Information on The Company — Business Overview — Company Strategy — Research and Development Strategy" for a discussion of our recent efforts with 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. In addition, product licensing involves inherent risks, including uncertainties due to matters that may affect the successful development or commercialization of the licensed product, as well as the possibility of contractual disagreements with regard to

3



terms such as license scope or termination rights. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both human and financial, to an opportunity that may not result in a successfully developed, or commercialized, product.

b.
Our approved products may not achieve or maintain expected levels of market acceptance, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Even if we are able to obtain regulatory approvals for our new pharmaceutical products, generic or branded, the success of those products is dependent upon market acceptance. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success. Levels of market acceptance for our new products could be impacted by several factors, many of which are not within our control, including but not limited to:

    safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors;

    scope of approved uses and marketing approval;

    timing of market approvals and market entry;

    difficulty or excessive costs to manufacture;

    infringement or alleged infringement of the patents or intellectual property rights of others;

    availability of alternative products from our competitors;

    acceptance of the price of our products; and

    ability to market our products effectively to the retail level.

        In addition, the success of any new product will also depend greatly on our ability to secure a third-party marketing or distribution partner in the U.S. Seeking out, evaluating and negotiating marketing or distribution agreements may involve the commitment of substantial time and effort and may not ultimately result in an agreement. In addition, our current commercialization strategy may make us less attractive to third party marketers, distributors and licensors of new products and this may affect our ability to secure such partners. If we are unable to commercialize new products successfully, whether through a failure to achieve market acceptance or a failure to secure marketing partners, there may be a material adverse effect on our business, financial condition and results of operations and it could cause the market value of our Common Shares to decline.

        Additionally, continuing studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others. Such studies, which increasingly employ sophisticated methods and techniques, may call into question the utilization, safety and efficacy of previously marketed products. In some cases, studies may result in the discontinuance of product marketing or the need for risk management programs. In addition, government agencies may determine that a product should be scheduled as a controlled substance, as is currently being proposed by Health Canada under the Controlled Drugs and Substances Act (CDSA) for our tramadol products. If one of our products is scheduled under the CDSA, such regulation would reduce practitioner prescriptions for such product, which may lead to a reduction in revenues from such product. Such regulation may also increase costs of manufacturing and distributing such product in order to meet the regulatory requirements applicable to controlled substances, such as process upgrades and renovations required at our facilities and changes to our manufacturing, storage and transportation practices. These situations, should they occur, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

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c.
A relatively small group of products represents a significant portion of our revenues, gross profit and earnings from time to time. If the volume or pricing of any of these products declines or the costs of related manufacturing, distribution or marketing increase, it could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Sales of a limited number of our products represent a significant portion of our revenues, gross profit and earnings. As the volume or pricing of our existing significant products declines in the future, our business, financial condition, and results of operations could be materially adversely affected and it could cause the market value of our Common Shares to decline. The genericization of our existing products is one of the reasons for the current or continued decline in volume and pricing of our products. For example, the genericization of Wellbutrin XL® has resulted in and may continue to result in a decline in the volume and pricing of this product. In 2007, sales of Wellbutrin XL® decreased by 53% or approximately $238 million, as compared to 2006. In addition, if this or any of our other key products were to become subject to any other issues, such as material adverse changes in prescription growth rates, unexpected side effects, regulatory proceedings, material product liability litigation, publicity affecting doctor or patient confidence or pressure from competitive products, the adverse impact on our business, financial condition and results of operations and market value of our Common Shares could be significant.

d.
A significant portion of our revenues is derived from sales to a limited number of customers. Any significant reduction of business with any of these customers could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        In 2007, our five largest customers, GSK, McKesson Corporation, Teva Pharmaceuticals Industries Ltd. ("Teva"), OMI and Cardinal Health, Inc., accounted for 25%, 20%, 11%, 10% and 10%, respectively, of our total revenues. 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, and results of operations and could cause the market value of our Common Shares to decline.

e.
We have entered into distribution agreements with other companies to distribute certain of our generic products in exchange for payments based on sales. Declines in the pricing and/or volume of such generic products, and therefore the amounts paid to us, may have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Our portfolio of generic products is the subject of various agreements, pursuant to which we manufacture and sell generic products to other companies, which distribute such products in the U.S. and Canada and make payments to us, typically based on sales. If the pricing and/or volume of such generic products declines, which may result from increased competition, our revenues could be adversely impacted, as the amount of the payments which we receive may correspondingly decline. For example, our gross revenues from the sale of generic products to Teva from the U.S. decreased by 38% in 2007, or approximately $54.2 million, as compared to 2006, due, in part, to a decline in the pricing for such products. If there is a further decline in the pricing or volume of these or any of our other generic products, it could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

2.     Intellectual Property

a.
We may be unable to effectively protect our intellectual and other proprietary property, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        The pharmaceutical industry historically has generated substantial litigation concerning the manufacture, use and sale of products and we expect this litigation activity to continue. Generic drug manufacturers are seeking to sell, and, in a number of cases, are selling, generic versions of many of our most important products prior to the expiration of our patents, and have exhibited a readiness to do so for other products in the future. As a result, we expect that patents related to our products will be routinely challenged, and our patents may not

5



be upheld. If we are not successful in defending an attack on our patents and maintaining exclusive rights to market one or more of our major products, we could lose a significant portion of sales in a very short period, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline. See Item 4.B, "Information on the Company — Business Overview — Patents and Proprietary Rights," for more information on our intellectual property rights and Item 8.B, "Financial Information — Significant Changes — Legal Proceedings — Intellectual Property," for a discussion of intellectual property-related proceedings in which we are involved.

        In addition, 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, we may not have adequate remedies in the event of a breach of these confidentiality agreements. Furthermore, the trade secrets and proprietary technology upon which we rely may otherwise become known or be independently developed by our competitors without infringing upon any proprietary technology. Our success will depend, in part, on our ability in the future to protect those trade secrets and other proprietary information.

        The cost of responding to challenges to our patents and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, and to protect our other intellectual property could be substantial and could preclude or delay commercialization of products. Such litigation could also require a substantial commitment of our management's time.

b.
We may be subject to intellectual property litigation and infringement claims, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        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. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes competitive with those we are developing. The patents of our competitors may impair our ability to do business in a particular area.

        In the event we discover that we may be infringing third-party patents or other intellectual property rights, we may not be able to obtain licenses from those third parties on commercially attractive terms or at all. We may have to defend against charges that we violated patents or the proprietary rights of third parties. Litigation is costly and time-consuming, and diverts the attention of our management and technical personnel. In addition, if we infringe the intellectual property rights of others, we could lose our right to develop, manufacture or sell products, including our generic products, or could be required to pay monetary damages or royalties to license proprietary rights from third parties. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our products, which could have a material adverse effect on our business, financial condition, and results of operations and could cause the market value of our Common Shares to decline. See Item 8.B, "Financial Information — Significant Changes — Legal Proceedings — Intellectual Property," for a discussion of intellectual property-related proceedings in which we are involved.

3.     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 is earned in a foreign country, which has 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. Our income tax reporting is subject to audit by domestic and foreign authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income allocated or earned 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; changes in our eligibility for benefits under those tax treaties; and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in an

6


increase in the effective tax rate on all or a portion of the income of the Company and/or any of our subsidiaries to a rate possibly exceeding the statutory income tax rate of Canada or the U.S. See Item 4.B, "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, the availability of benefits under tax treaties, and the rates 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 applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries 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 condition 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, Scientific Research and Experimental Development pool, provisions for legal settlements, future tax depreciation and tax credit carryforwards. 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.

4.     Marketing, Manufacturing and Supply

a.
Manufacturing difficulties or delays may adversely affect our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Our manufacturing and other processes use complicated and sophisticated equipment, which sometimes requires a significant amount of time to obtain and install. Manufacturing complexity, testing requirements and safety and security processes combine to increase the overall difficulty of manufacturing these products and resolve manufacturing problems that we may encounter. Although we endeavour to properly maintain our equipment, including through on-site quality control and experienced manufacturing supervision, 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, earthquake or other natural disaster, an explosion, an environmental accident, equipment failures or delays in obtaining components or replacements, construction delays or defects and other events, both within and outside of our control. In addition, for certain of our products, we do not have a secondary or back-up manufacturing facility in place to assist with these manufacturing and other processes should any of these events occur. 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, financial condition and results of operations and could cause the market value of our Common Shares to decline.

b.
Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and Canadian regulations, we could lose our marketing approvals, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Following initial regulatory approval of any drugs we or our partners may develop, we will be subject to continuing regulatory review by the FDA and the TPD, including the review of adverse drug events and clinical results that are reported after product candidates become commercially available. This may include results from any post-marketing follow-up studies or other reporting required as a condition to approval. The manufacturing, labelling, packaging, storage, distribution, advertising, promotion, reporting and recordkeeping related to the product will also be subject to extensive ongoing regulatory requirements. In addition, incidents of adverse drug reactions ("ADRs"), unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market. Similarly, our

7



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.

        All products manufactured by us or for us by third-party manufacturers must be made in a manner consistent with FDA-mandated and TPD-mandated good manufacturing practices ("GMP"). Compliance with GMP regulations requires substantial expenditures of time, money and effort in such areas as production, quality control and quality assurance to ensure full technical, facility and system compliance. The FDA, TPD and other regulatory authorities inspect on a regular basis our and our third-party manufacturers' manufacturing facilities for compliance. Failure to comply with GMP regulations could occur for various reasons, including failure of the product to meet or maintain specifications, stability issues or unexpected trends in patient ADRs. If the regulatory agencies were to require one of our or our third-party manufacturers' manufacturing facilities to cease or limit production, our business could be adversely affected, in part because regulatory approval to manufacture a drug is generally site-specific. Delay and cost in obtaining regulatory approval to manufacture at a different facility also could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        In addition, if we or our third-party manufacturers fail to comply with applicable continuing regulatory requirements, our business could be seriously harmed because a regulatory agency may:

    issue warning letters;

    suspend or withdraw our regulatory approval for approved or in-market products;

    seize or detain products or recommend a product recall;

    refuse to approve pending applications or supplements to approved applications filed by us;

    suspend any of our ongoing clinical trials;

    impose restrictions or obligations on our operations, including costly new manufacturing requirements;

    close our facilities or those of our contract manufacturers; or

    impose civil or criminal penalties.

        Under certain circumstances, the FDA and TPD also have the authority to revoke previously granted drug approvals. These policies may change and additional U.S. or Canadian federal, provincial, state, local or foreign governmental regulations may be enacted that could affect our ability to maintain compliance. We cannot predict the likelihood, nature or extent of adverse governmental regulation that may arise from future legislation or administrative action.

        If we or our third party manufacturers were deemed to be deficient regarding regulatory compliance in any significant way, it could have a material adverse effect on our business, financial condition and results of operations and it could cause the market value of our Common Shares could decline.

c.
If we are unable to optimize the use of or expand our manufacturing facilities, we may be unable to meet market demand for our products, which could affect our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        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. Successfully operating on that basis and meeting the anticipated market demand requires minimal equipment failures and product rejections. In addition, we manufacture products that employ a variety of technology platforms. Some of our manufacturing facilities may, at times, be scheduled in excess of rated capacity, while others may be under-utilized, resulting in inefficiencies and/or equipment failures and, therefore, rejection of lots. Unless our manufacturing processes are optimized or our manufacturing facilities are expanded, we may have difficulty fulfilling all demand for new large volume products, which could adversely affect our results of operations, financial condition and cash flows. In addition, if we are required to expand our facilities, it may require significant capital investment. If we are unable to complete any expansion projects in a timely and cost-efficient manner or adequately equip the expanded facilities in a timely and cost-effective manner or we experience delays in receiving FDA and TPD approvals for these expanded facilities, it could have a material

8



adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

d.
Disruptions of delivery of our product could adversely impact our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        The supply of our product to our customers is subject to and dependent upon the use of transportation services. Disruption of transportation services could adversely impact our financial results. In addition, our manufacturing facilities are located outside the continental U.S. and most of our sales are within the U.S. We also purchase products from third parties outside the U.S. As such, any change in policy or policy implementation relating to U.S. border controls may have an adverse impact on our access to the U.S. marketplace that, in turn, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

e.
If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture and deliver our products to the market may be impeded, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        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. Such suppliers must be qualified in accordance with applicable regulatory requirements and the process of qualifying a supplier can be costly and time consuming. 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. A prolonged interruption in the supply of a single-sourced raw material, including the active ingredient, or finished product or the occurrence of quality deficiencies in the products which our suppliers provide could have a material adverse effect on our business, financial condition and results of operations, and the market value of our Common Shares could decline.

        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. 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 the interruption of supply of a less important product.

        In addition, we rely on third-party manufacturers to supply certain products that we market and/or distribute, including Cardizem® CD, Vasotec®, Vaseretic®, Zovirax®, Ativan®, Wellbutrin® SR, Zyban® and Isordil®. Our manufacturers may suffer an interruption, including 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 with our third-party manufacturers expire, in which case we may experience an interruption in our supply. Any such supply interruption could have an adverse impact on our operations.

5.     Litigation and Regulatory Investigations

a.
We are involved in various legal proceedings in the U.S. and Canada and may experience unfavorable outcomes of such proceedings, or of future proceedings, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        We are involved in the following class actions in the U.S. and Canada:

    U.S. Securities Class Action — In late 2003 and early 2004, a number of securities class action complaints were filed in the United States District Court for the Southern District of New York naming us and

9


      certain of our current officers and former officers and directors as defendants. On December 11, 2007, we announced an agreement in principle to settle the consolidated U.S. securities class action.

    Canadian Securities Class Action — On September 21, 2005, the Canadian Commercial Workers Industry Pension Plan commenced a securities class action in Canada against us and certain of our current officers and former officers and directors that was factually similar to the U.S. securities class action. The plaintiffs have not taken any steps to certify the action as a class proceeding or to otherwise move it forward.

    Antitrust Class Actions — We are currently a defendant in various antitrust class actions in the U.S. related to our Tiazac® and generic Adalat products.

        We are also a party to several other actions or may become a party to actions that could similarly impact our business. The above actions are more fully described at Item 8.B, "Financial Information — Significant Changes — Legal Proceedings."

        In all cases, the resolution of these actions could have a material adverse effect on our business, financial condition and results of operations or could cause the market price of our Common Shares to decline. If the proposed agreement in the U.S. Securities Class Action (as described above) is not completed or approved, this action could result in the award of substantial monetary damages against us, as could the other class actions described above. In addition, we may continue to incur expenses associated with our defense of these actions, and the pending actions may divert the efforts and attention of our management team from normal business operations.

b.
We could be subject to fines, penalties or other sanctions as a result of ongoing investigations and inquiries by the U.S. Attorney's Office for the District of Massachusetts ("USAO"), the U.S. Securities and Exchange Commission ("SEC"), the Ontario Securities Commission ("OSC") and the U.S. Attorney's office for the Eastern District of New York (the "EDNY").

        We are the subject of the following ongoing investigations and inquiries:

    An investigation by the USAO related to the promotional and marketing activities surrounding the 2003 commercial launch of Cardizem® LA, including the Cardizem® LA clinical experience program, titled P.L.A.C.E. (Proving L.A. through Clinical Experience). We have been notified that we are the target of a federal grand jury investigation.

    An investigation by the SEC relating generally to our accounting and financial disclosure practices in 2002 and 2003, certain transactions associated with a corporate entity acquired by the Company in 2002 and the trading and ownership of our Common Shares. In 2007, we received a "Wells Notice" from the staff of the SEC alleging violations of U.S. federal securities laws. Four individuals, including current officers and former officers and director, have also received Wells Notices. We are indemnifying those individuals for legal expenses in accordance with indemnification agreements.

    An investigation by the OSC into the same matters being investigated by the SEC.

    An investigation by the EDNY into the same matters being investigated by the SEC.

        The above investigations are more fully described at Item 8.B, "Financial Information — Significant Changes — Legal Proceedings — Governmental and Regulatory Inquiries."

        We cannot predict the outcome or timing of resolution of any of these governmental investigations. Should any of these investigations reach adverse conclusions, we, or our current officers or former officers and director could be subject to fines, penalties or other civil or criminal sanctions, which may have a material adverse effect on our business, financial condition or results of operations or could cause the market value of our Common Shares to decline.

        In addition, as a result of the proposed settlement of the U.S. securities class action described above, we anticipate that, following approval of that settlement, we will have exhausted our coverage under our Director and Officer liability insurance for claims reported in respect of our 2002-2004 policy period. This may result in

10



an increase in amounts payable by us in connection with the investigations described above or any other existing or new matters for such period.

c.
We could be subject to counterclaims or other suits in response to actions we have initiated or may initiate, including our complaint against various parties alleging a stock-market manipulation scheme.

        From time to time, we initiate actions or file counterclaims. We could be subject to counterclaims or other suits in response to actions we initiate. For example, on February 22, 2006, we filed a lawsuit, seeking $4.6 billion in damages, from 22 defendants who, the complaint alleges, participated in a stock market manipulation scheme. For further details related to this matter see Item 8.B, "Financial Information — Significant Changes — Legal Proceedings — Biovail Action Against S.A.C. and Others". The defendants in this complaint may file counterclaims or take other actions in their defense that may require us to respond, which would require us to incur additional expense and could result in our payment of damages, which could have a material adverse effect on our business, financial condition and results of operations and which could cause the market value of our Common Shares to decline. We cannot reasonably predict the outcome of these proceedings, some of which could involve the payment of significant legal fees and damages.

6.     Dividend Policy

a.
The payment of dividends will depend on various factors, many of which are beyond our control.

        Our current policy contemplates quarterly dividends of $0.375 per Common Share to our shareholders. The declaration and payment of dividends, if any, is always subject to the discretion of our Board of Directors. The amount of future cash flows generated by the Company may not be sufficient 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 but not limited to:

    our profitability;

    fluctuations in working capital, research and development and capital and operating expenditure requirements;

    changes in our growth strategy;

    the sustainability of margins;

    payment of income taxes;

    quarterly variations in operating results;

    obligations under applicable credit facilities;

    availability of debt and equity financing;

    fines or litigation settlement payments;

    changes in the market price of the products we develop;

    restrictions in debt instruments;

    trends in the biotechnology and pharmaceuticals industry and the markets in which we operate;

    current events affecting the economic situation generally in Canada, Barbados, the U.S., Europe, the Middle East and Latin America; or

    applicable laws,

many of which are beyond our control and all of which are susceptible to a number of risks and other factors beyond our control.

11


b.
Our dividend policy may have an impact on our payment of capital and operating expenditures and our liquidity and capital requirements, as well as our deficit.

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

        As a result of payments of dividends under our dividend policy, we may in the future need to incur debt or issue equity to maintain the payment of dividends. We may be unable to renew our existing credit facility at all or 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 continue to pay dividends. 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 may 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.

7.     Other Company Risks

a.
If the companies in which we invest, or with which we partner or co-develop products are not successful, it could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Actions by third parties who control the promotion, pricing, trade rebate levels, product availability or other items for products we supply to them could have a material adverse impact on our financial results. For example, 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 obligations.

        Economic, governmental (including the results of the upcoming U.S. presidential election), industry and other factors outside our control affect companies in which we may invest or with which we may partner or co-develop products. 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 products 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 rights;

    the ability of these companies to enter the marketplace without infringing upon competitors' patents or other intellectual property;

    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. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

12


b.
If we are unable to successfully acquire or integrate businesses or products we may acquire, our future revenues and operating results may suffer.

        We pursue product or business acquisitions that could complement or expand our business. However, we may not be able to execute appropriate acquisitions in the future. In addition, future acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:

    we may fail to identify acquisitions that enable us to execute our business strategy;

    we compete with others to acquire companies and rights to products. We believe that this competition has intensified and may result in decreased availability of, or increased prices for, suitable acquisition candidates;

    we may be unable to successfully negotiate the terms of any acquisition or finance any such acquisitions;

    we may not be able to obtain the necessary regulatory approvals, including the approval of antitrust and competition regulatory bodies, in countries where we are seeking to consummate acquisitions;

    we may ultimately fail to consummate an acquisition even if we announce that we plan to make such acquisition;

    potential acquisitions may divert management's attention away from our existing products and business, resulting in the loss of key customers or personnel and exposing us to unanticipated liabilities;

    we may fail to successfully integrate acquisitions into our existing products and business;

    we may not be able to retain the skilled employees and experienced management that may be necessary to operate the businesses we acquire and, if we cannot retain such personnel, we may not be able to attract new skilled employees and experienced management to replace them; and

    we may acquire a company that has contingent liabilities that include, among others, known or unknown intellectual property or product liability claims.

        Furthermore, 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.

c.
Our continued success is dependent on our continued ability to attract and retain key personnel. Any failure to attract and retain key personnel could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        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. The continued availability of such individuals is important to our ongoing success. If we are unsuccessful in retaining key employees, it could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

d.
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 or to continue to pay dividends under our dividend policy. 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 may 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 a material adverse effect on our financial condition. If we raise funds through the issuance of equity, the proportional ownership interests of our shareholders could be diluted.

        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. We may not be successful in our efforts to arrange additional financing, if needed, on terms satisfactory to us.

13


e.
We are exposed to risks relating to currencies exchange.

        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 denominated in Canadian dollars or euros. We also face foreign currency exposure on the translation of our operations in Canada and Ireland from their local currencies to the U.S. dollar. A 10% change in foreign currency exchange rates could have a material adverse effect on our consolidated results of operations or cash flows.

        Currently, we do not utilize forward contracts to hedge against foreign currency risk.

f.
We may be exposed in the future 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. Our credit facility bears interest based on London Interbank Offering Rates, U.S. dollar base rate, Canadian dollar prime rate or Canadian dollar bankers' acceptance rates. While we currently do not have any outstanding borrowings under this facility, to the extent we borrow material amounts under this facility in the future, a change in interest rates could have a material adverse effect on our results of operations, financial condition or cash flows.

        Currently, we do not utilize interest rate swap contracts to hedge against interest rate risk.

g.
Lack of liquidity in the market for auction rate securities has had and may continue to have an adverse impact on the fair value of such securities and our ability to liquidate such securities.

        Our marketable securities portfolio currently includes $26.8 million of principal invested in auction rate securities. These securities have long-term maturities for which the interest rates are reset through a Dutch auction typically each month. These auctions historically have provided a liquid market for these securities. However, with the liquidity issues experienced in global credit and capital markets, these securities have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. We have recorded an impairment charge of $6.0 million at December 31, 2007, reflecting the portion of our auction rate securities that we have concluded has an other-than-temporary decline in fair value and we have recorded an unrealized loss of $2.8 million in other comprehensive income, reflecting adjustments to our auction rate securities that we have concluded have a temporary decline in fair value.

        The credit and capital markets have continued to deteriorate in 2008. If uncertainties in these markets continue, or these markets deteriorate further, or we experience any additional ratings downgrades on our auction rate securities experience any further ratings downgrades, we may incur additional impairments to our investment portfolio, which could have a material impact on our results of operations, financial condition and cash flows.

        We intend to liquidate our existing holdings once market liquidity returns. However, if market liquidity does not return, we may be required to hold these securities until maturity. This may have a material adverse effect on our short-term cash needs and expenditures.

h.
Our securities are subject to price volatility.

        Stock market trading prices for the securities of pharmaceutical and biotechnology companies, including our own, have historically been highly volatile, and such securities have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. For example, during the 12 month period ended December 31, 2007, the price of our Common Shares ranged from a low of $13.20 to a high of $26.48 on the New York Stock Exchange ("NYSE").

i.
Our failure to comply with applicable environmental laws and regulations worldwide could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our

14



business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, hazardous substances may be released into the environment, which could cause environmental or property damage or personal injuries, and which could subject us to remediation obligations regarding contaminated soil and groundwater or potential liability for damage claims. Under certain laws, we may be required to remediate contamination at certain of our properties regardless of whether the contamination was caused by us or by previous occupants of the property or by others.

        In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and future changes in laws or regulations may require us to install additional controls for certain of our emission sources, to undertake changes in our manufacturing processes or to remediate soil or groundwater contamination at facilities where such cleanup is not currently required.

j.
Rising insurance costs or our inability to obtain insurance could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        The cost of insurance, including insurance for directors and officers, workers' compensation, property, product liability and general liability insurance, may increase or insurance may become unavailable to us in future years. Rising insurance costs or the inability to obtain insurance could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline. In response to increased costs, we may increase deductibles or decrease certain coverages to mitigate cost increases. These increases, and our increased risk due to increased deductibles and reduced coverages, could have a material adverse effect on our business, financial condition and results of operations.

k.
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 ("SOX"), 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 SOX in the U.S. and Part XXIII.1 of the Ontario Securities Act (as defined below) and related rules and applicable stock exchange rules and regulations, 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. New laws and regulations could make it more expensive for us under indemnities we provide to our officers and directors and could 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 continuing to evaluate and monitor 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.

        We are required annually to review and report on the effectiveness of our internal control over financial reporting in accordance with applicable securities laws. The results of this review are reported in this Annual Report on Form 20-F and in our Management's Discussion and Analysis of Results of Operation and Financial Condition ("MD&A"). Our registered public accounting firm is also required to report on the effectiveness of our internal control over financial reporting.

        If we fail to maintain effective internal controls over our financial reporting, there is the possibility of errors or omissions occurring or misrepresentations in our disclosures which could have a material adverse effect on our business and financial condition and the value of our Common Shares.

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II.    NATURE OF OUR INDUSTRY AND OUR BUSINESS

1.     Pharmaceutical Industry Risks

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.

        The pharmaceutical industry is highly competitive and is subject to rapid and significant technological change that could render certain of our 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 effect on our long-term financial success.

        For example, our products face competition from conventional forms of drug delivery and from controlled release drug-delivery systems developed, or under development, by other 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, greater experience in clinical testing and human clinical trials of pharmaceutical products and greater experience in obtaining FDA, TPD and other regulatory approvals than we do. In addition, some of our competitors may have lower development and manufacturing costs. Our competitors may succeed in developing technologies and products that are more effective or less expensive to produce or use than any that we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline. See Item 4.B, "Information on the Company — Business Overview — Industry Overview."

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

        We face an inherent business risk of exposure to significant product liability and other claims in the event that the use of our products results, or is alleged to have resulted, in adverse effects. In addition, although we currently carry product liability insurance that we believe is appropriate for the risks that we face, our coverage may not be sufficient to cover our claims and we may not be able to obtain sufficient coverage at a reasonable cost in the future. 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, financial condition and results of operations and could cause the market value of our Common Shares to decline.

c.
We may experience reductions in the levels of reimbursement for pharmaceutical products by governmental authorities, health maintenance organizations ("HMOs") or other third-party payors. Any such reductions could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        Various governmental authorities and private health insurers and other organizations, such as HMOs, managed care organizations ("MCOs") and provincial formularies provide reimbursement to consumers for the cost of certain pharmaceutical products. Our ability to successfully commercialize our products and product candidates — even if FDA or TPD approval is obtained — and the demand for our products depend in part on the extent to which reimbursement is available from such third party payors.

        Third party payors are becoming increasingly less willing to reimburse for medications which offer primarily convenience to and greater compliance among patients (such as once-daily formulations) and are focusing more on products that offer clinically meaningful benefits. If we are not able to implement a strategy that addresses this shift, it could have a material adverse effect on our business, financial condition and results of operations. Third party payors increasingly challenge the pricing of pharmaceutical products. In addition, the trend toward

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managed healthcare in the U.S., the growth of organizations such as HMOs and MCOs and legislative proposals to reform healthcare and government insurance programs, could significantly influence the purchase of pharmaceutical products, resulting in lower prices and/or a reduction in product demand. Such, cost-containment measures and healthcare reform could affect our ability to sell our products, could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        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 healthcare 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. Any reimbursement may be reduced in the future, perhaps to the point that market demand for our products declines. Such decline could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

        A number of legislative and regulatory proposals aimed at changing the healthcare 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 and results of operations.

        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.

d.
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 labeling 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. Our distribution partners may also be the subject of regulatory investigations involving, or remedies or sanctions for, off-label uses of products we have licensed to them, which may have an adverse impact on sales of such licensed products, which may, in turn, have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Shares to decline.

e.
Regulations apply to our Contract Research Division Business.

        Our CRD business provides us and other pharmaceutical companies with a broad range of Phase I and Phase II clinical-research services. Our CRD business is subject to strict regulation by Canadian governmental authorities. These regulations may change and these governmental authorities periodically conduct audits. The

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outcome of such an audit, should it be unfavorable, could result in an adverse effect on our CRD business including, without limitation, costs to remediate deficiencies, reputational impact of an adverse audit and our ability to solicit work for our CRD business.


Item 4. Information on the Company

A.    History and Development of the Company

        Biovail Corporation 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"). Biovail Corporation was continued under the Canada Business Corporations Act (the "CBCA") effective 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) 590-9331.

        A description of our principal capital expenditures and divestitures and a description of acquisitions of material assets is found in our 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 and we are engaged in the formulation, clinical testing, registration, manufacture and commercialization of pharmaceutical products. Our business strategy involves commercializing these products both directly (as we do in Canada) and through strategic partners (as we do in the U.S. and in other countries). Our main therapeutic areas of focus are central nervous system ("CNS") disorders, pain management and cardiovascular disease, although we maintain the flexibility to explore opportunities in other niche areas. The primary markets for our products are the U.S. and Canada.

        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 portfolio of proprietary drug-delivery technologies that represent the foundation upon which our R&D strategy is based. Our portfolio includes (1) controlled release, (2) enhanced absorption, (3) rapid absorption, (4) taste masking, and (5) oral disintegration technologies, among others. Our drug-delivery technologies are applicable to a wide range of molecules, and have been able to address some of the pharmaceutical industry's more complex drug-delivery challenges.

        The application of our proprietary drug-delivery technologies to existing orally administered medications has provided us, together with our partners, with the opportunity to extend product lifecycles through the development of novel formulations. We have been focusing, and are continuing to focus, on R&D to foster long-term organic business growth. 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. Several of our branded (non-generic) pipeline products target enhancements to safety and/or efficacy profiles, which we believe may increase their commercial potential, as well as their attractiveness to commercialization partners. To supplement our organic business growth, we also pursue licensing and acquisition opportunities.

        Because we were expecting a decline in revenues and net income in 2007 as a result of the genericization of Wellbutrin XL®, our largest product by revenue, we undertook a number of initiatives in 2007 to reduce our cost structure, including the elimination of the Biovail Pharmaceuticals, Inc. ("BPI") specialty sales force and associated support functions, the redemption of all outstanding long-term debt and overall variable-cost containment.

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Industry Overview

        IMS reports that the total U.S. prescription drug market was approximately $286.5 billion in 2007, an increase of 4% relative to 2006. The Canadian pharmaceutical market was valued by IMS at C$19.0 billion in 2007.

        The pharmaceutical industry, and the companies that make up this industry, have experienced significant changes over the past several years and continue to undergo such changes. For example, IMS estimates that during the years 2008 to 2011, branded products with annual sales in excess of $49 billion will lose patent protection. In 2007, the loss of sales for branded products due to the introduction of generic competition is estimated to be $18.5 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 development-stage pipeline programs and technologies. Large pharmaceutical companies also employ strategies to extend brand lifecycles and exclusivity periods and establish product differentiation.

        In addition, 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 have forced many pharmaceutical companies to adjust their strategies. The pharmaceutical industry is also 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 have recently been implemented, and the results of the upcoming U.S. presidential election may lead to further constraints on pharmaceutical pricing.

Controlled Release Products

        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 either more consistent, optimal or targeted 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. As described in greater detail below, given the increasing prominence and influence of third party payors, our R&D efforts are now much more focused on the first two of these advantages.

        However, there are technical barriers to entry into the development of controlled release drugs. As a result, despite the therapeutic advantages and convenience and compliance benefits 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.

Competitive Strengths

        The pharmaceutical industry is highly competitive. 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 portfolio includes drug-delivery technologies that are amenable to combination products because, among other advantages, they allow for a high payload of active ingredient, minimizing required tablet size. Additionally, we have technologies that are generally resistant to interactions with alcohol, a technology that continues to gain prominence in the pharmaceutical industry. Some of our drug delivery technologies are described in further detail below (See "— Drug Delivery Technology" below).

        Because our R&D efforts are largely focused on developing novel formulations of existing drugs for which 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"). Given the increasing prominence and influence of third-party payors and their increasing unwillingness to reimburse for products that offer primarily convenience and compliance benefits, our R&D efforts are becoming increasingly focused on developing novel

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products that provide clinically meaningful benefits and advantages over existing formulations. Accordingly, our branded pipeline programs now target enhancements to a product's safety profile and/or its efficacy, as opposed to enhancement linked only to convenience and patient compliance. Although this approach inherently involves more development risk than we have assumed historically, it could ultimately result in the approval and commercialization of higher-value pharmaceuticals. The development costs we incur and our timelines to bring products to market, while likely to be higher and longer than what they have been historically, are still expected to be less than for NCEs.

        Another of our competitive advantages is our demonstrated ability to transfer technologies from the product-concept stage to full-scale commercial manufacturing of products incorporating those drug-delivery technologies. We have capabilities in many 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.

Company Strategy

        In 2007, our management team and Board of Directors began exploring potential strategic and business opportunities to enhance shareholder value and will continue to do so. A committee of independent members of the Board of Directors has been established and is working closely with management and external advisors.

        As part of this endeavour, our senior management team will be undertaking a comprehensive review of our company's core strategies, including our global infrastructure, commercialization model, product-development pipeline, acquisition targets, litigation strategy, and capital structure.

        Our current company strategy includes five main components: (1) R&D; (2) commercialization; (3) dividend policy; (4) cost containment; and (5) licensing and acquisition.

Research and Development Strategy

        Our drug development strategy involves leveraging our drug-delivery technologies to develop (1) enhanced formulations of existing drugs that confer meaningful therapeutic benefits and offer improved safety to patients; (2) combination products that incorporate two or more different therapeutic classes of drugs; and (3) difficult-to-manufacture generic pharmaceuticals.

        Over the past several years, we have targeted to spend between 8%-12% of our total revenues on R&D activities. In 2007, we spent approximately $100.6 million on internal R&D, representing 12% of our total revenues in 2007 (a 29% increase in internal R&D expenses in a period where total revenues declined 21%). In 2008, we expect to continue such levels of investment in R&D as we continue to focus on long-term organic growth. Our core R&D programs include novel formulations of a number of existing pharmaceutical brands and a number of undisclosed, earlier stage programs.

        The enhancement of existing in-market products (or brands), also described as a product line-extension strategy, is pursued by many pharmaceutical companies as they look to expand upon the significant clinical and marketing investments they have made in establishing high-value brands. Product enhancements may include new indications, introduction of existing drugs into new markets, improvements in the frequency of administration of drug products, improvements in the convenience of administration, reduction in dose, reduction in side effects (improved tolerability), or improved therapeutic effect/benefit. Through the application of our drug-delivery technologies, we have provided enhancements to existing compounds that have included reducing the number of doses per day (once-daily dosing versus multiple doses per day) and reducing potentially adverse side-effects and/or 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. However, as the influence of managed care organizations has increased, convenience and compliance alone is no longer sufficient to warrant favorable formulary coverage and third party payors are becoming increasingly unwilling to reimburse for products that offer convenience and compliance benefits alone. As a result, the commercial potential of these types of products — those that target only convenience and compliance benefits — is now significantly less

20



than what it has been historically. Accordingly, we are adjusting our approach to our R&D programs such that now our primary objective is to develop novel products that provide clinically meaningful benefits to patients over existing treatment options — through the enhancement of safety and/or efficacy profiles — and with strong intellectual property protection.

        In addition, we are also reviewing other strategies to gain preferential formulary access, including targeting products that address unmet medical needs, that have longer exclusivity periods and that are less sensitive to reimbursement issues.

        As it relates to combination therapy, our R&D efforts are focused on developing a single-tablet product that capitalizes on the synergistic effects and potential superior side effect profiles of two or more individual drugs. These products have the added benefit of reducing the "pill burden" on patients, and may also aid in patient compliance.

        With respect to generic pharmaceuticals, we focus our R&D efforts on difficult-to-manufacture products, where competition is more limited, and consequently, commercial pricing and gross margins are potentially higher.

        To prioritize those products with the most market potential, we employ a market-driven selection process for our drug-development pipeline candidates. The first step in the selection process involves the identification of 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 R&D 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. Intellectual property protection is an important criterion in our pipeline-candidate selection process. Having identified possible pipeline candidates, we also assess the applicability of our own intellectual property to, or the possibility of in-licensing intellectual property for, such prospects. We evaluate whether there are opportunities to develop new intellectual property to cover patentable aspects of such product candidates and review the existing landscape for potential infringement issues. We also identify any trade secret information that would be important to protect as a prospective product proceeds through the R&D process.

        Our current pipeline products are in various stages of development, with the most advanced being BVF-033, our salt formulation of bupropion, which is currently being reviewed by the FDA. With respect to other programs, we have recently submitted one ANDA (as defined below) and we anticipate the submission of up to two other ANDAs in 2008. Our product development pipeline is described in further detail below (See "— Product Development Pipeline" below).

        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 drug-development companies. These third party developers are typically paid with some combination of technology access fees, development milestone payments and/or royalty payments. In some cases, we have an ownership interest or an option to acquire an ownership position in the developer.

        For example, in November 2007, we entered into an agreement with Pharma Pass II, LLC ("Pharma Pass II") for an option to license an early-stage development product, BVF-068, a product for the treatment of a CNS disorder. Pursuant to the terms of the agreement, we have the option to acquire the worldwide rights to develop, manufacture and market BVF-068. We paid an upfront fee to Pharma Pass II, and are contingently obligated to make an option payment and additional milestone payments for this product, including upon the filing of a new drug application ("NDA") with the FDA, and upon FDA approval. The agreement also stipulates the payment of tiered, single-digit royalties on net commercial sales of the product. The agreement with Pharma Pass II initially also covered another early-stage development product, which has been terminated.

        In November 2006, we amended our 2002 product development and licensing agreement with Ethypharm S.A. ("Ethypharm") to, among other things, provide for the development by Ethypharm of an undisclosed product, for which we are to assume responsibility for the clinical programs associated with that product. We are obligated to pay Ethypharm royalties on any future sales of the new product. The agreement initially also covered the development of other undisclosed products, which has been discontinued.

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Commercialization Strategy

        We continuously explore opportunities to 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, and/or in the U.S. and other global markets through strategic alliances with third parties that have established sales and marketing infrastructures in those regions.

        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. The current strategy 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. This element of our commercialization strategy has been applied through our agreements with GSK for Wellbutrin XL®, with OMI for Ultram® ER, with Kos Pharmaceuticals, Inc. ("Kos") for Cardizem® LA and with Sciele for the promotion of Zovirax®, each of which is described in more detail below (See "— Current Product Portfolio and Product Revenue" below). We are currently in discussions with a number of other companies for the commercialization of certain of our pipeline products.

        The market in Canada is very different than it is in the United States. In Canada, the BPC sales force 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. Over its eleven-year history, the BPC sales force has developed a track record of success in promoting products, such as Tiazac®, Tiazac XC®, Celexa®, Wellbutrin® SR, and more recently, Wellbutrin® XL.

        While our business focus is primarily to develop products for the U.S. and Canadian markets, we are increasingly pursuing opportunities to more fully exploit the commercial potential of our products by having them launched in new geographic markets by 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 is expected to use in a number of countries for our once-daily formulation of bupropion HCl) in the Netherlands for the treatment of adult patients with major depressive episodes. Since then, Wellbutrin® XR has been launched in a number of European countries. In January 2008, we announced an exclusive 10-year supply agreement with Janssen Pharmaceutica NV ("Janssen"), a division of Johnson & Johnson and an affiliate of OMI, for the marketing and distribution of our once-daily, extended-release formulation of tramadol in 86 countries in two regions — Central and Eastern Europe/Middle East and Latin America.

Dividend Policy

        At the end of 2006, given our strong cash balances and the cash-flow generation of our business model, we concluded that there was likely to be significant excess cash on hand, after fully funding our internal growth strategy over the foreseeable future. As a result, in December 2006, our Board of Directors adopted a dividend policy that contemplates the quarterly payment of $0.375 per Common Share, subject to Board approval. Each dividend payment is made at the discretion of the Board of Directors, and is generally based on our business performance, operational results, future capital and other requirements and applicable laws. The policy is reviewed by the Board of Directors from time to time with regard to our capital requirements, strategic considerations, operations and results and any changes thereto.

Cost Containment Strategy

        In 2007, our business performance was negatively impacted by the December 2006 introduction of a generic formulation of Wellbutrin XL® 300mg tablets in the U.S. market. Two additional generic formulations were launched in June 2007, and by the end of 2007, generic formulations had captured 88% of total prescription volume for the 300mg strength of Wellbutrin XL®. As a result, our revenues derived from supplying the 300mg product to GSK decreased in 2007 by $208.9 million, or 86%, as compared with 2006. Pursuant to a settlement agreement entered into with a number of generic pharmaceutical companies in February 2007, generic competition for Wellbutrin XL® 150mg strength could commence on May 30, 2008, and potentially sooner under

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specific conditions (See Item 8.B, "Financial Information — Significant Changes — Legal Proceedings — Intellectual Property").

        In response, we undertook certain initiatives to reduce our cost structure. In December 2006, we announced that we would leverage strategic partners to promote our products to specialist physicians in the U.S., which was consistent with the approach we have taken to commercializing products in the U.S. primary-care market since May 2005. As a result, the 85-member BPI specialty sales force and related support functions were eliminated. Effective April 1, 2007, we redeemed all of our outstanding 77/8% Senior Subordinated Notes (the "Notes"), being all of our outstanding long-term debt, for a total cash outlay of $422 million, which included accrued interest and a 1.969% premium for the early redemption of the Notes. This resulted in an elimination of $31.5 million in annual interest payments. Other variable-cost containment measures include the addition of a requirement that all new additions to headcount be approved by the Chief Executive Officer. Identifying further opportunities to contain costs and drive operational efficiencies is an ongoing priority.

Licensing and Acquisition Strategy

        To supplement our organic growth strategy, we are actively pursuing and/or evaluating a number of potential licensing and acquisition opportunities. In 2007, these included late-stage or commercial products for BPC and companies with new and/or complementary drug-delivery technologies, including several in new modalities (for example, transdermal and inhalation). In addition, while the acquisition of commercial products in the U.S. is not a priority focus for us, several companies previously screened by us as potential acquisition targets each have a commercial infrastructure in the U.S. market.

Manufacturing

        We regard our manufacturing expertise as it relates to our drug-delivery technologies as an integral component of our success. We currently operate three pharmaceutical manufacturing facilities, which are located in Steinbach, Manitoba; Dorado, Puerto Rico; and Carolina, Puerto Rico. Through these facilities, we manufacture branded products that are commercialized by our partners, including 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 Laboratories, Inc. ("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. All of these facilities meet FDA-mandated and TPD-mandated GMP and have been audited recently.

        We source raw materials for our manufacturing operations from various FDA-approved and TPD-approved companies worldwide. It is our policy, 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. However, the pricing of the raw materials needed for the development or manufacture of our products has fluctuated, from time to time, as a result of a number of factors, including the acts of governments outside the U.S. and Canada.

Marketing

        As described above, our marketing strategies in the U.S. and Canada differ substantially. In the U.S., our wholly-owned subsidiary, BPI, distributes a number of pharmaceutical products. In May 2005, we 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. As a result, we reduced our primary-care and cardiovascular specialty sales forces by 307 positions, and our general and administrative functions by 30 positions. Kos offered employment to 186 of our sales representatives, of which 164 accepted

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positions with Kos. We incurred restructuring charges of $19.8 million, which consisted of employee termination benefits, contract termination costs and professional fees. Employee termination costs included severance and related benefits, as well as outplacement services. We did not pay termination benefits to those employees that were offered employment by Kos. Contract termination costs included facility and vehicle lease payments that we will continue to incur without economic benefit. We also divested all of our rights to Teveten® and Teveten® HCT to Kos. In December 2006, we announced that we would leverage strategic partners to promote our products to specialist physicians in the U.S. As a result, the remaining 85-member 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 commenced promotion of our topical antiviral line, Zovirax® Ointment and Zovirax® Cream, to U.S. physicians.

        BPI continues to distribute a number of branded products for which there is no longer market exclusivity. These products — which we refer to as "Legacy Products" — include the well-known brands Cardizem® CD, Ativan®, Vaseretic®, Vasotec® and Isordil®. These products are not actively promoted by us and represent non-core assets. 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. However, as a result of price increases, our revenues in connection with Legacy Products have stabilized.

        In Canada, where the market dynamics are much different than in the U.S., we have maintained a direct-selling commercial presence through 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. In 2006, BPC expanded its sales force to 97 territories to support a number of new product launches. BPC's therapeutic focus lies in cardiovascular disease and depression, markets valued at C$2.7 billion and C$799 million, respectively. BPC currently promotes a well-respected portfolio of products to approximately 11,000 physicians across Canada. Products include Tiazac® XC, Wellbutrin XL®, Glumetza®, and more recently Ralivia™ — our once-daily formulation of tramadol, which was launched to Canadian physicians in November 2007. During 2007, the Tiazac® franchise (Tiazac® and Tiazac® XC) was BPC's leading product line, representing approximately 46% of our total Canadian product revenues. We view BPC as an important asset and are pursuing a number of product-marketing opportunities and acquisitions that have a strategic fit to further grow BPC's commercial operations.

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 $286.5 billion in 2007. U.S. prescription spending in 2007 increased 4% relative to 2006. While our business focus is primarily to develop products for the U.S. and Canadian markets, we are increasingly pursuing opportunities to more fully exploit the commercial potential of our products by having them launched in new geographic markets by strategic marketing partners with expertise in their local markets.

        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):

 
  2007
  2006
  2005
 
  Product Sales
  R&D
  Royalty
and Other

  Total
  Product Sales
  R&D
  Royalty
and Other

  Total
  Product Sales
  R&D
  Royalty
and Other

  Total
Canada   68,811   5,946   294   75,051   82,513   7,344   63   89,920   104,966   5,281   264   110,511
United States and Puerto Rico   732,235   15,656   7,593   755,484   938,765   11,739   15,708   966,212   732,136   13,074   14,965   760,175
Other countries   0   2,227   10,056   12,283     2,510   9,080   11,590     924   7,546   8,470
   
 
 
 
 
 
 
 
 
 
 
 
    801,046   23,829   17,943   842,818   1,021,278   21,593   24,851   1,067,722   837,102   19,279   22,775   879,156
   
 
 
 
 
 
 
 
 
 
 
 

        Within the U.S. and Canadian markets, our therapeutic focus areas include cardiovascular disease, CNS disorders and pain management.

24


Cardiovascular Disease

        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. The U.S. market for cardiovascular products was valued at $38.1 billion in 2007, of which $18.6 billion was represented by anti-hypertensives. The Canadian market for the calcium channel blocker ("CCB") category of cardiovascular drugs for 2007 was valued at approximately $746 million, an increase of 5.1% versus the previous year. In 2007, our commercial portfolio of cardiovascular therapeutic products in the U.S. included Cardizem® LA (promoted by Kos/Abbott), Cardizem® CD, Tiazac®, Vasotec®, Vaseretic®, Isordil®, and a number of generic pharmaceutical products.

CNS Disorders

        CNS disorders represent another of our therapeutic focus areas. The U.S. market for the treatment of CNS was valued at $15.5 billion in 2007, with the majority — $11.8 billion — represented by anti-depressants. The Canadian market for anti-depressants was valued at C$799 million in 2007, a decrease of 5.0% over the previous year. Our commercial portfolio in these markets includes Wellbutrin XL®, a once-daily formulation of bupropion sold by GSK, and Ativan®.

Pain

        We also have a presence in the pain market — the U.S. market that was valued at $11.2 billion in 2007 — through OMI's marketing of Ultram® ER, a once-daily formulation of tramadol hydrochloride developed by us. 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.

Other

        Our commercial portfolio also includes products targeting the herpes market — the U.S. market that was valued at $2.1 billion in 2007. 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 73.1% share at the end of 2007. However, oral therapeutic products for herpes represent the vast majority of the overall herpes market, with 2006 sales of $1.8 billion.

        We also have a presence in generic pharmaceutical products in the U.S., an industry valued at $47.0 billion in 2007, a 15% increase relative to 2006. We also own the U.S. rights to a number of branded pharmaceutical products that are not actively promoted, which we refer to as Legacy Products. Generic products and Legacy Products are described further below.

Current Product Portfolio and Product Revenue

        The following table summarizes our commercial product line:

Product
  Therapeutic Area
  Indications
  Therapeutic Market Size*
Distributed by BPI            
Cardizem® CD   Cardiovascular   Hypertension/angina   $18.6 billion
Ativan®   CNS   Anxiety   $734 million
Vasotec®   Cardiovascular   Hypertension/congestive heart failure   $18.6 billion
Vaseretic®   Cardiovascular   Hypertension/congestive heart failure   $18.6 billion
Isordil®   Cardiovascular   Angina   $226 million
Zovirax® Cream(1)   Antiviral   Herpes labialis (cold sores)   $2.1 billion
Zovirax® Ointment(1)   Antiviral   Genital herpes   $2.1 billion

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Promoted/Distributed by BPC

 

 

 

 

 

 
Tiazac®   Cardiovascular   Hypertension/angina   C$2.25 billion
Tiazac® XC   Cardiovascular   Hypertension   C$2.25 billion
Glumetza®   Cardiovascular   Type II diabetes   C$418 million
Wellbutrin® XL and SR   CNS   Depression   C$799 million
Ralivia™   Pain   Chronic Pain   C$443 million
Monocor®   Cardiovascular   Hypertension   C$2.25 billion
Retavase®   Cardiovascular   Acute myocardial infarction   C$42.3 million
Zyban®   CNS   Smoking cessation   C$113 million
Cardizem® CD   Cardiovascular   Hypertension/angina   C$2.25 billion

Promoted/Distributed by Partners

 

 

 

 

 

 
Wellbutrin XL®   CNS   Depression   $11.8 billion(7)
Cardizem® LA(2)   Cardiovascular   Hypertension/angina   $18.6 billion
Ultram® ER   Pain   Chronic Pain   $10.7 billion
Tiazac®(3)   Cardiovascular   Hypertension/angina   $18.6 billion

Bioequivalent (generic) Products

 

 

 

 

 

 
Adalat CC (nifedipine extended release)(4)   Cardiovascular   Hypertension/angina   $18.6 billion
Cardizem® CD (diltiazem controlled release)(5)   Cardiovascular   Hypertension/angina   $18.6 billion
Procardia XL (nifedipine extended release)(4)   Cardiovascular   Hypertension/angina   $18.6 billion
Tiazac® (diltiazem)(6)   Cardiovascular   Hypertension/angina   $18.6 billion
Trental (pentoxifylline)(4)   Cardiovascular   Peripheral vascular disease   $49 million
Voltaren XR (diclofenac controlled release)(4)   Inflammation   Arthritis   $8.3 billion

*
Market size for 2007 according to IMS.

(1)
As of December 2006, Zovirax® Ointment and Zovirax® Cream are promoted by Sciele for BPI, which is responsible for product sales and distribution.

(2)
As of May 2005, Cardizem® LA is promoted and distributed by Kos (Kos was acquired by Abbott in December 2006).

(3)
Tiazac® is marketed by Forest in the U.S.

(4)
Distributed by Teva in the U.S.

(5)
Distributed by Teva in the U.S. and Novopharm, a subsidiary of Teva, in Canada.

(6)
Distributed by Forest in the U.S. and Novopharm in Canada.

(7)
U.S. market size.

        In 2007, to provide greater visibility in our business performance, we reported our product revenue based on the following categories:

1.
Wellbutrin XL® (U.S., European markets)

2.
Ultram® ER

3.
Zovirax®

4.
Cardizem® LA

5.
BPC

6.
Legacy products

7.
Generic products

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        The following table summarizes our product revenues by category for the fiscal years of 2007 and 2006:

 
  Revenues
($000)

   
  % of
Product
Revenues

 
 
  Change
%

 
Product / Product Line
  2007
  2006
  2007
  2006
 
Wellbutrin XL® (U.S., European markets)   212,325   450,329   (53 ) 27   44  
Ultram® ER   86,714   53,724   61   11   5  
Zovirax®   147,120   112,388   31   18   11  
Cardizem® LA   69,300   56,509   23   9   6  
BPC   61,889   68,723   (10 ) 8   7  
Legacy Products   136,855   139,853   (2 ) 17   14  
Generic products   86,843   141,075   (38 ) 11   14  
Teveten®     (1,323 ) NM (1)    
   
 
 
 
 
 
Total Product Revenues   801,046   1,021,278   (22 ) 100 (2) 100 (2)
   
 
 
 
 
 

(1)
NM: not meaningful.

(2)
Percentages may not add up to 100 due to rounding.

        Each of these categories and the products or product lines they include are described in more detail below:

Wellbutrin XL® (bupropion hydrochloride extended release tablets)

        Launched in the U.S. in September 2003 by GSK, Wellbutrin XL®, an extended-release formulation of bupropion indicated as first-line therapy for the treatment of depression in adults, has been well received by U.S. physicians and by the end of 2006, had captured 59% of all bupropion prescriptions in the U.S. Pursuant to our manufacturing and supply agreement with GSK, we are entitled to a three-tiered supply price that is based on GSK's net sales of Wellbutrin XL® in any given year. The tier thresholds increase and are reset at the beginning of each calendar year. In the lowest tier, we receive a supply price of less than 25% of GSK's net sales price. In the second tier, the supply price escalates to a value between 25% and 30% of GSK's net sales price. In the highest tier, the supply price is greater than 30% of GSK's net sales price. In 2007, given the late-2006 launch of a generic formulation of the 300mg strength of Wellbutrin XL®, we did not reach the second tier supply price until the fourth quarter — where the pricing remained through year-end. Currently, we do not expect to reach the second tier supply price in 2008 or beyond.

        To date, GSK has opted not to launch a generic version ("authorized generic") of Wellbutrin XL® 300mg. Pursuant to the February 2007 settlement agreement with a number of generic manufacturers, an authorized generic version of Wellbutrin XL® 150mg tablets could not be launched for a period of six months following the introduction of the first generic formulation. This six-month period has expired. Should GSK decide to launch an authorized generic, we would be the exclusive manufacturer of the product and would receive fixed contractual supply prices, which are substantially lower than the tiered supply price we receive on sales of Wellbutrin XL® brand product.

        In February 2006, GSK announced that they had submitted applications for regulatory approval of the product in several European markets. In January 2007, GSK announced the first European approval for Wellbutrin® XR in the Netherlands for the treatment of adult patients with major depressive episodes. Since then, Wellbutrin® XR has been launched in a number of European countries, including Germany, Italy, Spain, Sweden, the Netherlands, Norway, Austria, Iceland, Poland, Portugal and Greece. We manufacture and supply Wellbutrin® XR to GSK at fixed contractual supply prices, which are substantially lower than the tiered supply price we receive on sales of Wellbutrin XL® in the U.S.

Ultram® ER (tramadol hydrochloride extended-release tablets)

        Launched in the U.S. in February 2006 by OMI, a Johnson & Johnson company, Ultram® ER is an extended-release formulation of tramadol hydrochloride indicated for the management of moderate to moderately severe chronic pain in adults who require around-the-clock treatment of their pain for an extended

27



period of time. Over 24 million prescriptions were dispensed for tramadol-based medicines in the U.S. in 2007. Ultram® ER made steady market-share gains throughout much of 2006 and 2007, and by the end of 2007 had captured 5.4% of all tramadol-based prescriptions in the U.S. To date, Ultram® ER is the only once-daily tramadol formulation approved for use in the U.S.

        In November 2005, we entered into a 10-year supply agreement with OMI for the distribution of our extended release and orally disintegrating formulations of Ultram®. Pursuant to the agreement, we manufacture and supply Ultram® ER to OMI for distribution in the United States and Puerto Rico at contractually determined prices, which range from 27.5% to 37.5% of OMI's net selling price for Ultram® ER, depending on the year of sale and aggregate sales. The contractually determined supply price that we receive will be reduced by 50% upon the first sale in the U.S. of a generic equivalent. The supply price was at the lower end of the range in 2006, and at the higher end in 2007, where it is expected to remain through 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 2007, $13.7 million remained to be amortized.

        In January 2008, we announced an exclusive supply agreement with Janssen for the marketing and distribution of our once-daily, extended-release formulation of tramadol in Central and Eastern Europe/Middle East and Latin America. Under the terms of this agreement, which has a 10-year term, we will manufacture and supply once-daily extended-release tramadol hydrochloride tablets in dosage strengths of 100mg, 200mg and 300mg to Janssen at contractually determined prices. Janssen affiliates will be responsible for all related promotional costs, as well as all regulatory filings and the management of the regulatory approvals process.

Zovirax® Ointment/Zovirax® Cream (acyclovir)

        Zovirax® Ointment is a topical formulation of a synthetic nucleoside analogue active against herpes viruses. Each gram of Zovirax® Ointment contains 50mg of acyclovir in a polyethylene glycol base. This product is indicated for the management of initial genital herpes and in limited non-life threatening mucocutaneous herpes simplex infections in immuno-compromised patients. Zovirax® Ointment was originally launched in 1982 by Burroughs Wellcome and although it was not promoted by Glaxo Wellcome, and subsequently GSK, since 1997, Zovirax® Ointment remains the market leader with approximately a 47% share of total prescriptions in the U.S. for topical anti-herpes products in 2007.

        Zovirax® Cream was approved by the FDA in December 2002 and launched by BPI in July 2003. Zovirax® Cream is a topical antiviral medication used for the treatment of herpes labialis (cold sores). Zovirax® Cream held a 26% share of the total prescriptions in the U.S. for topical anti-herpes products at the end of 2007. In December 2006, following the elimination of our U.S. specialty sales force, we entered into a five-year exclusive promotional services agreement with Sciele, whereby we pay Sciele an annual fee to provide detailing and sampling support for Zovirax® Ointment and Zovirax® Cream to U.S. physicians. Sciele is also entitled to additional payments if certain tiered revenue targets are met each calendar year. In 2007, we paid Sciele total compensation of $17.2 million.

Cardizem® LA (diltiazem)

        Cardizem® branded products have been leading CCBs for more than 20 years. In 2007, the U.S. CCB market was valued at $3.5 billion, of which once-daily diltiazem products represented $566 million. These once-daily products generated 16 million prescriptions in the U.S. in 2007, of which 11.7 million were written for all Cardizem® products, representing a market of $424 million, including generics.

        In April 2003, we launched Cardizem® LA through the BPI sales force. Cardizem® LA is a graded, extended-release formulation of diltiazem hydrochloride that provides 24-hour blood pressure control with a single daily dose and offers physicians a flexible dosing range from 120mg to 540mg. Cardizem® LA is the only diltiazem product labelled to allow administration in either the morning or evening. With evening administration, clinical trials have shown Cardizem® LA improved reduction in blood pressure in the early morning hours, which is when patients are at the greatest risk of significant cardiovascular events, such as heart attack, stroke, and death. Kos now promotes Cardizem® LA in the U.S. pursuant to the May 2005 distribution and product acquisition agreement between Kos and us. Under the May 2005 supply and employee agreement

28



with Kos, we manufacture, supply and sell Cardizem® LA to Kos for distribution at contractually determined prices, which exceed 30% of Kos' net selling price. Kos also obtained from us the rights to distribute a combination product under development comprising Cardizem® LA and Vasotec® (Vasocard™); however, the Vasocard™ development and distribution arrangement between Kos and us has since been terminated. In consideration for these transactions, as well as the transfer of our rights in Teveten® and Teveten® HCT, Kos paid us $105.5 million in cash, less withholding tax of $7.4 million. The up-front cash consideration was recorded in deferred revenue and is being recognized in product sales on a straight-line basis over the seven-year Cardizem® LA supply term. In December, 2006, Kos was acquired by Abbott.

        Pursuant to a settlement agreement between us and Watson relating to a consolidated civil action in the U.S., a generic version of Cardizem® LA can be marketed commencing April 2009 (See Item 8.B, "Financial Information — Significant Changes — Legal Proceedings — Intellectual Property").

Biovail Pharmaceuticals Canada (BPC)

        This category includes the following products promoted and/or distributed by BPC:

Tiazac®/Tiazac® XC (diltiazem)

        Tiazac® is a CCB used in the treatment of hypertension and angina. Tiazac® is a once-daily formulation of diltiazem that delivers smooth blood pressure control over a 24-hour period. As a non-dihydropyridine CCB, Tiazac® provides specific renal protective benefits as well as blood pressure reduction, which is particularly important for diabetic hypertensive patients. At December 2007, Tiazac® and Tiazac® XC held a 21.8% share of the once-daily diltiazem market (measured as a percentage of total prescriptions for once-daily diltiazem products). In August 2004, we received TPD approval for Tiazac® XC for the treatment of hypertension and, in July 2007, we received TPD approval for Tiazac® XC for the treatment of angina. Tiazac® XC is a novel formulation of diltiazem taken at bedtime specifically formulated to provide peak drug-plasma levels during the early morning hours when cardiac events are most likely to occur. In January 2005, the BPC sales force launched Tiazac® XC to Canadian physicians. Presently, Tiazac® XC is listed on all provincial formularies with the exception of British Columbia. Our generic version of Tiazac® is distributed in Canada by Novopharm, a subsidiary of Teva.

Wellbutrin® XL (extended release bupropion)

        In February 2005, we submitted a supplemental new drug submission ("sNDS") to the TPD for Wellbutrin® XL, a once-daily formulation of bupropion developed by us. The submission received TPD approval in January 2006. Wellbutrin® XL was formally launched in April 2006 by the BPC sales force. By December 2007, Wellbutrin® XL had captured 40% share of the Canadian bupropion market (measured as a percentage of total prescriptions for bupropion products). In February 2008, Wellbutrin® XL received TPD approval for a new indication of the prevention of seasonal major depressive illness.

Wellbutrin® SR (bupropion)/Zyban® (bupropion)

        We acquired the Canadian rights to Wellbutrin® SR and Zyban® from GSK in December 2002. Wellbutrin® SR (sustained-release bupropion) is indicated as first-line therapy for the treatment of depression. Wellbutrin® SR's anti-depressant activity appears to be mediated by noradrenergic and dopaminergic mechanisms that differentiate it from selective serotonin reuptake inhibitors ("SSRIs") and other known anti-depressant agents. In addition to anti-depressant efficacy, Wellbutrin® SR has a low propensity to cause sexual dysfunction, a common side effect of some other anti-depressant therapies. Zyban®, the same chemical entity as Wellbutrin® SR, is indicated as an aid to smoking cessation treatment.

        In 2003, GSK Canada marketed Wellbutrin® SR and Zyban® in Canada under contract for BPC, as our detailing efforts were focused on Celexa® pursuant to a co-promotion agreement with H. Lundbeck A/S. With the termination of the Celexa® agreement at the end of 2003, BPC assumed full responsibility for Wellbutrin® SR on January 1, 2004. In January 2005, we became aware that a formulation of generic Wellbutrin® SR had received a Notice of Compliance ("NOC"), clearing the path for the generic product's introduction. This generic

29



product was introduced into the Canadian market in 2005. A second generic Bupropion SR product entered the market in June 2006 and a third in December 2006.

        Zyban® is marketed through non-sales force mediated, direct marketing activities. The 2007 Canadian ethical drug market for smoking cessation aids is estimated at C$113 million.

Monocor® (bisoprolol fumarate)

        Monocor® is a cardio selective beta-blocker indicated for the treatment of mild to moderate hypertension and congestive heart failure. Monocor® first faced generic competition in July 2003. The beta-blocker market in Canada was valued at approximately C$184 million in 2007.

Retavase® (reteplase recombinant)

        Retavase®, which was originally licensed from Centocor Inc., is a tissue plasminogen activator used in thrombolytic therapy. The medication is administered to patients immediately after the incidence of acute myocardial infarction ("AMI" or heart attack) and acts to clear arterial blockage. The fibrolytic market has been relatively flat since 2001 averaging about C$45 million each year over the past 6 years. Limited promotion and limited therapeutic window for use of fibrolytics, keeps the market size relatively stable.

Glumetza® (extended-release metformin)

        Glumetza® is a once-daily formulation of metformin, indicated for the control of hyperglycemia in adult patients with type 2 (non-insulin dependent, mature onset) diabetes, as an adjunct to dietary management, exercise, and weight reduction, or when insulin therapy is not appropriate. Glumetza® (500mg and 1,000mg) received TPD approval in May 2005, and the 500mg tablet was formally launched by the BPC sales force in Canada in November 2005. Glumetza®, the first and only once-daily metformin formulation available in Canada, competes in the oral diabetes market, which was valued at approximately C$418 million in 2007 (representing growth of 8.3% relative to 2006). A second application for a once-daily formulation of Glumetza® 1,000mg tablets was filed with the TPD in February 2007 and received an NOC in October 2007. The BPC sales force formally launched Glumetza® 1,000mg tablets to Canadian physicians in January 2008.

Ralivia™ (extended-release tramadol)

        A New Drug Submission ("NDS") for our once-daily formulation of tramadol hydrochloride, comprising 100mg, 200mg and 300mg tablets, was accepted for review in November 2006, and received TPD approval in August 2007. In November 2007, the BPC sales force launched Ralivia to Canadian physicians. Ralivia is indicated for the management of pain of moderate severity in patients who require continuous treatment for several days or more.

        Ralivia is produced using our proprietary Smartcoat™ technology, which provides 24-hour delivery for more constant plasma concentration and clinical effects with less peak-to-trough fluctuation. Ralivia is identical to Ultram® ER, which was launched in the U.S. and Puerto Rico in February 2006 by OMI.

Legacy Products

        This category includes products that we distribute in the U.S., but do not actively promote. In general, these are products that have been genericized and generate revenue streams that are declining at reasonably predictable rates. The products in this reporting category are Cardizem® CD, Ativan®, Tiazac®, Vasotec®, Vaseretic® and Isordil®. Despite the availability of generic competitors, these products continue to generate significant cash flow. We have attempted to mitigate the revenue impact of declining prescription volumes through the implementation of price increases. These Legacy Products are not promoted and minimal resources are required to support their distribution.

Cardizem® CD (diltiazem)

        Cardizem® branded products have been leading medications in the CCB category of cardiovascular drugs for more than 20 years. In 2007, the U.S. CCB market was valued at $3.5 billion, of which once-daily diltiazem

30



products represented $566 million. We entered into a new supply contract with sanofi-aventis for Cardizem® CD effective June 1, 2006.

Ativan® (lorazepam)

        Ativan® is the benzodiazepine lorazepam, indicated for the management of anxiety disorders, or for the short-term relief of anxiety, or anxiety associated with symptoms of depression. We acquired U.S. marketing rights to Ativan® from Wyeth in June 2003. Although under the agreement, Wyeth was to manufacture and supply the product only until November 2006, the terms of that agreement continued to govern the manufacture and supply by Wyeth of outstanding purchase orders of Ativan® into 2007, with the last lots of Ativan being received from Wyeth in March 2007. In August 2007, we commenced receiving the supply of Ativan® tablets for the U.S. market from Meda Manufacturing GmbH ("Meda") under a replacement supply contract with Meda. The market for anxiety treatments was in excess of $733 million for 2007, with Ativan® (lorazepam) generating 25.1 million prescriptions in the U.S. during such period. Sales of benzodiazepine products were in excess of $586 million for 2007.

Tiazac® (diltiazem)

        Tiazac® belongs to the CCB class of drugs, used in the treatment of hypertension and angina, which generated sales in the U.S. of $3.5 billion for the 12 months ended December 31, 2007. Within the CCB market, once-daily diltiazem products accounted for approximately $566 million of this total. After being introduced in the U.S. in February 1996, Tiazac® reached a peak market share of 21.1% (measured as a percentage of total prescriptions for once-daily diltiazem products) in 2002. At December 31, 2007, this figure was 1% resulting from generic competition, the first of which entered the U.S. market in April 2003.

        In 1995, Forest acquired the right to market Tiazac® in the U.S. The formal product launch took place in February 1996. We act as the exclusive manufacturer of the product and receive a contractually determined supply price and a royalty payment from Forest on net sales of Tiazac®. Upon the onset of generic competition for Tiazac® in the U.S., we launched a competing authorized generic version through Forest under a variable supply price arrangement, following which Forest ceased promotional support for branded Tiazac® in April 2003 and Forest now distributes a Tiazac® authorized generic on our behalf.

Vasotec® (enalapril maleate) / Vaseretic® (enalapril maleate/hydrochlorothiazide)

        Vasotec® and Vaseretic® have been highly recognized in the treatment of hypertension, symptomatic congestive heart failure, and asymptomatic left ventricular dysfunction for nearly 20 years. Enalapril is a pro-drug; following oral administration, it is bio-activated by hydrolysis of the ethyl ester to enalaprilat, which is the active angiotensin converting enzyme ("ACE") inhibitor. Vasotec® is the maleate salt of enalapril. Vaseretic® combines Vasotec® and a diuretic, hydrochlorothiazide. The product is also indicated for the treatment of hypertension.

        In 2007, the ACE inhibitor market had total sales in the U.S. of approximately $1.7 billion with 118.3 million total prescriptions dispensed, a 1% increase over the previous year. Vasotec® (branded and generic) is one of the most widely prescribed ACE inhibitors and is one of the top-five most recognized cardiovascular brands. Vasotec® lost its market exclusivity in August 2000 and its revenues have since been eroded by generic competition. Nevertheless, in 2007, there were 13.9 million prescriptions written for enalapril maleate in the U.S.

        Merck supplies this product to us pursuant to a supply agreement that was recently extended to December 2009.

Isordil® (isosorbide dinitrate)

        Isordil® (isosorbide dinitrate), a coronary vasodilator, is indicated for the prophylaxis of ischemic heart pain associated with coronary insufficiency (angina pectoris). Isordil® dilates the blood vessels by relaxing the muscles in their walls. Oxygen flow improves as the vessels relax, and chest pain subsides. Isordil® helps to increase the amount of exercise that may occur prior to the onset of chest pain, and can help relieve chest pain that has

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already started, or prevent pain expected from a strenuous activity, such as walking up a hill or climbing stairs. We acquired U.S. marketing rights to Isordil® from Wyeth in June 2003.

        Meda supplies Isordil® tablets to us pursuant to a June 2007 amendment to a supply agreement. Sales of nitrate products were approximately $226.0 million in the U.S. for 2007. Total prescriptions for orally administered nitrates were in excess of 17.2 million in 2007 in the U.S.

Generic Products

        In previous 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.

        Our generic product portfolio is currently comprised of those products that are distributed in the U.S. for us by Teva under a manufacturing and distribution agreement originally signed in 1997, in addition to an authorized generic formulation of Tiazac®, which is distributed by Forest. In 2007, the products distributed by Teva included bioequivalent formulations of Cardizem® CD, Adalat CC, Procardia XL, Tiazac®, Voltaren XR and Trental. In September 2004, we resolved arbitration proceedings initiated by us against Teva and renegotiated certain aspects of the agreement. Amendments include an extension of the agreement by an additional four years (on a product-by-product basis) and the sale of two development stage ANDA programs to Teva. Furthermore, we renegotiated financial terms such that we now receive higher selling prices on all products within the portfolio. Generic Tiazac® was introduced in Canada in January 2006 and is distributed by Novopharm, a subsidiary of Teva, in Canada.

        Our portfolio of generic formulations of branded controlled release products, such as Cardizem® CD, Adalat CC and Procardia XL, represents technically challenging products to formulate. These technological barriers may limit the number of generic versions of the products. This competitive landscape allows for some pricing flexibility, and may mitigate, to some extent, the price discounting that can often reach 90% in the generic pharmaceuticals industry. However, in 2007, a number of new competitor products became available, which resulted in a significant decline in our revenues relating to these products.

Product Development Pipeline

        In addition to our current portfolio of existing products described above, we currently have a number of pipeline products in various stages of development, including targets in the cardiovascular disease, CNS disorders and pain management markets. While our therapeutic focus is on cardiovascular disease, CNS disorders and pain management, our drug-delivery technologies can be applied to other therapeutic areas and, accordingly, we consider opportunities outside these therapeutic areas as they arise.

        We currently have development efforts ongoing for novel formulations of existing products that we believe may provide clinically meaningful benefits to patients. In addition, we and/or our partners are also developing generic formulations of a number of difficult-to-manufacture pharmaceutical products.

        For competitive reasons, we do not disclose the identity and/or target enhancement of all of our pipeline products.

        As indicated above, our pipeline products are in various stages of development, with the most advanced being BVF-033, our salt formulation of bupropion. BVF-033 is currently being reviewed by the FDA, further to our October 23, 2007 submission of a Complete Response to the FDA's July 19, 2007 Non-Approval Letter for the product. The FDA action date for our NDA is April 23, 2008. With respect to other programs, we anticipate the submission of up to two ANDAs in 2008.

        Despite the reduced risk profile of our pipeline programs (relative to NCEs), they do carry development risk — more so than ever as we focus on clinically meaningful enhancements as opposed to convenience and compliance enhancements — and as such, we do not anticipate the commercialization of all of these products. In addition, we routinely review and prioritize our pipeline as market conditions change and as new products are added, which can result in the discontinuation or delay of lower priority development programs. In 2007 and

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early 2008, we discontinued our development efforts related to BVF-087 for the treatment of a CNS disorder; BVF-211 for the treatment of hypertension; BVF-300 targeting the gastrointestinal-disease market; and BVF-247 for the treatment of cardiovascular disease. In March 2008, we terminated BVF-146, a once-daily combination product consisting of tramadol and a non-steroidal anti-inflammatory, primarily as a result of a reassessment of the commercial opportunity for this product. Given that the successful development of any pipeline program is dependent on a number of variables, it is difficult to accurately predict timelines for regulatory approval and accordingly clinical development expenses.

Selected Development Pipeline Products

        Our new product development efforts are subject to the process and regulatory requirements of the TPD (in Canada) and the FDA (in the U.S.). Since we focus on novel formulations of existing drugs, the development path we face is generally less onerous than that facing companies pursuing NCEs. The flowchart below summarizes the steps required to bring such pipeline products to market.

CHART

        The following is a chart that describes certain of our active and disclosed pipeline projects.

Product
  Indication

Cardiovascular    
BVF-203 (undisclosed)   Cardiovascular disease
BVF-239 (undisclosed)   Cardiovascular disease

Central Nervous System

 

 
BVF-012 (Venlafaxine EA)   Depression
BVF-033 (Bupropion salt)   Depression
BVF-045 (Bupropion Combination)   Depression
BVF-058 (undisclosed)   CNS disorders
BVF-065 (undisclosed)   Depression
BVF-068 (undisclosed)   CNS disorders

Other

 

 
BVF-324 (undisclosed)   Sexual dysfunction

Drug Delivery Technology

        We have numerous proprietary drug delivery technologies that are used to develop controlled release, enhanced/modified absorption and rapid dissolve products. We also have access to technologies of our development partners through licensing agreements. These technologies enable us to develop both branded and generic pharmaceutical products. Our formulations for these products are either patented or proprietary. Accordingly, generic manufacturers may be inhibited from duplicating our products or may have difficulty duplicating our formulations by other means.

        Oral controlled release technologies permit the development of specialized oral delivery systems that improve the absorption and utilization of drugs by the human body. Release patterns may be characterized as either "zero order", which indicates constant drug release rate over time, or "first order", which indicates decreasing release rate over time. These systems offer a number of advantages, in particular allowing the patient to take only one or two doses of the drug per day. This, combined with enhanced therapeutic effectiveness, reduced side effects, improved patient compliance and potential cost effectiveness, makes controlled release drug products ideally suited for the treatment of chronic conditions.

        Our controlled release technologies can provide a broad range of release profiles, taking into account the physical and chemical characteristics of a drug product, the therapeutic use of the particular drug and the optimal site for release of the basic drug in the gastrointestinal tract (the "GI tract"). The objective is to provide a delivery system allowing for a single dose per 12 to 24 hour period, while assuring gradual and controlled release of the subject drug at a suitable location(s) in the GI tract.

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        Our rapid dissolve (FlashDose®) formulations contain the same active pharmaceutical ingredient found in the original branded products. The active product ingredient is encapsulated in microspheres utilizing our CEFORM™ technology. These microspheres can be coated to provide taste-masking, or specialty release profiles such as sustained release. Our proprietary directly compressible oral disintegrating tablet ("ODT") technologies are used to produce matrices or excipient blends that are subsequently combined with the coated CEFORM™ microspheres. This final blend can be compressed into rapid dissolve tablet formulations using conventional manufacturing technology. The benefits of rapid dissolve formulations include the ease of administration for the elderly, young children, or people with disease states who may have difficulty swallowing tablets or capsules.

        Our enhanced absorption technology platform is unique in the sense that various formulation and physico-chemical tools can be applied alone or in combination to improve the absorption profile of a drug. For example, it may be possible to increase the solubility and/or permeability, increase the amount absorbed, control the pre-systemic metabolism, and/or increase the rate of absorption, with or without modification of the total amount of drug into the bloodstream.

        The following describes some of our proprietary technologies.

Dimatrix

        Dimatrix is a diffusion controlled matrix technology for water soluble drugs in the form of tablets. The drug compound is uniformly dispersed in a polymer matrix. The mechanism of release involves the swelling of polymers within the matrix, thus enabling the drug to be dissolved and released by diffusion through an unstirred boundary layer. The release pattern is characterized as first order as the rate of drug diffusion out of the swollen matrix is dependent upon the concentration gradient.

Macrocap

        Macrocap consists of immediate release beads made by extrusion/spheronization/pelletization techniques, or by layering powders or solutions onto nonpareil seeds. Release modulating polymers are applied on the beads using a variety of specialized coating techniques. The coated beads are filled into hard gelatin capsules. Drug release occurs by diffusion associated with bioerosion or by osmosis via the surface membrane. The release mechanism can be pH activated or pH independent. The beads can be formulated to produce first order or zero order release.

Consurf

        Consurf is a zero order drug delivery system for hydrophilic and hydrophobic drugs in the form of matrix tablets. The drug compound is uniformly dispersed in a matrix consisting of a unique blend of polymers. The mechanism of release involves the concurrent swelling and erosion of the matrix such that a constant surface matrix area is maintained during transit through the GI tract. This results in a zero order release of the drug of interest.

Multipart

        Multipart consists of a tablet carrier for the delivery of controlled release beads that preserves the integrity and release properties of the beads. The distribution of the beads is triggered by disintegration of the tablet carrier in the stomach. Drug release from the beads can be pH activated or pH independent and can occur by disintegration or osmosis. The beads can be formulated to produce first or zero order release.

CEFORM™

        CEFORM™ is a microsphere technology used to produce uniformly sized and shaped microspheres of a wide range of pharmaceutical compounds. The microspheres are nearly perfectly spherical in shape and typically have a mean target diameter between 50-600 microns, depending on the application. For example, 150-200 micron microspheres may be used for FlashDose®, with high drug content and a taste-mask coating applied for oral cavity dispersion. CEFORM™ microspheres are produced using a continuous, single-step and

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solvent-free manufacturing process. CEFORM™ can be used to formulate drugs that are generally thermally unstable because of the very brief application of heat and the wide range of temperatures which can be used in the manufacturing process. Depending on the desired release characteristics and oral dosage format, CEFORM™ microspheres can be formulated for controlled release, enhanced absorption, delayed release, rapid absorption or taste masking.

Flash Dose™

        Our proprietary FlashDose™ drug-delivery technology is based on a unique, directly-compressible formulation platform we use to provide ODTs. FlashDose™ tablets are manufactured using conventional dry blending, rotary compression and standard packaging operations. The tablets are hard and robust, which allows for bulk handling and conventional packaging in a manner similar to hard tablets. FlashDose™ technology is often combined with our innovative CEFORM™ microsphere technology which, in turn, allows for application of a broad range of drug-delivery options, such as sustained-release ODTs, rapid-onset ODTs, enhanced absorption ODTs, combination ODTs, and taste-masked ODTs. The ability to apply such specialized oral delivery in an ODT formulation is termed our Advanced-Delivery FlashDose™.

Shearform™

        Shearform™ is used to produce matrices of saccharides, polysaccharides or other carrier materials that are subsequently processed into amorphous fibers or flakes and recrystallized to a predetermined level. This process is used to produce rapid dissolve formulations, including FlashDose®. Shearform™ can also be applied to food product ingredients to provide enhanced flavoring. Other ODT technologies have been developed and applied by us, allowing for simpler manufacturing of ODTs as well.

Smartcoat™

        Smartcoat™ is a technology we acquired from and developed with Pharma Pass II. This technology allows the manufacturing of very high potency controlled release tablets, allowing for smaller sized tablets while controlling the release over a 24-hour period.

Smartcoat™ AQ

        Smartcoat™ AQ is an aqueous based, proprietary version of the Smartcoat™ technology. By using water-based technologies, the manufacturing process promotes "green" production practices and enhances worker safety. The once-daily formulation of metformin hydrochloride (Glumetza®) utilizes this technology.

Chronotabs

        Chronotabs are made of Multipart or Smartcoat™ tablets particularly adapted to chronotherapy (the science of treating diseases that follow the body's circadian rhythms), using a second layer of smart polymers made of dry or filmcoating in order to optimize the active drug absorption profile for bedtime administration.

Zero Order Release System ("ZORS™")

        ZORS™ is a technology that allows us to develop zero order kinetic systems, based on a proprietary controlled release matrix coating. ZORS™ allows us to develop controlled release tablets that alleviate food effect in drugs known to have their pharmacokinetic profile influenced by meals.

Other drug-delivery systems

        We are in the process of preparing and filing new patents for drug-delivery technologies amenable to very low doses of drugs in once-daily, extended release formulations with optimal absorption profiles, as well as the optimization of site-specific absorption of controlled release, oral drugs.

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Other Recent Developments

        In August 2007, we entered into a license and development agreement with an undisclosed, privately held, drug-development company for the exclusive global rights to BVF-324, a novel product for the treatment of a sexual dysfunction. The agreement includes an option to license the clinical data, intellectual property and the rights to develop, manufacture and market BVF-324 globally. We paid an upfront fee, and are contingently obligated to make an option payment and additional milestone payments, including upon the initiation of the first Phase III trial for the product and upon the first commercial sale of the product in the United States. The agreement also stipulates that we make tiered, single-digit royalty payments on net commercial sales of the product. In the Fall of 2007, we met with the FDA to discuss the development program for this product. That meeting resulted in a number of concerns being raised by the FDA that make the development path for BVF-324 in the U.S. uncertain. With respect to other geographic markets, however, we believe that BVF-324 represents a potentially viable opportunity, particularly in a number of European countries, and accordingly, we are actively evaluating the commercial value and development requirements in those markets.

Patents and Proprietary Rights

        We protect the proprietary nature of our technology through a combination of patents, trade secrets, know-how and other methods. We have not routinely sought patents on our controlled release technologies themselves because the filing of certain patents may provide competitors and potential competitors with information relating to proprietary technology, which may enable such competitors to exploit information related to such technology that is not within the confines of the protection of the patent. However, we typically do file patent applications relating to the application of our technologies to specific drug compounds for specific uses. Accordingly, we usually seek patent protection for novel products arising from our development efforts, to thereby provide intellectual property rights and associated market protection.

        Historically, we have relied on trade secrets, know-how and other proprietary information. Our ability to compete effectively with other companies will depend, in part, upon our ability to maintain the proprietary nature of our technology. To protect our rights in these areas, we require all licensors, licensees and significant employees to enter into confidentiality agreements. These agreements may not, however, provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information.

Significant Customers

        The following table identifies external customers that accounted for 10% or more of our total revenue during the years ended December 31, 2005, 2006 and 2007:

 
  Percentage of
Total Revenue

 
  2007
%

  2006
%

  2005
%

GSK   25   42   38
McKesson Corporation   20   12   14
Teva   11   12   15
OMI   10   5  
Cardinal Health, Inc.   10   6   6

Other Revenue

        Beyond the development, manufacture and distribution of pharmaceutical products described above, we also provide research, development and clinical contract research services to third parties, as described further below. In 2007, the provision of these services generated revenues of $23.8 million, compared with $21.6 million in 2006. We also generate revenues related to the sale of a number of our controlled release products by third parties. We have also, in the past, generated revenue by promoting and/or co-promoting products on behalf of third parties. In 2007, these sales and promotion efforts resulted in revenues of $17.9 million, compared with

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$24.9 million in 2006. The year-over-year decrease reflects the termination of our co-promotion efforts of Ultram® ER and Zoladex®, further to our December 2006 restructuring.

Other Business Operations and Services

Contract Research Division

        Our Contract Research Division (CRD) provides us and other pharmaceutical companies with a broad range of Phase I and Phase II clinical-research services. This involves conducting pharmacokinetic studies along with bioanalytical laboratory testing to establish a drug's bioavailability or its bioequivalence to another drug moiety. Clinical studies are reviewed by an independent Institutional Review Board that assures that all studies are conducted in an ethical and safe manner, without compromising the safety or well-being of the human subjects participating in these studies. As well, all clinical studies are reviewed by Health Canada under a Clinical Trial Application and executed under Good Laboratory Practices ("GLP") and Good Clinical Practices ("GCP").

        Operating as an independent business unit in Toronto, Ontario, the CRD is located in a 41,000-square-foot stand-alone facility owned by us, and a 10,500-square-foot leased facility. These facilities include a 200-bed capacity Clinic (five study clinics and a 12-bed dedicated Phase I unit) and a Medical Recruiting and Subject Screening Unit.

        Our Bioanalytical Laboratory maintains the latest technology in mass spectrometry and liquid chromatography supported by a fully validated Laboratory Information Management System ("LIMS"). The Bioanalytical Laboratory continues to add to its inventory of over 175 developed and validated assays. The Department of Biopharmaceutics provides scientific support to our operational departments by providing pharmacokinetic, statistical, medical writing, data management, and regulatory services.

        To date, the CRD has designed and conducted in excess of 3,250 bioavailability, bioequivalence and/or drug-drug interaction studies. The therapeutic areas in which studies have been completed include cardiovascular disease, pulmonary, bone and joint disease, pain management, infectious diseases, CNS, gastroenterology and endocrinology. In addition, the CRD has performed Phase I, first-in-man studies to establish the safety of new chemical entities.

        The CRD maintains a database in excess of 90,000 adult male and female volunteers for potential study enrolment as well as an inventory of patient and specialty populations, including post-menopausal, renal-impaired and diabetic patients. The CRD has it own independent Quality Assurance Department to assure that the operations of the CRD are subject to full compliance with the rules and regulations of the FDA, TPD and other comparable foreign regulatory bodies. The regulations applicable to the CRD activity may change as regulatory bodies identify new areas of necessary focus, or issues related to product or patient safety.

Regulatory Affairs and Quality Assurance

        Our Regulatory Affairs Department is involved in the development and registration of each product and prepares product submissions for regulatory agencies in the U.S. and Canada. This group coordinates all data and document management for submissions, including amendments, supplements and adverse events reporting to such regulatory agencies. Our Quality Assurance Department seeks to ensure that all stages of product development and manufacturing fully comply with applicable good clinical, laboratory and manufacturing practices.

Regulation

        The R&D, manufacture, and marketing of controlled release pharmaceuticals are subject to regulation by U.S., Canadian and foreign health authorities. Such national agencies and other federal, state, provincial and local entities regulate the testing, manufacturing, safety and promotion of our products.

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U.S. Regulation

New Drug Application ("NDA")

        We are required by the FDA to comply with regulations governing our products prior to commencement of marketing by us or by our commercial partners. New chemical products and new formulations for existing drug compounds which cannot be filed as ANDAs are subject to NDA requirements. These requirements include: (1) preclinical laboratory and animal toxicology tests; (2) submission in certain cases of an Investigational New Drug Application ("IND"), and its required acceptance by the FDA before human clinical trials can commence; (3) adequate and well-controlled replicate human clinical trials to establish the safety and efficacy of a drug for its intended indication; (4) the submission of an NDA to the FDA; and (5) FDA approval of an NDA prior to any commercial sale or shipment of the product, including pre-approval and post-approval inspections of its manufacturing and testing facilities.

        Preclinical laboratory and animal toxicology tests must be performed to assess the safety and potential efficacy of a product. The results of these preclinical tests, together with information regarding the methods of manufacture of the products and quality control testing, are then submitted to the FDA as part of an IND requesting authorization to initiate human clinical trials. Once the IND goes into effect, clinical trials may be initiated, unless a "hold" on clinical trials is subsequently issued by the FDA.

        Clinical trials involve the administration of a pharmaceutical product to individuals under the supervision of qualified medical investigators that are experienced in conducting studies under "Good Clinical Practice" guidelines. Clinical studies are conducted in accordance with protocols that detail the objectives of a study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA and to an Institutional Review Board ("IRB") prior to the commencement of each clinical trial. Clinical studies are typically conducted in three sequential phases, which may overlap. In Phase I, first-in-man, the initial introduction of the product into healthy human subjects, the compound is tested for absorption, safety, tolerability, metabolic interaction, distribution and excretion. Phase II involves studies in a limited patient population with the disease to be treated to (1) determine the effectiveness of the product for specific targeted indications; (2) determine optimal dosage; and (3) identify possible adverse effects and safety risks. If Phase II evaluations demonstrate that a pharmaceutical product is effective, has acceptable data to show an appropriate clinical dose and has an acceptable safety profile, Phase III clinical trials are undertaken to further evaluate clinical efficacy of the product and to further test its safety within an expanded patient population at geographically dispersed clinical study sites. Periodic reports to the FDA and IRBs on the clinical investigations are required. We, as a sponsor of the study, or the FDA may suspend clinical trials at any time if either party believes the clinical subjects are being exposed to unacceptable health risks. The results of the product development, analytical laboratory studies, toxicology studies and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing of a pharmaceutical product.

        The above described NDA requirements are predicated on the applicant being the owner of, or having obtained a right of reference to, all of the data required to prove safety and efficacy. However, for those NDAs containing some data which the applicant neither owns nor has a right-of-reference, the FDA's ability to grant approval is limited when there are exclusivity periods or infringed patent rights that are accorded to others. These NDAs are governed by 21 U.S.C. § 355(b)(1), also known as Section 505(b)(1) of the U.S. Food, Drug and Cosmetic Act (the "FD&C Act") (sometimes referred to as "505(b)(1) NDAs").

Abbreviated New Drug Application ("ANDA")

        In certain cases, where the objective is to develop a generic (bioequivalent formulation) of an approved product already on the market, an ANDA is required. Under the ANDA procedure, the FDA waives the requirement to submit complete reports of preclinical and clinical studies of safety and efficacy, and instead, requires the submission of bioequivalence data, which is a demonstration that the generic drug produces the statistically equivalent blood levels of active ingredient in the body as its brand-name counterpart. It is mandatory that the generic products have a comparable rate and extent of absorption as measured by plasma drug levels as a function of time. In certain cases, an ANDA applicant may submit a suitability petition to the FDA requesting permission to submit an ANDA for a drug product that differs from a previously approved reference drug product (the "Listed Drug") when the change is one authorized by statute. Permitted variations

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from the Listed Drug may include changes in: (1) route of administration; (2) dosage form; (3) strength; and (4) one of the active ingredients of the Listed Drug when the Listed Drug is a combination product. The FDA must approve the petition before the ANDA may be submitted. An applicant is not permitted to petition for any changes from Listed Drugs which are not authorized by statute. The information in a suitability petition must demonstrate that the change may be adequately evaluated for approval without data from investigations to show the product's safety or effectiveness. The advantages of an ANDA over an NDA include reduced R&D costs associated with bringing a product to market, potentially shorter review and approval periods and potentially quicker time to market. The disadvantages include the lack of market exclusivity unless the ANDA is the first substantially complete file to challenge innovator patents (See "— Patent Certification and Exclusivity Issues" below).

505(b)(2) Application Process

        In certain cases, pharmaceutical companies may submit an application for marketing approval of a drug product under Section 505(b)(2) of the FD&C Act (referred to as a "505(b)(2) NDA"). This mechanism essentially relies upon the same FDA conclusions that would support the approval of an ANDA available to an applicant who develops a modification of a Listed Drug that is not supported by a suitability petition. Relative to more extensive regulatory requirements for a full 505(b)(1) NDA, the Section 505(b)(2) regulations permit applicants to forego costly and time-consuming drug development studies by relying on the FDA's finding of safety and efficacy for a previously approved drug product. Under some circumstances, the extent of the reliance on the approved drug product approaches that which is permitted under the generic drug approval provisions. This approach is intended to encourage innovation in drug development without requiring duplicative studies to demonstrate what is already known about a drug while protecting the patent and exclusivity rights for the approved drug. If clinical efficacy trials are required for approval, the 505(b)(2) product is generally entitled to three years of market exclusivity following approval.

Patent Certification and Exclusivity Issues

        When submitting ANDAs and 505(b)(2) NDAs, a company must include certifications with respect to any patents that claim the Listed Drug or that claim a use for the Listed Drug for which the applicant is seeking approval. If applicable patents are in effect and the patent information has been submitted to the FDA and listed in the FDA's "Orange Book", the FDA may be required to delay approval of the ANDA or 505(b)(2) NDA until the patents expire. If the applicant believes it will not infringe the patents or that the patents are invalid, it can make a patent certification to the owners of the patents and the holder of the original NDA approval for the drug product for which a generic drug approval is being sought. This may result in patent infringement litigation which could delay the FDA approval of the ANDA or 505(b)(2) NDA for up to 30 months. If the drug product covered by an ANDA or 505(b)(2) NDA were to be found by a court to infringe another company's patents, approval of the ANDA or 505(b)(2) NDA could be delayed until the infringed patents expire.

        Under the FD&C Act, the first filer of an ANDA with a certification of patent non-infringement or invalidity is generally entitled to receive 180 days of market exclusivity. Subsequent filers of generic products would be entitled to market their approved product after the 180-day exclusivity period expires. However, the first filer may be deemed to have forfeited its 180-day exclusivity if, for example, it has not started marketing its generic product within certain time frames.

        Patent expiration refers to expiry of U.S. patents (inclusive of any extensions) on drug compounds, formulations and uses. Patents outside the U.S. may differ from those in the U.S. Under U.S. law, the expiration of a patent on a drug compound does not create a right to make, use or sell that compound. There may be additional patents relating to a person's proposed manufacture, use or sale of a product that could potentially prohibit such person's proposed commercialization of a drug formulation.

        The FD&C Act contains non-patent market exclusivity provisions that offer additional protection to pioneer drug products and are independent of any patent coverage that might also apply. In the case of pioneer drugs, exclusivity refers to the fact that the effective date of approval of a potential competitor's ANDA or 505(b)(2) NDA may be delayed or, in certain cases, an ANDA or 505(b)(2) NDA may not be submitted until the

39



exclusivity period expires. Five years of exclusivity are granted to the first approval of a new chemical entity. Three years of exclusivity may apply to products which are not new chemical entities, but for which new clinical investigations are essential to the approval. For example, a new indication for use, or a new dosage strength of a previously approved product, may be entitled to exclusivity, but only with respect to that indication or dosage strength. In the case of pioneer drugs, exclusivity only offers protection against a competitor entering the market via the ANDA and 505(b)(2) NDA routes, and does not operate against a competitor that generates all of its own data and submits a full NDA under Section 505(b)(1) of the FD&C Act.

        If applicable regulatory criteria are not satisfied, the FDA may deny approval of an 505(b)(2) NDA, full NDA or an ANDA or may require additional testing. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA may require further testing and surveillance programs to monitor the pharmaceutical product that has been commercialized. Non-compliance with applicable requirements can result in additional penalties, including product seizures, injunction actions and criminal prosecutions.

Canadian Regulation

        The requirements to sell pharmaceutical drugs in Canada are substantially similar to those in the U.S., which are described above, with the exception of the 505(b)(2) NDA and 180 day marketing exclusivity for a first filer of an ANDA under the FD&C Act in the U.S.

Clinical Trial Application

        Before conducting clinical trials of a new drug in Canada, a Clinical Trial Application ("CTA") must be submitted to the TPD. Applications for Phase I trials include information about the proposed trial and the new drug as well as information on any previously executed clinical trials with the new drug. Phase II and III applications also include information on the methods of manufacture of the drug and controls, and preclinical laboratory and animal toxicology tests on the safety and potential efficacy of the drug. If, within 7 days (Phase I) and 30 days (Phase II and III) of receiving the application, the TPD does not notify the applicant that its application is unsatisfactory, the applicant may proceed with clinical trials of the drug. The phases of clinical trials are the same as those described above under "U.S. Regulation — New Drug Application ("NDA")".

New Drug Submission ("NDS")

        Before selling a new drug in Canada, the applicant must submit an NDS or sNDS to the TPD and receive a Notice of Compliance ("NOC") from the TPD to sell the drug. The submission includes information describing the new drug, including its proper name, the proposed name under which the new drug will be sold, a quantitative list of ingredients in the new drug, the methods of manufacturing, processing and packaging the new drug, the controls applicable to these operations, the tests to be applied to control the potency, purity and stability of the new drug, pharmacology data and the results of non-clinical, biopharmaceutics, clinical trials, as appropriate, the intended indications for which the new drug may be prescribed and the effectiveness and safety of the new drug when used as intended. The TPD reviews the NDS or sNDS. If the submission meets the requirements of Canada's Food and Drugs Act and regulations, the TPD will issue an NOC for the new drug.

        The TPD may deny approval or may require additional testing of a proposed new drug if applicable regulatory criteria are not met. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Contravention of Canada's Food and Drugs Act and regulations can result in fines and other sanctions, including product seizures and criminal prosecutions.

        Where the TPD has already approved a drug for sale in controlled release dosages, the applicant may seek approval from the TPD to sell an equivalent generic drug through an Abbreviated New Drug Submission ("ANDS"). The TPD does not require additional clinical trials to be conducted by the manufacturer of a proposed drug that is claimed to be equivalent to a drug that has already been approved for sale and marketed. Instead, the manufacturer must satisfy the TPD that the drug is bioequivalent to the drug that has already been approved and marketed.

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        The Canadian government has regulations which can prohibit the issuance of an NOC for a patented medicine to a generic competitor, provided that the patentee or an exclusive licensee has filed a list of its Canadian patents covering that medicine with the Minister of Health Canada. Generic competitors that are interested in marketing generic versions of medicines against which certain patents have been listed must first provide proof that their product will not infringe the listed patents in question. In order to do this, the generic competitor must serve a Notice of Allegation in which it outlines the reasons that its product will not infringe the listed patents, or assert that the listed patents are invalid. At that point, the patentee or an exclusive licensee can commence a legal proceeding to obtain an order of prohibition directed to the Minister prohibiting him or her from issuing an NOC to the generic competitor that has served a Notice of Allegation. The Minister may be prohibited from issuing an NOC permitting the importation or sale of a patented medicine to a generic competitor until patents on the medicine expire or the allegation of non-infringement and/or invalidity of the patent(s) in question is resolved by litigation in the manner set out in such regulations. There may be additional patents relating to a company's proposed manufacture, use or sale of a product that could potentially prohibit a generic competitor's proposed commercialization of a drug compound.

        Certain provincial regulatory authorities in Canada have the ability to determine whether the consumers of a drug sold within such province will be reimbursed by a provincial government health plan. A determination that a drug is reimbursable results in the listing of that drug on provincial formularies. The listing or non-listing of a drug on a provincial formulary may affect the price of the drug within that province and the volume of the drug sold within that province.

Additional Regulatory Considerations

        Sales of our products by our commercial partners outside the U.S. and Canada are subject to local regulatory requirements governing the testing, registration and marketing of pharmaceutical products which vary widely from country to country.

        Our manufacturing facilities located in Steinbach, Manitoba, Dorado, Puerto Rico and Carolina, Puerto Rico, operate according to FDA-mandated and TPD-mandated GMP. These manufacturing facilities are inspected on a regular basis by the FDA, the TPD and other regulatory authorities. Our internal quality auditing team monitors compliance on an ongoing basis with FDA-mandated and TPD-mandated GMP. From time to time, the FDA, the TPD or other regulatory agencies may adopt regulations that may significantly affect the manufacture and marketing of our products.

        In addition to the regulatory approval process, pharmaceutical companies are subject to regulations under provincial, state and federal laws, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future regulations governing the pharmaceutical industry. We believe that we are in compliance in all material respects with such regulations as are currently in effect.

Taxation

        We have operations in various countries that have differing tax laws and rates. A significant portion of our revenue and income is 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. Our effective tax rate may change from year to year based on changes in the mix of activities and income allocated or earned 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; changes in our eligibility for benefits under those tax treaties; and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in an increase in the effective tax rate on all or a portion of the income of the Company and/or any of our subsidiaries to a rate possibly exceeding the statutory income tax rate of Canada or the U.S. We conduct transfer pricing studies to support the pricing of transactions between the various entities in our structure. Our income tax reporting is subject to audit by domestic and foreign tax authorities.

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Acquisitions of Businesses

        We have not made an acquisition of a business in the three most recently completed fiscal years.

Seasonality of Business

        Our results of operations have not been materially impacted by seasonality.

Discontinued Operation

Nutravail

        On May 2, 2006, we completed the sale of our Nutravail division to Futuristic Brands USA, Inc. ("Futuristic"). Nutravail developed and manufactured nutraceutical and food-ingredient products. In consideration for Nutravail's inventory, long-lived assets and intellectual property, we are entitled to future payments based on the net revenues generated from those assets by Futuristic for a period of ten years. In May 2007, pursuant to an amendment to the agreement with Futuristic, Futuristic paid us $300,000 as consideration for the termination of its obligation to make these future payments.

C.    Organizational Structure

        At December 31, 2007, each of the subsidiaries listed below either represents at least 10% of our total assets, or sales and operating revenues on a consolidated basis, or are entities through which we conduct our business.

Company
  Jurisdiction of
Incorporation

  Nature of Business
  Group Share
%

  Address
Biovail Laboratories International SRL   Barbados   Manufacture, sale, development, licensing of pharmaceutical products, strategic planning and management of intellectual property   100   Chelston Park, Bldg 2
Collymore Rock,
St. Michael, Barbados
Biovail Americas Corp.   Delaware   Holding company   100   700 Route 202/206 North
Bridgewater, New Jersey
Biovail Insurance Incorporated   Barbados   Captive insurance company   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados
Biovail Distribution Corporation   Delaware   Distribution of pharmaceutical products   100   700 Route 202/206 North
Bridgewater, New Jersey
Biovail Pharmaceuticals, Inc.   Delaware   Distribution of pharmaceutical products   100   700 Route 202/206 North
Bridgewater, New Jersey
Biovail Technologies (Ireland) Limited   Ireland   Contract development of pharmaceutical products   100   3200 Lake Drive
Citywest Business Campus
Dublin 24
Biovail Technologies Ltd.   Delaware   Contract development of pharmaceutical products   100   3701 Concorde Parkway,
Chantilly, Virginia 20151

D.    Property, Plant and Equipment

Manufacturing Facilities

        We own and lease space for manufacturing, warehousing, research, development, sales, marketing, and administrative purposes. We currently operate three modern, fully integrated 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. These facilities are inspected on a regular basis by regulatory authorities, and our own internal auditing team ensures compliance on an ongoing basis with such standards.

        We have owned our Steinbach, Manitoba facility since 1992. In 2006, we completed a $31 million expansion at that facility which increased total capacity to 250,000 square feet, providing additional manufacturing capacity

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and capability. Among the products manufactured in Steinbach in 2007 were Wellbutrin XL®, Ultram® ER, Cardizem® LA, and Tiazac XC®.

        The Dorado, Puerto Rico facility totals 145,000 square feet. This facility is set up to support the manufacture of controlled release and FlashDose® products and houses the packaging operations for Tiazac®, Wellbutrin XL®, Ultram® ER, Vasotec®, Vaseretic®, Cardizem®, Ativan® and Isordil® products for the U.S. market. This facility will also provide additional capacity for manufacturing of Wellbutrin XL® and Ultram® ER. We have owned the Dorado manufacturing facility since January 2001, and we have upgraded it to accommodate our process and packaging requirements. Packaging operations at this facility commenced in January 2003.

        The Carolina, Puerto Rico facilities total 35,000 square feet, including a 25,000 square foot owned manufacturing facility and a 10,000 square foot leased warehouse space. This plant is specially constructed for the high volume production of controlled release beads.

Other Facilities

        Our corporate headquarters is located in Mississauga, Ontario. In December 2006, we commenced a $12.5 million 30,000 square-foot addition to the corporate headquarters facility. The expansion was completed on January 28, 2008. During construction, some employees were temporarily re-located to a leased facility in Mississauga.

        We also perform certain R&D services at a GMP-compliant leased facility in Mississauga, Ontario. The technology transfer group is based at this facility and also utilizes the facility for activities related to product and process transfers.

        In February 2005, we leased a corporate administrative office in Toronto, Ontario, the lease for which expired in October 2007.

        CRD operates from an owned facility in Toronto, Ontario which includes various clinic areas used during clinical trials, a laboratory and administrative offices. In addition, CRD conducts its recruitment and screening activities at a smaller leased facility which also contains clinic facilities.

        The St. Michael, Barbados facility, which we began leasing in 1992, is used for strategic planning, product sales and related operations, product development, supply chain and logistics, contract management, licensing, intellectual property management and administration. Construction of a $6.4 million two-story building on land owned by our subsidiary in Christ Church, Barbados commenced in March 2007. The completion of the project is expected to occur in June 2008. The new facility is expected to be operational by August 2008. The current lease for the St. Michael facility expires in December 2008.

        The Bridgewater, New Jersey facility, which we began leasing in 2003, is used for our U.S. operations including certain clinical and R&D administration.

        The Chantilly, Virginia facility continues to primarily perform R&D services and to be a technology transfer site.

        The Dublin, Ireland facility, which we purchased in 2002, is used to perform R&D services.

        We believe our facilities are in satisfactory condition and are suitable for their intended use, although investments to improve and expand our manufacturing and other related facilities are contemplated, based on the needs and requirements of our business. 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 windstorm, earthquake or other natural disaster.

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        We believe that we have sufficient facilities to conduct our operations during 2008. However, we continue to evaluate the purchase or lease of additional properties, as our business requires. The following table lists the location, use, size and ownership interest of our principal properties:

Location
  Use
  Size
  Ownership
 
Mississauga, Ontario, Canada   Corporate office, sales, marketing and administration   85,000 Sq. Ft.   Owned  
    Research and development services   24,300 Sq. Ft.   Leased  

Toronto, Ontario, Canada

 

Contract research and development and administration

 

40,000 Sq. Ft.

 

Owned

 
    Contract research and development   11,000 Sq. Ft.   Leased  

Steinbach, Manitoba, Canada

 

Manufacturing and warehousing

 

250,000 Sq. Ft.

 

Owned

 

Chantilly, VA, USA

 

Research and development services

 

80,000 Sq. Ft.

 

Leased

 
    Warehousing   10,000 Sq. Ft.   Leased  
    Vacated and sublet   50,000 Sq. Ft.   Leased  

Bridgewater, NJ, USA

 

U.S. Corporate office and administration

 

110,000 Sq. Ft.

 

Leased

 

Morrisville, NC, USA

 

Site vacated and subleased

 

42,000 Sq. Ft.

 

Leased

(1)

Dorado, Puerto Rico

 

Manufacturing and warehousing

 

145,000 Sq. Ft.

 

Owned

 

Carolina, Puerto Rico

 

Manufacturing

 

25,000 Sq. Ft.

 

Owned

 
    Warehousing   10,000 Sq. Ft.   Leased  

St. Michael, Barbados

 

Strategic planning, product sales, product development, supply chain and logistics, contract management, licensing, intellectual property management and administration

 

6,500 Sq. Ft.

 

Leased

(2)

Christ Church, Barbados

 

Building under construction(3)

 

17,780 Sq. Ft.

 

Owned

 

Dublin, Ireland

 

Research and development services

 

27,000 Sq. Ft.

 

Owned

 

(1)
Lease expires April 2008.

(2)
Lease expires December 2008.

(3)
Construction of two storey building currently underway. Once complete, this facility will house the business operations currently conducted at leased premises in St. Michael, Barbados.

Item 4A. Unresolved Staff Comments

        The staff of the SEC has advised us that they have reviewed the Form 20-F/A filed on May 23, 2007 with respect to the year ended December 31, 2006 (the "2006 Form 20-F/A"). Based on their review of that document, the staff provided comments regarding certain accounting disclosures and methods. On July 16, 2007, we provided our responses to the staff's comments. On August 15, 2007, we provided further clarification to the staff with respect to additional comments that were raised by the staff based on their review of our July 16, 2007 responses. Since August 15, 2007, we have not had any further communication with the staff in relation to this matter. However, based on our communications to date, we have incorporated certain amended disclosures into the MD&A and this Form 20-F. The eventual outcome of this matter may result in modifications to the 2006 Form 20-F/A and/or the incorporation of additional disclosure items into future documents filed with the SEC.

        On February 5, 2008, we were advised that the OSC's Corporate Finance Branch had recently selected our company for a full review of its continuous disclosure record. On the basis of this review, the OSC staff has raised questions regarding certain accounting disclosures and methods. We are currently in the process of preparing our response to OSC staff. The eventual outcome of this matter may result in modifications to past filings with the Canadian Securities Administrators ("CSA"), and/or the incorporation of additional disclosure items into future documents filed with the CSA.

Item 5.    Operating and Financial Review and Prospects

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MANAGEMENT'S DISCUSSION AND ANALYSIS

(All dollar amounts expressed in U.S. dollars)

        The following Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") should be read in conjunction with our audited consolidated financial statements and related notes thereto prepared in accordance with United States ("U.S.") generally accepted accounting principles.

        Additional information relating to Biovail Corporation, including our Annual Report on Form 20-F for the fiscal year ended December 31, 2007 (the "2007 Form 20-F"), is available on SEDAR at www.sedar.com.

        The discussion and analysis contained in this MD&A are as of March 17, 2008.

FORWARD-LOOKING STATEMENTS

        To the extent any statements made in this MD&A 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 under 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 following:

    Intent and ability to make changes to our strategies;

    Estimation of the amount of the U.S. securities class action settlement and the amount that our insurance carriers will pay;

    Timing of the launch of a generic version of the 150mg strength of Wellbutrin XL®;

    Beliefs and positions related to, results of, costs associated with, and benefits to our company of prosecuting, certain litigation and regulatory proceedings, including, but not limited to, the outcome of the investigation by the U.S. Attorney's Office ("USAO") for the District of Massachusetts relating to the Cardizem® LA Clinical Experience Program, titled P.L.A.C.E. (Proving L.A. Through Clinical Experience);

    Regulatory approval and product commercialization timelines, including, but not limited to, beliefs regarding responses to the U.S. Food and Drug Administration ("FDA") concerning BVF-033;

    Outcome, amount and timing of the potential settlement of the U.S. Securities and Exchange Commission ("SEC") investigation;

    Intent and ability to make future dividend payments;

    Timing, results, and progress of research and development efforts;

    Sufficiency of cash resources to support future spending requirements;

    Expected capital expenditures;

    Investment recovery, liquidity, valuation, and impairment conclusions associated with auction rate securities;

    Expected potential milestone payments;

    Ability to manage exposure to foreign currency exchange rate changes;

    Availability of benefits under tax treaties;

    Expected stock-based compensation expense;

    Outcome of the SEC staff review of our amended Annual Report on Form 20-F/A for the fiscal year ended December 31, 2006, filed on May 23, 2007 (the "2006 Form 20-F/A");

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    Outcome of the continuous disclosure review by the Corporate Finance Branch of the Ontario Securities Commission ("OSC"); and

    Expected impact of the adoption of new accounting pronouncements.

        Forward-looking statements 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. Although we have indicated above certain of these statements set out herein, all of the statements in this MD&A that contain forward-looking statements are qualified by these cautionary statements. Although we believe 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; the resolution of insurance claims relating to certain litigation and regulatory proceedings; 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 substance of the FDA response on the April 23, 2008 action date for BVF-033, the difficulty of predicting FDA and Canadian Therapeutic Products Directorate ("TPD") approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the results of continuing safety and efficacy studies by industry and government agencies, uncertainties associated with the development, acquisition and launch of new products, contractual disagreements with third parties, reliance on key strategic alliances, our eligibility for benefits under tax treaties, availability of raw materials and finished products, the regulatory environment, the results of the upcoming U.S. presidential election, the unpredictability of protection afforded by our patents, the mix of activities and income in the various jurisdictions in which we operate, successful challenges to our generic products, infringement or alleged infringement of the intellectual property rights of others, unanticipated interruptions in our manufacturing operations or transportation services, the expense and uncertain outcome of legal and regulatory proceedings and settlements thereto, payment by insurers of insurance claims, currency fluctuations, consolidated tax rate assumptions, fluctuations in operating results, the market liquidity and amounts realized for our auction rate securities held as investments, and other risks detailed from time to time in our filings with the SEC and the Canadian Securities Administrators ("CSA"), as well as our 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 MD&A, as well as under the heading "Risk Factors" under Item 3, Sub-Part D of the 2007 Form 20-F. We caution 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 our 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.

COMPANY PROFILE

        We are a specialty pharmaceutical company, engaged in the formulation, clinical testing, registration, manufacture and commercialization of pharmaceutical products. Our core competency lies in our expertise in the development and large-scale manufacture of pharmaceutical products incorporating oral drug-delivery technologies. Our main therapeutic areas of focus are central nervous system ("CNS") disorders, pain management, and cardiovascular disease, although we maintain the flexibility to explore opportunities in other niche areas. We have various research and development, clinical research, manufacturing and commercial operations located in Barbados, Canada, the U.S., Puerto Rico and Ireland.

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        We have a portfolio of products that includes the following brand names:

    Wellbutrin® (bupropion) for the treatment of depression;

    Ultram®/Ralivia™ (tramadol) for the treatment of moderate to moderately severe chronic pain;

    Zovirax® (acyclovir) for the treatment of herpes; and

    Cardizem®/Tiazac® (diltiazem) for the treatments of hypertension and angina.

        We market and/or distribute our products in the U.S. principally through supply and distribution agreements with third-party strategic partners. Under those agreements, we manufacture and supply Wellbutrin XL® to GlaxoSmithKline plc ("GSK"); Ultram® ER to Ortho-McNeil, Inc. ("OMI"); Cardizem® LA to Kos Pharmaceuticals, Inc. ("Kos") (a subsidiary of Abbott); Tiazac® branded and generic products to Forest Laboratories, Inc. ("Forest"); and bioequivalent (Generic) products to Teva Pharmaceuticals Industries Ltd. ("Teva"). Our Zovirax® products are distributed in the U.S. by Biovail Pharmaceuticals, Inc., and promoted by Sciele Pharma, Inc. ("Sciele") under an exclusive promotional services agreement.

        In Canada, we market and/or distribute a number of products, including Tiazac® XC, Wellbutrin® XL, Ralivia™ and Glumetza®, directly through our internal sales organization — Biovail Pharmaceuticals Canada ("BPC").

OVERVIEW

        The critical event that impacted our business in 2007 was the introduction of generic competition to 300mg Wellbutrin XL® product in the U.S. in December 2006, and the material adverse effect that event had on our revenue, results of operations and cash flows for the year. In response, however, we made solid progress with our strategy to reduce our overall cost structure, including the restructuring of our U.S. operations and related transition of promotional activities for our Zovirax® franchise to Sciele. As a result, we were able, despite the loss of Wellbutrin XL® exclusivity in the U.S., to pay our shareholders an aggregate annual cash dividend of $1.50 per share, while eliminating long-term debt through the redemption of our 77/8% Senior Subordinated Notes ("Notes").

        We will continue to face a number of challenges in 2008 and beyond, including intellectual property protection; increasing competition for our marketed and pipeline products; and greater scrutiny of clinical trials with respect to safety by drug regulators. To meet these challenges, we will continue to focus our research and development efforts on selected products that we believe will provide clinically meaningful benefits to patients; aim to maintain revenue and cash flow streams through price and/or cost effectiveness in order to maximize the potential of our currently marketed products; look for additional opportunities to drive efficiencies and reduce costs; and evaluate and pursue favourable research and development collaborations and acquisition opportunities.

STRATEGY UPDATE

        In 2007, our management team and Board of Directors began exploring potential strategic and business opportunities to enhance shareholder value and will continue to do so. A committee of independent members of the Board of Directors has been established and is working closely with management and external advisors.

        Our senior management team will be undertaking a comprehensive review of our company's core strategies, including our global infrastructure, commercialization model, product-development pipeline, acquisition targets, litigation strategy, and capital structure. The objective of this wide-ranging analysis is to optimize all facets of our business model, to ensure our core competencies are fully exploited, and to ensure our investments are targeted towards opportunities that provide an appropriate return.

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OPERATING ENVIRONMENT

        We conduct our business within the pharmaceutical industry, which is highly competitive and subject to rapid and significant technological change. To successfully compete in this industry, we strive to demonstrate that our products offer safety and efficacy benefits, as well as convenience and cost effectiveness. As most of our revenue and cash flows are related to the performance of our portfolio of branded products, which are priced higher than generic products, generic competition is one of our leading challenges. A large portion of a branded product's commercial value is usually realized during the period in which the product has market exclusivity. Upon the loss of that exclusivity, we will lose a significant portion of a product's pre-genericization sales in a short period of time, which can have a material adverse effect on our future revenue and cash flows. To address this challenge, we will continue to:

    Highlight to healthcare providers and patients the benefits of our products in terms of safety, efficacy, convenience, and cost, as appropriate;

    Aggressively defend our intellectual property against infringement;

    Invest heavily in research and development with a view to generating new innovative products, ensuring our product portfolio is renewed over time and offsetting future revenue losses due to generic competition;

    Strive to develop products eligible for patents covering indications and uses, in addition to patents issued for formulations and processes, in order to provide longer exclusivity periods; and

    Manufacture and sell generic versions of certain of our own branded products.

        Despite those efforts, however, the loss of market exclusivity of key products, or certain other significant factors — including a failure of research and development to yield commercially successful new products; a failure to successfully market new or existing products; an interruption in manufacturing or supply; a recall of product from the market; an adverse decision or settlement related to litigation or regulatory matters; a growth in costs and expenses; the trend toward managed care and healthcare cost containment; or a change in governmental laws and regulations affecting, among other things, pharmaceutical product pricing and reimbursement or access under Medicaid and Medicare — could have a material adverse effect on our business and financial performance.

KEY PERFORMANCE DRIVERS

        Our strategy for long-term growth has been focused on the following key performance drivers:

    Leveraging our drug-delivery technologies to develop (1) enhanced formulations of existing products; (2) combination products that incorporate two or more different therapeutic classes of drugs; and (3) difficult-to-manufacture generic pharmaceuticals;

    Protection of our intellectual property and defence of our products and proprietary technologies from infringement;

    Expansion of our product pipeline by entering into agreements with other companies to develop, license, or acquire innovative compounds, technologies, or capabilities;

    Formation of strategic commercial alliances with other pharmaceutical companies on favourable terms;

    Exploitation of the commercial potential of our products through supply and distribution agreements in markets outside the U.S. and Canada;

    Prudent use of our cash resources to provide a return to shareholders, while maintaining sufficient capital to invest in growing our business; and

48


    Control of expenses through initiatives to achieve lower operating costs, more focused development efforts, and improved manufacturing efficiencies.

CHANGES IN BOARD OF DIRECTORS

        During the past year, the following changes occurred to our Board of Directors:

    Effective June 30, 2007, Eugene Melnyk — the founder of our company — retired as Chairman of the Board of Directors of Biovail Corporation. Between June 30, 2007 and February 25, 2008, Mr. Melnyk provided us with consulting services, and continued to serve as President of Biovail Laboratories International SRL ("BLS"), a subsidiary of Biovail Corporation, and as a director of BLS and as a director and officer of BLS's parent company — Biovail Holdings International SRL ("BHS"). Effective June 30, 2007, Mr. Melnyk resigned from all other director and officer roles relating to subsidiaries of Biovail Corporation.

    Effective February 25, 2008, Mr. Melnyk resigned from his director and officer positions at BLS and BHS, and, as a result, he is no longer affiliated with our company in any management capacity.

    Effective June 30, 2007, Dr. Douglas Squires, our Chief Executive Officer ("CEO"), was appointed Interim Chairman, and William (Bill) Wells was appointed Chairman of the Compensation, Nominating and Corporate Governance Committee of the Board of Directors and Lead Director.

    Effective December 7, 2007, Lloyd M. Segal, CEO of Thallion Pharmaceuticals Inc., was appointed to the Board of Directors.

    Effective February 25, 2008, Sheldon Plener resigned from the Board of Directors.

CHANGES IN EXECUTIVE MANAGEMENT

        Effective July 6, 2007, Gilbert Godin was appointed Executive Vice-President, Chief Operating Officer ("COO"). In his capacity as COO, Mr. Godin oversees our company's operational functions, product-development services, manufacturing and contract-development services, as well as business-development services. Mr. Godin joined our company in April 2006 as Senior Vice-President, Technical Operations/Drug Delivery.

        Dr. Peter Silverstone has tendered his resignation as Senior Vice-President, Medical and Scientific Affairs, which will be effective April 4, 2008.

RECENT DEVELOPMENTS

Investigation of P.L.A.C.E. Program

        In July 2003, we received a subpoena from the USAO 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 P.L.A.C.E. program. On January 29, 2008, we received a letter from the USAO notifying us that our company is the target of a federal grand jury investigation relating to the P.L.A.C.E. program. The investigation could lead to civil or criminal charges against us. We have cooperated fully with the investigation and will continue to cooperate. The USAO has invited us to provide evidence and arguments bearing on the matter and we intend to do so.

Settlement of U.S. Securities Class Action

        In late 2003 and early 2004, our company and certain current and former officers and directors were named as defendants in a number of securities class actions in the U.S. alleging that the defendants made materially false and misleading statements that inflated the price of our stock between February 7, 2003 and March 2, 2004. On December 11, 2007, we announced that our company and the named individual defendants had entered into

49



an agreement in principle to settle this matter. Under the terms of the agreement, the total settlement amount payable is $138 million, out of which the Court-approved legal fees to the plaintiffs' counsel will be paid. We estimate that our insurance carriers will pay $54.9 million of the settlement amount, and that we will ultimately pay $83.1 million after resolution of all insurance claims. The agreement contains no admission of wrongdoing by our company or any of the named individual defendants, nor did our company or any of the named individual defendants acknowledge any liability or wrongdoing by entering into the agreement. As a result of this settlement, we will avoid the considerable legal costs that we otherwise would have expected to incur to defend this matter.

BVF-033

        On July 19, 2007, we received a Non-Approval Letter from the FDA for our New Drug Application ("NDA") for BVF-033 (bupropion salt) for the treatment of depression. The main issue raised by the FDA in its letter related to the design of the pharmacokinetic studies required to support the NDA. On October 23, 2007, we submitted a Complete Response to the FDA that we believe addresses all the issues raised in its non-approval letter. Our response included new analyses of the data included in the original NDA for BVF-033, but did not include any new clinical data. The FDA has classified our response as a Class 2 response, which is subject to a six-month review period by the FDA. An action date of April 23, 2008 has been set for an FDA response.

        The delay in FDA approval has negatively impacted the commercial opportunity for BVF-033, as our strategy was to convert a portion of the once-daily bupropion market to BVF-033 before the genericization of 150mg Wellbutrin XL® occurred, which could happen commencing May 30, 2008, or potentially sooner upon the occurrence of specified events (as described below under "Wellbutrin XL®").

Wellbutrin XL®

        In December 2006, the FDA granted approval for the first generic versions of Wellbutrin XL®. As a result, Teva launched a generic version of 300mg Wellbutrin XL® product in December 2006, and Watson Pharmaceuticals, Inc. ("Watson") and Anchen Pharmaceuticals, Inc. ("Anchen") each launched its own generic versions in June 2007. The introduction of generic competition resulted in a $208.9 million, or 86%, decline in sales of our 300mg branded product in 2007, compared with 2006.

        However, under the terms of a comprehensive settlement agreement entered into in February 2007 with Teva, Watson, Anchen, and Impax Laboratories, Inc., our sales of 150mg branded product were not materially impacted by generic competition in 2007. Under the terms of that settlement agreement, a generic version of the 150mg strength of Wellbutrin XL® could be launched commencing May 30, 2008, or potentially sooner upon the occurrence of specified events, including an adverse decision of our appeal (heard on September 5, 2007), of the non-infringement summary judgment granted to Anchen on August 1, 2006, and/or when new prescriptions for BVF-033 exceed 35% of new prescription volume for Wellbutrin XL® 150mg.

RESTRUCTURING

        In May 2005, we sold the distribution rights to Cardizem® LA in the U.S. and Puerto Rico, and transferred all of our product rights and certain inventories related to Teveten and Teveten HCT, to Kos. Kos also obtained the rights to distribute a combination product under development comprising Cardizem® LA and Vasotec® (Vasocard™). Concurrent with the Kos transaction, we restructured our commercial operations in the U.S. At that time, we reduced our primary-care and specialty sales forces and related functions by 493 positions (including 186 sales representatives who were offered employment by Kos) and administrative functions by 30 positions. We retained 85 specialty sales representatives to focus on the promotion of Zovirax® Ointment and Zovirax® Cream to specialist practitioners, as well as to provide co-promotion services to other pharmaceutical companies.

50


        In December 2006, we eliminated our remaining U.S. specialty sales force, and implemented other measures to reduce the operating and infrastructure costs of our U.S. operations, including the abandonment of large-scale manufacturing at our Chantilly, Virginia facility. We reduced our sales force and related functions by 115 positions, and administrative and other functions by 73 positions. These measures were considered necessary to address a lack of product-acquisition, or co-promotion opportunities, available to us on reasonable terms, to fully utilize our sales force. In December 2006, we consequently entered into a five-year exclusive promotional services agreement with Sciele, whereby we will pay Sciele an annual fee to provide detailing and sampling support for Zovirax® Ointment and Zovirax® Cream to U.S. physicians. Sciele is also entitled to additional payments if certain tiered revenue targets are met each calendar year.

        As a result of the preceding restructuring programs, we no longer maintain a direct commercial presence in the U.S. The cost savings associated with the elimination of our sales and marketing activities to support Zovirax®, and the reduction in headcount in our U.S. operations, had a positive impact on our results of operations and cash flows in 2007. However, those savings were partially offset by $17.2 million in compensation we paid Sciele for its promotional services during 2007, which included the aforementioned additional payments due under the agreement as a result of Sciele achieving the highest tier revenue target.

SELECTED ANNUAL INFORMATION

        The following table provides selected financial information for each of the last three years:

 
  Years Ended December 31
 
  2007
  2006
  2005
 
  ($ in 000s, except per share data)

Revenue   $ 842,818   $ 1,067,722   $ 938,343
Income from continuing operations     195,539     215,474     257,015
Net income     195,539     211,626     246,440

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 1.22   $ 1.35   $ 1.61
Net income   $ 1.22   $ 1.32     1.54
   
 
 
Cash dividends declared per share   $ 1.50   $ 1.00   $ 0.50
   
 
 
Total assets   $ 1,782,115   $ 2,192,442   $ 2,036,820
Long-term obligations         410,525     436,058
   
 
 

Revenue

        Total revenue declined $224.9 million, or 21%, to $842.8 million in 2007, compared with $1,067.7 million in 2006. This decline was due mainly to the impact of generic competition on sales of 300mg Wellbutrin XL® product in the U.S., as well as the impact of the tiered supply price for Wellbutrin XL® sales to GSK. In addition, this decline reflected lower revenue from Generic product sales, due mainly to lower prescription volumes and pricing on certain of those products. Those factors were partially offset by higher revenue from Ultram® ER , Zovirax® and Cardizem® LA product sales, reflecting price increases and/or higher prescription volumes.

        Total revenue increased $129.4 million, or 14%, to $1,067.7 million in 2006, compared with $938.3 million in 2005. This increase was due mainly to higher revenue from sales of Wellbutrin XL® to GSK and the added contribution from sales of Ultram® ER to OMI. Those factors were partially offset by lower product sales in Canada, due mainly to the negative impact of generic competition to Tiazac® and Wellbutrin® SR. Product sales were also negatively impacted in 2006 by certain manufacturing issues we experienced related primarily to the

51



production of lower dosage 120mg and 180mg Cardizem® LA products. We resumed full production of Cardizem® LA in early 2007 and subsequently addressed any shortfall in our supply to Kos.

        Changes in foreign currency exchange rates increased total revenue by approximately $5.1 million, or 0.6%, in 2007, compared with 2006, and approximately $5.9 million, or 0.6%, in 2006, compared with 2005. Those positive foreign exchange effects on revenue were due to a strengthening of the Canadian dollar relative to the U.S. dollar in each of 2007 and 2006, compared with the immediately preceding years.

Results of Operations

        Where possible, we manage our exposure to foreign currency exchange rate changes through operational means, mainly by matching our cash flow exposures in foreign currencies. As a result, the positive impact of a stronger Canadian dollar on revenue generated in Canadian dollars, but reported in U.S. dollars, is counteracted by an opposing effect on operating expenses incurred in Canadian dollars. As our Canadian dollar-denominated expenses currently exceed our Canadian dollar-denominated revenue base, the appreciation of the Canadian dollar in 2007 and 2006 had the overall effect of reducing our income from continuing operations and net income as reported in U.S. dollars.

        Our income from continuing operations and net income were also impacted by specific factors that affected the comparability of those results between years. These factors comprise material income or expense items that management believes are not related to our ongoing, underlying business; are not recurring; or are not generally predictable. These factors include, but are not limited to, asset impairment or restructuring charges; charges related to legal settlements or contract resolutions; charges resulting from the early extinguishment of debt; and gains or losses resulting from the disposal of assets. We believe that identifying these factors enhances an analysis of our results of operations when comparing the results of our ongoing, underlying business with those of a previous or subsequent period. In addition, management considers these factors when analyzing operating performance. However, it should be noted that the determination of these factors involves judgment by management.

        In 2007, the following, among other factors, impacted our net income:

    A charge of $95.1 million (net of expected insurance recoveries) related primarily to the settlement of the U.S. securities class action complaint and a potential settlement of the SEC investigation;

    A charge of $12.5 million related to the early redemption of our Notes;

    An impairment charge of $9.9 million related to the write-down of product rights associated with Zolpidem ODT and Ultram® ODT, as well as the write-down of certain other product rights and technology assets; and

    A loss of $8.9 million on the impairment of investments, related primarily to an other-than-temporary decline in the fair value of a portion of our auction rate securities.

        Those factors were partially offset by:

    A gain of $24.4 million on the disposals of our investments in Ethypharm S.A. ("Ethypharm") and Reliant Pharmaceuticals, Inc. ("Reliant").

        In 2006, the following, among other factors, impacted net income:

    Asset impairments of $147.0 million related to the write-down of Vasotec®, Vaseretic® and Glumetza® trademarks and/or product rights;

    Contract losses of $54.8 million related to our estimate of the total amount of the payments we expected to make to GSK, as a result of the introduction of generic competition to Wellbutrin XL® in December 2006, and to Kos for its lost profits, due to our failure to supply minimum required quantities of Cardizem® LA;

52


    Restructuring costs of $15.1 million mainly related to the December 2006 restructuring program; and

    Legal settlements of $14.4 million related primarily to our share of a settlement between GSK and Andrx Corporation ("Andrx") in respect of a patent-infringement suit involving Wellbutrin XL®.

        In 2005, the following, among other factors, impacted net income:

    Asset impairments of $29.2 million mainly related to the write-down of the Teveten and Teveten HCT product rights transferred to Kos;

    Restructuring costs of $19.8 million related to the May 2005 restructuring program; and

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

        The collective impact of all factors affecting the comparability of our income from continuing operations and net income for each of the last three years, as well as the impact of those factors on basic and diluted earnings per share, are identified in the following table:

 
  Years Ended December 31
 
  2007
  2006
  2005
 
  ($ in 000s, except per share data; Expense (Income))

Legal settlements, net of insurance recoveries   $ 95,114   $ 14,400   $
Gain on disposal of investments     (24,356 )      
Loss on early extinguishment of debt     12,463        
Intangible asset impairments, net of gain on disposal     9,910     143,000     25,833
Loss on impairment of investments     8,949         3,397
Equity loss     2,528     529     1,160
Contract costs (recovery)     (1,735 )   54,800    
Restructuring costs     668     15,126     19,810
Write-off of inventory             4,862
   
 
 
Impact on income from continuing operations     103,541     227,855     55,062
Asset impairments of discontinued operation         1,084     5,570
   
 
 
Impact on net income   $ 103,541   $ 228,939   $ 60,632
   
 
 

Impact on basic earnings per share

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 0.64   $ 1.42   $ 0.35
Net income   $ 0.64   $ 1.43   $ 0.38
   
 
 

Impact on diluted earnings per share

 

 

 

 

 

 

 

 

 
Income from continuing operations   $ 0.64   $ 1.42   $ 0.34
Net income   $ 0.64   $ 1.43   $ 0.38
   
 
 

Cash Dividends

        Cash dividends declared per share were $1.50, $1.00 and $0.50 in 2007, 2006 and 2005, respectively. Our current dividend policy contemplates the payment of a quarterly dividend of $0.375 per share, subject to our financial condition and operating results, and the discretion of our Board of Directors. In March 2008, our Board of Directors declared a quarterly cash dividend of $0.375 per share.

Financial Condition

        Effective April 1, 2007, we used $406.8 million of our existing cash resources to redeem all of our outstanding Notes, which included an early redemption premium of $7.9 million paid to the noteholders. At December 31, 2007, we had cash balances of $433.6 million, and we did not have any outstanding borrowings under our $250 million credit facility, or other long-term debt.

53


MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

RESULTS OF OPERATIONS

        We operate our business on the basis of a single reportable segment — pharmaceutical products. This basis reflects how management reviews the business; makes investing and resource allocation decisions; and assesses operating performance.

Revenue

        Our revenue is derived primarily from the following sources:

    Sales of pharmaceutical products developed and manufactured by us, as well as sales of proprietary and in-licensed products;

    Pharmaceutical clinical research and laboratory testing services, and product development activities in collaboration with third parties; and

    Royalties from the sale of products we developed or acquired, as well as the co-promotion of pharmaceutical products owned by other companies.

        The following table displays the dollar amount of each source of revenue for each of the last three years; the percentage of each source of revenue, compared with total revenue in the respective year; and the percentage changes in the dollar amount of each source of revenue. Percentages may not add due to rounding.

 
  Years Ended December 31
  Percentage Change
 
 
  2007
  2006
  2005
 
($ in 000s)

  2006
to 2007

  2005
to 2006

 
  $
  %
  $
  %
  $
  %
 
Product sales   801,046   95   1,021,278   96   887,074   95   (22% ) 15%  
Research and development   23,828   3   21,593   2   27,949   3   10%   (23% )
Royalty and other   17,944   2   24,851   2   23,320   2   (28% ) 7%  
   
 
 
 
 
 
         
    842,818   100   1,067,722   100   938,343   100   (21% ) 14%  
   
 
 
 
 
 
 
 
 

Product Sales

        The following table displays product sales by category for each of the last three years; the percentage of each category compared with total product sales in the respective year; and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 
  Years Ended December 31
  Percentage Change
 
 
  2007
  2006
  2005
 
($ in 000s)

  2006
to 2007

  2005
to 2006

 
  $
  %
  $
  %
  $
  %
 
Wellbutrin XL®   212,325   27   450,329   44   354,213   40   (53% ) 27%  
Ultram® ER   86,714   11   53,724   5       61%   NM  
Zovirax®   147,120   18   112,388   11   95,858   11   31%   17%  
Biovail Pharmaceuticals Canada   61,889   8   68,723   7   99,508   11   (10% ) (31% )
Cardizem® LA   69,300   9   56,509   6   62,479   7   23%   (10% )
Legacy   136,855   17   139,853   14   133,419   15   (2% ) 5%  
Generic   86,843   11   141,075   14   135,209   15   (38% ) 4%  
Teveten       (1,323 )   6,388   1   NM   NM  
   
 
 
 
 
 
         
    801,046   100   1,021,278   100   887,074   100   (22% ) 15%  
   
 
 
 
 
 
 
 
 

NM — Not meaningful

54


Wellbutrin XL®

        The $238.0 million, or 53%, decline in Wellbutrin XL® product sales from 2006 to 2007, compared with the $96.1 million, or 27%, increase from 2005 to 2006, reflected the impact that the introduction of generic competition had on the relative volumes of 300mg product sold to GSK, as well as on the tiered supply price for Wellbutrin XL®. That supply price is reset to the lowest tier at the start of each calendar year, and the net sales-dollar thresholds to achieve the second and third tier supply prices generally increase each year. Due to the impact of generic competition, GSK's net sales of Wellbutrin XL® in 2007 only met the sales-dollar threshold to increase our supply price from the first to second tier in the fourth quarter, while in the second and third quarters of 2006, GSK's net sales exceeded the thresholds to achieve the second and third tier supply prices, respectively. As a result, approximately 40% of the decline in Wellbutrin XL® product sales in 2007 was attributable to the impact of tier pricing, with the balance of the decline due mainly to lower volumes of 300mg product sold to GSK due to generic competition.

        Those adverse effects of lower tier pricing and lower sales volumes in 2007 were partially offset by:

    The positive effect on our supply price — which is determined after taking into consideration estimates for future returns, rebates and chargebacks made by GSK — of a reduction in GSK's 2006 year-end provision for 300mg product returns, due to slower than anticipated generic erosion;

    The positive effect on our supply price of price increases implemented by GSK in December 2006 and July 2007; and

    The inclusion of $3.2 million of Wellbutrin XR® product sold to GSK for the European market.

Ultram® ER

        OMI launched Ultram® ER in the U.S. in February 2006. Ultram® ER product sales increased $33.0 million, or 61%, in 2007, compared with 2006, due to higher prescription volumes, as well as a contractual increase in our supply price to OMI effective January 1, 2007, and the positive effect on our supply price of a price increase implemented by OMI in January 2007. Those factors were partially offset by a reduction in inventory levels of Ultram® ER owned by OMI over the course of 2007.

        In 2006, we recorded a provision of $7.8 million related to a voluntary recall initiated by OMI for certain lots of Ultram® ER tablets due to a tablet printing-related matter. We agreed to replace the recalled product, including lots still in OMI's inventory, and to bear the costs of the recall (which were recorded in selling, general and administrative expenses in 2006).

Zovirax®

        Combined sales of Zovirax® Ointment and Zovirax® Cream increased $34.7 million, or 31%, and $16.5 million, or 17%, in 2007 and 2006, respectively, compared with the immediately preceding years, reflecting price increases we implemented for these products in each of those years. Those price increases more than offset a modest decline in prescription volumes in 2007, compared with each of 2006 and 2005.

BPC Products

        Key BPC products are Tiazac® XC, Tiazac®, Wellbutrin® XL, Wellbutrin® SR, Zyban®, Ralivia™ and Glumetza®, which are sold in Canada. Sales of BPC products declined $6.8 million, or 10%, and $30.8 million, or 31%, in 2007 and 2006, respectively, compared with the immediately preceding years. However, excluding the positive effect on Canadian dollar-denominated revenue of the strengthening of the Canadian dollar relative to the U.S. dollar, BPC product sales declined 15% and 35% in 2007 and 2006, respectively, compared with the immediately preceding years. Those declines were due mainly to declining sales of Tiazac® and Wellbutrin® SR products as a result of generic competition, which more than offset year-over-year increases in sales of our promoted Tiazac® XC and Wellbutrin® XL products in 2007 and 2006.

55


        Recent changes to BPC's product portfolio include the following:

    In February 2008, the TPD approved Wellbutrin® XL in Canada for the prevention of seasonal major depressive illness;

    In October 2007, we received TPD approval for Glumetza® 1000mg dosage strength, our once-daily, extended-release formulation of metformin for the treatment of type 2 diabetes. BPC launched Glumetza® 1000mg in January 2008 to supplement our currently marketed 500mg dosage strength;

    In August 2007, we received TPD approval for 100mg, 200mg and 300mg strengths of Ralivia™, our once-daily, extended-release formulation of tramadol for the management of pain of moderate severity. BPC began promoting Ralivia™ to Canadian physicians in November 2007; and

    In July 2007, BPC began promoting Tiazac® XC for the treatment of angina following TPD approval for that indication.

Cardizem® LA

        Cardizem® LA product sales included the amortization of deferred revenue associated with the cash consideration received from the sale to Kos of the distribution rights to Cardizem® LA in May 2005. That amortization amounted to $15.1 million in each of 2007 and 2006, and $10.0 million in 2005.

        Our revenue from sales of Cardizem® LA increased $12.8 million, or 23%, in 2007, compared with 2006, and declined $6.0 million, or 10%, in 2006, compared with 2005. The increase in Cardizem LA product sales in 2007 reflected the positive effect on our supply price of price increases implemented by Kos in 2007, which more than offset a decline in prescription volumes. In addition, certain manufacturing issues related primarily to the production of 120mg and 180mg dosage strengths negatively impacted sales in 2006. Following the resumption of full production in early 2007, we recorded higher shipments of those products to Kos as a result of addressing the backorder that existed at the end of 2006. However, as prescription volumes for the 120mg and 180mg dosage strengths have not returned to pre-backorder levels, Kos has consequently lowered its purchase requirements for those products.

Legacy Products

        Our key Legacy products are Ativan®, Cardizem® CD, Isordil®, Tiazac®, Vasotec® and Vaseretic®, which are sold primarily in the U.S. We do not actively promote these products as they have been genericized. Sales of Legacy products declined $3.0 million, or 2%, in 2007, compared with 2006, and increased $6.4 million, or 5%, in 2006, compared with 2005. The decline in Legacy product sales in 2007 was due mainly to lower prescription volumes for Tiazac® (both branded and generic) following the introduction of an additional generic competitor in November 2006. Sales of our other Legacy products (excluding Tiazac®) increased in each of 2007 and 2006, compared with the immediately preceding years, as a result of price increases we implemented for these products in both of those years, which more than offset year-over-year declines in prescription volumes in 2007 and 2006.

Generic Products

        Our key Generic products are bioequivalent versions of Adalat CC, Cardizem® CD, Procardia XL and Voltaren XR. The $54.2 million, or 38%, decline in sales of our Generic products from 2006 to 2007, compared with the increase of $5.9 million, or 4%, from 2005 to 2006, was primarily due to lower prescription volumes and pricing for certain of these products because of increased competition and changes in Teva's customer base, as well as shelf-stock adjustments granted by Teva to its customers to reflect decreases in the selling prices on certain of these products.

56


Research and Development Revenue

        The $2.2 million, or 10%, increase in research and development revenue from 2006 to 2007, compared with a decline of $6.4 million, or 23%, from 2005 to 2006, reflected changes in the relative volume and pricing of clinical research and laboratory testing services provided to external customers by our contract research operation, as well as the inclusion of $1.9 million received from Kos in 2007 related to development activities completed on Vasocard™.

Royalty and Other Revenue

        Royalty and other revenue declined $6.9 million, or 28%, from 2006 to 2007, compared with an increase of $1.5 million, or 7%, from 2005 to 2006, primarily due to lower royalties from third parties on sales of products we developed or acquired, including Tiazac® and Cardizem®, as well as the elimination of revenue associated with the co-promotion of Ultram® ER and AstraZeneca Pharmaceuticals LP's Zoladex® 3.6mg product in the U.S. We are no longer co-promoting Ultram® ER and Zoladex® as a result of the elimination of our U.S. specialty sales force in December 2006. In addition, we terminated our promotion of Novartis Pharmaceuticals Canada Inc.'s Lescol® products in Canada in August 2007.

Operating Expenses

        The following table displays the dollar amount of each operating expense category for each of the last three years; the percentage of each category compared with total revenue in the respective year; and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 
  Years Ended December 31
   
   
 
 
  Percentage Change
 
 
  2007
  2006
  2005
 
($ in 000s)

  2006
to 2007

  2005
to 2006

 
  $
  %
  $
  %
  $
  %
 
Cost of goods sold   223,680   27   211,152   20   201,330   21   6%   5%  
Research and development   118,117   14   95,479   9   88,437   9   24%   8%  
Selling, general and administrative   161,001   19   238,441   22   227,394   24   (32% ) 5%  
Amortization   48,049   6   56,457   5   62,260   7   (15% ) (9% )
Legal settlements, net of insurance recoveries   95,114   11   14,400   1       561%   NM  
Intangible asset impairments, net of gain on disposal   9,910   1   143,000   13   25,833   3   (93% ) 454%  
Restructuring costs   668     15,126   1   19,810   2   (96% ) (24% )
Contract costs (recovery)   (1,735 )   54,800   5       (103% ) NM  
   
 
 
 
 
 
         
    654,804   78   828,855   78   625,064   67   (21% ) 33%  
   
 
 
 
 
 
 
 
 

NM — Not meaningful

Cost of Goods Sold and Gross Margins

        Cost of goods sold includes manufacturing, packaging, shipping and handling costs for products we produce; the cost of products we purchase from third parties; royalty payments we make to third parties; and lower of cost or market adjustments to inventories.

        Gross margins based on product sales were 72%, 79% and 77% in 2007, 2006 and 2005, respectively.

        The gross margin in 2007, compared with 2006, was unfavourably impacted by the following factors:

    Lower volumes of 300mg Wellbutrin XL® product sold to GSK, net of the reduction in GSK's provision for 300mg product returns;

57


    Lower supply prices for 150mg and 300mg Wellbutrin XL® product sold to GSK, as a result of not achieving the third tier supply price in 2007, and the later achievement of the second tier supply price in 2007 as compared to 2006;

    The negative impact of lower pricing on Generic product sales;

    The inclusion of amortization expense of $9.1 million related to the $40.7 million deferred charge for payments we made to GSK in consideration for reduced supply prices for Zovirax® products;

    The inclusion of $7.9 million for our one-third share of a royalty expense on sales of 150mg Wellbutrin XL® product following the settlement in February 2007 of the patent-infringement suit between GSK and Andrx;

    Lower absorption of overhead costs due to decreased Wellbutrin XL® production volumes;

    Increases in obsolescence reserves related to inventories of certain of our products that are in excess of anticipated demand; and

    The unfavourable impact of foreign currency exchange rate changes on Canadian dollar-denominated manufacturing expenses.

        Those factors were partially offset by:

    The positive impact of price increases we implemented for Zovirax® and certain Legacy products in 2007;

    The positive effect on our supply prices for Wellbutrin XL®, Ultram® ER and Cardizem® LA of the price increases implemented by our strategic partners in 2007, together with the contractual increase in our supply price for Ultram® ER; and

    Lower levels of rejected lots of Ultram® ER and Cardizem® LA in 2007, as a result of the resolution of manufacturing issues we experienced in 2006.

        The overall gross margin in 2006, compared with 2005, was positively impacted by the following factor:

    Higher volumes of Wellbutrin XL® sold to GSK, as well as the positive impact on our supply price of the price increases implemented by GSK in 2006.

        That factor was partially offset by:

    A write-off to cost of goods sold of $11.4 million of rejected lots of Ultram® ER and Cardizem® LA;

    An increase of $2.7 million in the amortization of the Cardizem® LA intangible asset;

    The product sales provision related to the return of Ultram® ER lots recalled by OMI in 2006; and

    Start-up manufacturing inefficiencies related to Ultram® ER.

Research and Development Expenses

        Expenses related to internal research and development programs include employee compensation costs; overhead and occupancy costs; clinical trial costs; clinical manufacturing and scale-up costs; contract research services; and other third-party development costs. Research and development expenses also include costs associated with providing contract research services to external customers.

58


        The following table displays the dollar amount of each research and development expense category for each of the last three years; the percentage of each category compared with total revenue in the respective year; and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 
  Years Ended December 31
  Percentage Change
 
 
  2007
  2006
  2005
 
($ in 000s)

  2006
to 2007

  2005
to 2006

 
  $
  %
  $
  %
  $
  %
 
Internal research and development programs   100,610   12   77,795   7   69,420   7   29%   12%  
Contract research services provided to external customers   17,507   2   17,684   2   19,017   2   (1% ) (7% )
   
 
 
 
 
 
         
Total research and development expenses   118,117   14   95,479   9   88,437   9   24%   8%  
   
 
 
 
 
 
 
 
 

        Internal research and development program expenses increased $22.8 million, or 29%, and $8.4 million, or 12%, in 2007 and 2006, respectively, compared with the immediately preceding years, primarily due to the costs of clinical and scale-up activities for BVF-033 and Phase III safety studies conducted related to the recently terminated BVF-146 program (as described below). As a percentage of total revenue, internal research and development program expenses were 12% in 2007, compared with 7% in each of 2006 and 2005.

        In addition to BVF-033 and BVF-146, our research and development activities in 2007 related to the following programs:

    BVF-012, BVF-045 and BVF-065 for the treatment of depression;

    BVF-058 and BVF-068 for the treatment of other CNS disorders;

    BVF-203 and BVF-239 for the treatment of certain cardiovascular diseases;

    BVF-324 for the treatment of a sexual dysfunction; and

    Other feasibility programs targeting safety and efficacy enhancements to existing therapies.

        We met with the FDA in the Fall of 2007 to discuss the development program for BVF-324 and the FDA raised a number of concerns that make the development path for BVF-324 in the U.S. uncertain. We are evaluating the commercial value and development requirements for BVF-324 in a number of European countries.

        We have terminated the following previously disclosed programs in 2007 and early 2008 due to diminished commercial prospects, or for other reasons:

    BVF-146, a once-daily combination product consisting of tramadol and a non-steroidal anti-inflammatory drug, following a reassessment of the commercial opportunity for this product;

    BVF-087 for the treatment of a CNS disorder;

    BVF-211 and BVF-247 for the treatment of certain cardiovascular diseases; and

    BVF-300 for the treatment of a gastrointestinal condition.

        On December 31, 2007, we entered into an exclusive, 10-year supply agreement with Janssen Pharmaceutica N.V. ("Janssen"), a division of Johnson & Johnson, for the marketing and distribution of our once-daily, extended-release formulation of tramadol in 86 countries in two regions — Central and Eastern Europe/Middle East and Latin America. Janssen affiliates will be responsible for all regulatory filings and the management of the regulatory approvals process.

        Any success in our product-development programs would be reflective of the investments in research and development we make over a number of years. On an ongoing basis, we review and optimize the projects in our

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development portfolio to reflect changes in the competitive environment and emerging opportunities. Our future level of research and development expenditures will depend on, among other things, the outcome of clinical testing of our products under development; delays or changes in government required testing and approval procedures; technological developments; and strategic marketing decisions.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses include employee compensation costs associated with sales and marketing, finance, legal, information technology, human resources, and other administrative functions; outside legal fees; product promotion expenses; overhead and occupancy costs; and other general and administrative costs.

        Selling, general and administrative expenses declined $77.4 million, or 32%, in 2007, compared with 2006, and increased $11.0 million, or 5%, in 2006, compared with 2005. As a percentage of total revenue, selling, general and administrative expenses were 19%, 22% and 24% in 2007, 2006 and 2005, respectively. Legal costs comprised a significant portion of our selling, general and administrative expenses in each of the last three years. Those costs included amounts related to matters we do not consider to be in the ordinary course of business, such as the S.A.C. complaint (as described in note 23 to the audited consolidated financial statements for the fiscal year ended December 31, 2007); governmental and regulatory inquiries; securities class actions; and defamation claims. As we have settled the U.S. securities class action complaint, we do not expect to incur additional significant legal costs related to this matter. However, we may continue to incur considerable legal costs related to the remaining unresolved matters for an indefinite period, as we cannot predict the outcome or timing of when each of those matters may be resolved.

        The decline in selling, general and administrative expenses in 2007, compared with 2006, was primarily due to:

    Cost savings in 2007 associated with the headcount reduction in our U.S. operations as a result of the December 2006 restructuring program;

    The discontinuance of spending on sales and marketing activities to support Zovirax®, partially offset by the compensation of $17.2 million paid to Sciele for its promotional services;

    Lower net legal costs (after insurance recoveries) related to ongoing litigation and regulatory matters;

    Lower expenses related to Sarbanes-Oxley Act of 2002 compliance, and corporate governance and strategic planning initiatives completed in 2006. The strategic planning initiative culminated with the December 2006 restructuring program;

    Lower stock-based compensation expense due to a reduction in the overall number of stock options granted to employees, together with a lower estimated grant-date fair value for those options, as well as a recovery of compensation expense related to deferred share units ("DSUs") granted to directors due to a decline in the underlying trading price of our common shares; and

    Overall cost containment initiatives.

        Those factors were partially offset by:

    The unfavourable impact of foreign currency exchange rate changes on Canadian dollar-denominated selling, general and administrative expenses.

        The increase in selling, general and administrative expenses in 2006, compared with 2005, was primarily due to:

    Higher legal costs related to ongoing Wellbutrin XL® patent infringement actions, and other litigation and regulatory matters;

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    Inclusion of $11.9 million of stock-based compensation for stock options granted to employees, partially offset by a decline in compensation expense related to DSUs due to a decrease in the underlying trading price of our common shares; and

    Incremental spending to support the advertising and promotion of Ultram® ER, and costs associated with processing the Ultram® ER  recall.

        Those factors were partially offset by:

    Cost savings associated with a reduction in headcount in our primary-care and cardiovascular specialty sales forces following the May 2005 restructuring of our U.S. commercial operations; and

    Discontinuance of spending on sales and marketing activities to support Cardizem® LA, Teveten and Teveten HCT following the Kos transaction.

Amortization Expense

        Amortization expense declined $8.4 million, or 15%, and $5.8 million, or 9%, in 2007 and 2006, respectively, compared with the immediately preceding years. The decline in amortization expense in 2007, compared with 2006, reflected reduced amortization related to Vasotec®, Vaseretic® and Glumetza® intangible assets following the write-down of those assets in 2006. The decline in amortization expense in 2006, compared with 2005, reflected the discontinuance of the amortization of the Teveten and Teveten HCT product rights following the Kos transaction, as well as reduced amortization related to the Vasotec® and Vaseretic® intangible assets following the write-down of those assets.

Legal Settlements, Net of Insurance Recoveries

        In 2007, we recorded a net charge of $95.1 million for legal settlements, of which $83.1 million (net of expected insurance recoveries) related to the settlement of the U.S. securities class action complaint, and $10.0 million related to a potential settlement of the SEC investigation.

        In 2006, we recorded a charge of $14.4 million related to the following legal settlements:

    In February 2007, GSK reached a settlement with Andrx related to a patent infringement suit by Andrx in respect to its U.S. patent purportedly covering 150mg Wellbutrin XL® product. GSK agreed to make a one-time payment of $35.0 million to Andrx, while Andrx granted GSK a royalty-bearing license to its patent. Under the terms of the Wellbutrin XL® agreement with GSK, we agreed to reimburse GSK for $11.7 million of the payment to Andrx, which was paid to GSK in 2007, and to pay one-third of the ongoing royalties on sales of 150mg Wellbutrin XL® product, which are recorded in cost of goods sold.

    At December 31, 2006, we accrued $2.7 million for our estimated share of the total consideration to be paid to settle certain California State antitrust claims related to our licensing of generic Adalat CC products. That amount was paid in 2007 after the settlement received final court approval.

Intangible Asset Impairments, Net of Gain on Disposal

        We perform an evaluation of intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. Impairment exists when the carrying amount of an asset is not recoverable based on related undiscounted future cash flows, and its carrying amount exceeds its estimated fair value based on related discounted future cash flows.

        In 2007, during our annual evaluation of intangible assets for impairment, we identified certain product rights and technology assets that were not recoverable due to the absence of any material future cash flows. We determined that the extent to which these assets were anticipated to be used in the foreseeable future had been adversely affected due to changes in market conditions and/or technological advances. The assets identified as

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impaired included the product rights associated with Zolpidem ODT and Ultram® ODT due to the following events or changes in circumstances:

    In December 2007, we decided not to market Zolpidem ODT for the treatment of insomnia following a negative assessment of its commercial potential due to the genericization of the brand name drug (Ambien) in April 2007; and

    Also in December 2007, OMI notified us of its decision to terminate the Ultram® ODT supply agreement based on market considerations.

        As a result, we recorded an impairment charge of $9.9 million in 2007 to write down the carrying value of the Zolpidem ODT and Ultram® ODT product rights, as well as to write down the other identified product rights and technology assets.

        In 2006, we recorded an impairment charge of $147.0 million as a result of the following events or changes in circumstances:

    In September 2006, we were informed by Kos that it had decided to discontinue its involvement with Vasocard™. We had been developing Vasocard™ as a line extension to our Vasotec® and Vaseretic® product lines. We determined that without Kos's continued involvement Vasocard™ had limited commercial potential, and, as a result, we suspended its development. Our evaluation of the estimated future cash flows associated solely with the existing Vasotec® and Vaseretic® product lines resulted in an impairment charge of $132.0 million to the related trademarks and product rights.

    In October 2006, Depomed was granted a Canadian patent pertaining to Glumetza®. As a result, the prices we set for Glumetza® are subject to regulation by the Patented Medicine Prices Review Board ("PMPRB") in Canada. Since its launch in the Canadian market in November 2005, the sales performance (in terms of prescription volumes) of Glumetza® had been less than originally anticipated due to the competitive pricing and existing formulary listing of immediate-release generic formulations of metformin (the active drug compound in Glumetza®). We revised our sales forecast for Glumetza® to reflect both the possible future pricing concessions that may be required by the PMPRB and the underlying prescription trend since the launch of this product. On the basis of that forecast, our evaluation of the estimated future cash flows associated with the Glumetza® product line resulted in an impairment charge of $15.0 million to the related product right.

        Partially offsetting the impairment charge in 2006 was a $4.0 million gain we recorded on the disposal of four cardiovascular products to Athpharma Limited ("Athpharma"). We originally acquired these products from Athpharma in April 2003. We had expensed the original cost of the acquired products at the date of acquisition.

        In 2005, we recorded an impairment charge of $25.8 million related primarily to the write-down of the carrying value of the Teveten and Teveten HCT product rights that were transferred to Kos.

Restructuring Costs

        In 2007, 2006 and 2005, we incurred restructuring charges of $668,000, $15.1 million and $19.8 million, respectively, which consisted primarily of employee termination benefits, asset impairments, contract termination costs, and professional fees associated with the May 2005 and December 2006 restructuring programs. Restructuring costs incurred in 2007 related primarily to employee retention bonuses and additional contract termination costs associated with the December 2006 restructuring program, which were partially offset by higher than anticipated proceeds from the sale of leased vehicles at auction.

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Contract Costs or Recovery

        In 2007, we recorded a recovery of $1.7 million related to the following provisions for contract costs:

    At December 31, 2006, we had accrued a provision of $46.4 million for the estimated amount of a payment we expected to make to GSK as a result of the introduction of generic competition to Wellbutrin XL®. The maximum amount of this payment is reduced by the total dollar amount of Wellbutrin XL® sample supplies purchased by GSK. During 2007, GSK purchased additional sample supplies worth $1.3 million.

    At December 31, 2006, we had accrued a provision of $8.4 million based on our estimate of the payment we were required to make to Kos for its lost profits due to our failure to supply minimum required quantities of Cardizem® LA during 2006. In 2007, we reduced that liability by $400,000 to reflect an agreed upon settlement amount of $8.0 million, which was paid to Kos in July 2007.

        In 2006, we recorded provisions of $46.4 million and $8.4 million for the then estimated amounts that we expected to pay to GSK and Kos, respectively, for the matters described above.

Non-Operating Expenses

Interest Income and Expense

        Interest income was $24.6 million in 2007, compared with $29.2 million and $7.2 million in 2006 and 2005, respectively. The year-over-year changes in interest income reflected the relative amounts of surplus cash available for investment.

        Interest expense was $9.7 million in 2007, compared with $35.2 million and $37.1 million in 2006 and 2005, respectively. Interest expense mainly comprised interest on our Notes prior to their redemption effective April 1, 2007.

Gain or Loss on Investments

        In 2007, we recorded a gain of $24.4 million related to the disposal of the following investments:

    In December 2007, we recorded a gain of $8.6 million on the liquidation of our investment in convertible preferred stock of Reliant following its acquisition by GSK. We received cash consideration of $14.9 million on closing and may be entitled to additional proceeds of up to approximately $700,000 pending the resolution of certain closing conditions. Those additional proceeds were not included in the gain recognized in 2007, and will only be recognized upon receipt.

    In April 2007, we recorded a gain of $15.7 million (net of costs) on the sale to Financière Verdi ("Verdi") of a portion of our investment in common shares of Ethypharm. We received proceeds on disposal of $39.4 million in cash and $5.6 million in convertible bonds of Verdi. We exchanged the remaining portion of our Ethypharm investment for common shares of Verdi, which were measured at $2.3 million based on an allocation of the previous carrying value of our Ethypharm investment, resulting in no gain or loss on the exchange. Our investment in common shares of Verdi represents a 5% equity interest in Verdi, which is being accounted for using the cost method.

        Those gains were partially offset by an impairment charge of $8.9 million in 2007, which was related to an other-than-temporary decline of $6.0 million in the estimated fair value of a portion of our auction rate securities (as described below under "Liquidity and Capital Resources — Auction Rate Securities"), as well as the write-down of the carrying values of certain available-for-sale equity investments to reflect other-than-temporary declines in their quoted market values.

        In 2005, we recorded a loss of $3.4 million related primarily to the write-down of our investment in Reliant to reflect an other-than-temporary decline in its estimated fair value at that time.

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Loss on Early Extinguishment of Debt

        In 2007, we recorded a charge of $12.5 million on the early redemption of our Notes, which comprised the premium paid to noteholders of $7.9 million, as well as the net write-off of unamortized deferred financing costs, discount, and fair value adjustment associated with the Notes, which totaled $4.6 million.

Foreign Exchange Gain or Loss

        In 2007, the Canadian dollar traded at a 30-year high relative to the U.S. dollar, which contributed to a foreign exchange gain of $5.5 million recorded in 2007, compared with a foreign exchange loss of $2.4 million in 2006 and a gain of $794,000 in 2005.

Equity Loss

        We recorded equity losses of $2.5 million, $529,000 and $1.2 million in 2007, 2006 and 2005, respectively, related to our investment in Western Life Sciences ("WLS") — a venture fund that invests in early-stage biotechnology companies. We are not committed to make any further capital contributions to WLS.

Income Taxes

        Our effective tax rate reflected the fact that most of our income was derived from foreign subsidiaries with lower statutory tax rates than those that apply in Canada. We recorded provisions for income taxes of $13.2 million in 2007, compared with $14.5 million and $22.6 million in 2006 and 2005, respectively. Our effective tax rate was affected by the availability of unrecognized tax loss carryforwards that can be used to offset taxable income in Canada and the U.S.

DISCONTINUED OPERATION

        In May 2006, we completed the sale of our Nutravail division. As a result, the following amounts related to Nutravail have been reported as a discontinued operation in our consolidated statements of income and cash flows.

 
  Years Ended December 31
 
($ in 000s)

 
  2007
  2006
  2005
 
Revenue   $   $ 1,289   $ 5,532  
   
 
 
 
Loss from discontinued operation before asset impairments         (2,764 )   (5,005 )
Asset impairments         (1,084 )   (5,570 )
   
 
 
 
Loss from discontinued operation   $   $ (3,848 ) $ (10,575 )
   
 
 
 

SUMMARY OF QUARTERLY RESULTS

        The following table presents a summary of our quarterly results of operations and cash flows from continuing operations in 2007 and 2006:

 
  2007
  2006
($ in 000s, except per share data)

  Q1
  Q2
  Q3
  Q4
  Q1
  Q2
  Q3
  Q4
Revenue   $ 247,005   $ 203,027   $ 188,890   $ 203,896   $ 222,629   $ 255,143   $ 282,302   $ 307,648
Expenses     148,358     140,567     127,890     237,989     140,894     162,965     336,951     188,045
   
 
 
 
 
 
 
 
Operating income (loss)     98,647     62,460     61,000     (34,093 )   81,735     92,178     (54,649 )   119,603
   
 
 
 
 
 
 
 
Income (loss) from continuing operations     93,819     67,824     65,867     (31,971 )   72,556     85,005     (60,063 )   117,976
   
 
 
 
 
 
 
 
Net income (loss)     93,819     67,824     65,867     (31,971 )   68,436     85,277     (60,063 )   117,976
   
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share                                                
Income (loss) from continuing operations   $ 0.58   $ 0.42   $ 0.41   $ (0.20 ) $ 0.45   $ 0.53   $ (0.37 ) $ 0.74
Net income (loss)   $ 0.58   $ 0.42   $ 0.41   $ (0.20 ) $ 0.43   $ 0.53   $ (0.37 ) $ 0.74
   
 
 
 
 
 
 
 
Net cash provided by continuing operating activities   $ 119,828   $ 98,277   $ 43,415   $ 79,333   $ 94,692   $ 110,806   $ 81,382   $ 235,637
   
 
 
 
 
 
 
 

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

Results for the Fourth Quarter

Revenue

        Total revenue declined $103.8 million, or 34%, to $203.9 million in the fourth quarter of 2007, compared with $307.6 million in the corresponding period of 2006, primarily due to:

    A decline in Wellbutrin XL® product sales of $103.7 million, or 70%, to $44.4 million in the fourth quarter of 2007, compared with $148.1 million in the fourth quarter of 2006. Approximately one-third of that decline was the result of lower volumes of 300mg product sold to GSK due to generic competition, and approximately two-thirds of that decline was attributable to the impact of tiered pricing, as sales to GSK were at the first and second tier supply prices in the fourth quarter of 2007, while sales in fourth quarter of 2006 were mainly at the third and highest tier supply price; and

    A decline in Generic product sales of $21.6 million, as a result of lower prescription volumes and pricing in the fourth quarter of 2007.

        Those factors were partially offset by:

    An aggregate $19.3 million increase in Zovirax® and Legacy product sales, due to price increases implemented in 2007, as well as the timing of purchases by our wholesale customers, which resulted in higher shipments and wholesaler inventory levels at 2007 year-end.

Results of Operations

        Net income declined $150.0 million to a net loss of $32.0 million in the fourth quarter of 2007, compared with net income of $118.0 million in the corresponding period of 2006, primarily due to:

    A decline in gross profit on product sales of $114.7 million, or 47%, to $131.7 million in the fourth quarter of 2007, compared with $246.4 million in the fourth quarter of 2006, due mainly to lower Wellbutrin XL® and Generic product sales, partially offset by higher sales of Zovirax® and Legacy products; and

    An increase in legal settlements of $78.7 million related primarily to the settlement of the U.S. securities class action complaint and the potential settlement of the SEC investigation.

        Those factors were partially offset by:

    A decrease in selling, general and administrative expenses of $33.6 million, due mainly to lower sales force and marketing costs as a result of the December 2006 restructuring program; lower net legal costs (after insurance recoveries); lower corporate expenses; and lower compensation expense related to DSUs; and

    A decrease of $15.2 million in costs related to restructuring activities.

Cash Flows

        Net cash provided by continuing operating activities declined $156.3 million, or 66%, to $79.3 million in the fourth quarter of 2007, compared with $235.6 million in the corresponding period of 2006, primarily due to:

    A decrease of $93.7 million related to the change in accounts receivable, due to the timing of purchases by wholesale customers, which resulted in higher shipments in the fourth quarter of 2007, compared with higher collections from GSK in the fourth quarter of 2006 related to Wellbutrin XL® product sales; and

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    A $57.3 decrease related to income from operations before changes in operating assets and liabilities, due mainly to lower gross profit on product sales, partially offset by lower sales force and marketing costs; lower restructuring costs; and lower net legal costs (after insurance recoveries).

FINANCIAL CONDITION

        The following table presents a summary of our financial condition at December 31, 2007 and 2006:

 
  At December 31
 
  2007
  2006
 
  ($ in 000s)

Working capital(1)   $ 339,439   $ 647,337
Long-lived assets(2)     1,005,147     1,072,699
Long-term obligations (including current portion)         410,525
Shareholders' equity     1,297,819     1,302,257
   
 

(1)
Total current assets less total current liabilities.

(2)
Property, plant and equipment; goodwill; intangible and other assets.

Working Capital

        Working capital declined $307.9 million, or 48%, to $339.4 million at December 31, 2007, compared with $647.3 million at December 31, 2006, primarily due to:

    A net decrease in cash and cash equivalents of $400.9 million, due mainly to:

    The redemption of our Notes for $406.8 million;

    Dividend payments of $321.5 million;

    Capital expenditures of $35.1 million; and

    Additions to marketable securities of $34.5 million.

      Which were in excess of:

    Operating cash flows of $340.9 million; and

    Net cash proceeds of $52.7 million on the disposal of our investments in Ethypharm and Reliant;

    An increase in accrued legal settlements of $133.6 million, related primarily to the settlement of the U.S. securities class action complaint and the potential settlement of the SEC investigation, partially offset by payments made related to legal settlements provided for in 2006; and

    A decrease in accounts receivable of $18.1 million, due mainly to the decline in Wellbutrin XL® product sales.

        Those factors were partially offset by:

    A decrease in declared but unpaid dividends of $80.2 million;

    An increase in insurance recoveries receivable of $62.9 million, related primarily to the settlement of the U.S. securities class action complaint;

    A reclassification of $31.4 million in respect of uncertain tax positions from current to non-current income tax payable;

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    A decrease in accrued liabilities of $26.9 million, due mainly to the settlement of restructuring costs, and the elimination of interest payable on our Notes;

    A decrease in the current portion of deferred revenue of $12.8 million, related primarily to the portion of the $60 million Ultram® ER supply prepayment received from OMI in 2005 that was amortized in 2007;

    The final payment of $11.3 million to GSK with respect to the Zovirax® obligation; and

    A decrease of $9.7 million in accrued contract costs, related primarily to the settlement of the lost profits claim by Kos.

Long-Lived Assets

        Long-lived assets declined $67.6 million to $1,005.1 million at December 31, 2007, compared with $1,072.7 million at December 31, 2006, primarily due to:

    The depreciation of plant and equipment of $27.6 million and the amortization of intangible and other assets of $73.3 million; and

    An impairment charge of $9.9 million related to the write-down of the Zolpidem ODT and Ultram® ODT product rights, as well as the write-down of certain other product rights and technology assets.

        Those factors were partially offset by:

    Additions to property, plant and equipment of $35.1 million, which included expenditures related to the expansion of our Mississauga, Ontario corporate office and upgrades to our Dorado, Puerto Rico manufacturing facility; and

    The impact of foreign exchange rate changes on the reported value in U.S. dollars of property, plant and equipment located in Canada.

Long-Term Obligations

        In April 2007, we redeemed the entire $398.9 million outstanding principal amount of our Notes (and wrote-off the associated unamortized discount and fair value adjustment that were included in the Notes' carrying value), and we made the final payment of $11.3 million to GSK in consideration for the reduced Zovirax® supply prices. As a result, we had no long-term obligations at December 31, 2007.

Shareholders' Equity

        Shareholders' equity declined $4.4 million to $1,297.8 million at December 31, 2007, compared with $1,302.3 million at December 31, 2006, primarily due to:

    Dividends declared of $241.3 million.

        That factor was partially offset by:

    Net income of $195.5 million (including $10.6 million of stock-based compensation recorded in additional paid-in capital);

    A foreign currency translation adjustment of $21.4 million to other comprehensive income, due mainly to the impact of the strengthening of the Canadian dollar relative to the U.S. dollar, which increased the reported value of our Canadian dollar-denominated net assets; and

    Proceeds of $11.2 million on the issuance of common shares on the exercise of stock options.

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CASH FLOWS

        Our primary source of cash is the collection of accounts receivable related to product sales. Our primary uses of cash include dividend payments; salaries and benefits; inventory purchases; research and development programs; sales and marketing activities; capital expenditures; and, in 2007, loan repayments associated with our Notes. The following table displays cash flow information for each of the last three years:

 
  Years Ended December 31
 
 
  2007
  2006
  2005
 
 
  ($ in 000s)

 
Net cash provided by continuing operating activities   $ 340,853   $ 522,517   $ 501,879  
Net cash provided by (used in) continuing investing activities     (15,045 )   (40,447 )   31,825  
Net cash used in continuing financing activities     (728,650 )   (92,256 )   (119,095 )
Net cash used in discontinued operation         (558 )   (3,817 )
Effect of exchange rate changes on cash and cash equivalents     1,943     (5 )   173  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     (400,899 )   389,251     410,965  
Cash and cash equivalents, beginning of year     834,540     445,289     34,324  
   
 
 
 
Cash and cash equivalents, end of year   $ 433,641   $ 834,540   $ 445,289  
   
 
 
 

Operating Activities

        Net cash provided by continuing operating activities declined $181.7 million, or 35%, to $340.9 million in 2007, compared with $522.5 million in 2006, primarily due to:

    A decrease of $156.0 million related to income from operations before changes in operating assets and liabilities, due mainly to lower gross profit on product sales, and higher research and development expenses. Those factors were partially offset by lower sales force and marketing costs; lower restructuring costs; lower net legal costs (after insurance recoveries); and reduced interest expense; and

    A decrease of $40.2 million related to the change in accrued liabilities, due mainly to the settlement of restructuring costs, and the elimination of interest payable on our Notes.

        Those factors were partially offset by:

    An increase of $13.4 million related to the change in accounts receivable, due mainly to the decline in Wellbutrin XL® product sales in 2007.

        Net cash provided by continuing operating activities increased $20.6 million, or 4%, to $522.5 million in 2006, compared with $501.9 million in 2005, primarily due to:

    An increase of $157.5 million related to income from operations before changes in operating assets and liabilities, due mainly to higher gross profit on product sales; lower sales force and marketing costs; and higher interest income. Those factors were partially offset by higher legal costs; and

    An increase of $8.1 million related to the change in accrued liabilities, due mainly to unpaid restructuring costs.

        Those factors were partially offset by:

    A decrease of $90.3 million related to the change in deferred revenue, due mainly to the receipt of the $60 million supply prepayment from OMI in 2005, and the portion of that prepayment and the deferred proceeds from the Kos transaction that were amortized in 2006;

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    A decrease of $35.7 million related to the change in inventories and accounts payable, due mainly to the timing of inventory purchases and payments;

    A decrease of $9.4 million related to the change in income taxes payable; and

    A decrease of $8.1 million related to the timing of collection of accounts receivable.

Investing Activities

        Net cash used in continuing investing activities declined $25.4 million to $15.0 million in 2007, compared with $40.4 million in 2006, primarily due to:

    Net cash proceeds of $52.7 million on the disposal of our investments in Ethypharm and Reliant in 2007; and

    A decrease in capital expenditures of $9.7 million, primarily as a result of the completion of an expansion of our Steinbach, Manitoba manufacturing facility in 2006.

        Those factors were partially offset by:

    An increase of $31.3 million in additions to marketable securities, including $26.8 million of auction rate securities.

        Net cash used in continuing investing activities increased $72.3 million to net cash used of $40.4 million in 2006, compared with net cash provided of $31.8 million in 2005, primarily due to:

    A decrease of $94.1 million in proceeds from the disposal of intangible assets, mainly related to consideration received in connection with the Kos transaction in 2005.

        That factor was partially offset by:

    A decrease of $26.0 million in payments to acquire intangible assets, related primarily to the addition of the Glumetza® product right in 2005.

Financing Activities

        Net cash used in continuing financing activities increased $636.4 million to $728.7 million in 2007, compared with $92.3 million in 2006, primarily due to:

    Principal and premium payments of $406.8 million to redeem our Notes in 2007; and

    An increase in dividends paid of $241.5 million in 2007.

        Those factors were partially offset by:

    A decrease of $14.0 million in repayments of other long-term obligations, related primarily to the final payments for Vasotec® and Vaseretic® in 2006.

        Net cash used in continuing financing activities declined $26.8 million to $92.3 million in 2006, compared with $119.1 million in 2005, primarily due to:

    An increase of $12.6 million in proceeds from the issuance of common shares; and

    A decrease of $10.4 million in repayments of other long-term obligations, related primarily to the final payment for Ativan® and Isordil® in 2005.

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LIQUIDITY AND CAPITAL RESOURCES

        The following table displays our net financial asset position at December 31, 2007 and 2006:

 
  At December 31

 
  2007
  2006
 
  ($ in 000s)

Financial assets            
Cash and cash equivalents   $ 433,641   $ 834,540
Marketable securities     28,312     5,677
   
 
Total financial assets     461,953     840,217
   
 

Debt

 

 

 

 

 

 
Senior Subordinated Notes         399,379
Zovirax® obligation         11,146
   
 
Total debt         410,525
   
 
Net financial assets   $ 461,953   $ 429,692
   
 

General

        We believe that our existing cash resources, together with cash expected to be generated by operations and funds available under our $250 million credit facility, will be sufficient to cover our operational and capital expenditure requirements; support our current dividend policy; and meet our working capital needs, for at least the next 12 months, based on our current expectations. We anticipate total capital expenditures of approximately $50 million to $55 million in 2008. Major projects include the completion of the expansion of our corporate office and ongoing upgrades of our manufacturing facilities in Canada and Puerto Rico.

        We cannot, however, predict the amount or timing of our need for additional funds under various circumstances, such as a significant future acquisition; new product development projects; changes to our capital structure; or other factors that may require us to raise additional funds through borrowings, or the issuance of debt or equity securities. In addition, certain contingent events, such as the resolution of certain legal proceedings (as described in note 23 to the audited consolidated financial statements for the fiscal year ended December 31, 2007), if realized, could have a material adverse impact on our liquidity and capital resources.

Cash and Cash Equivalents

        Our cash and cash equivalents are held in cash operating accounts, or are invested in securities such as treasury bills, money market funds, term deposits, or commercial paper with a minimum investment-grade credit rating of "A1/P1".

Auction Rate Securities

        Our marketable securities portfolio currently includes $26.8 million of principal invested in nine individual auction rate securities. These securities have long-term maturities for which the interest rates are reset through a dutch auction typically each month. Those auctions historically have provided a liquid market for these securities. These securities represent interests in collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations, and other structured credits, including corporate bonds. Some of the underlying collateral for these securities consists of sub-prime mortgages.

        With the liquidity issues experienced in global credit and capital markets, these securities have experienced multiple failed auctions as the amount of auction rates securities submitted for sale has exceeded the amount of

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purchase orders. Our auction rate securities all had "Aaa/AAA" credit ratings at the time of purchase. In the fourth quarter of 2007, two of these securities with an aggregate principal amount of $6.0 million were downgraded to "A3/AAA" and placed on credit watch with negative implications, and one other of these securities with a principal amount of $3.0 million was downgraded to "A2/AAA" with negative implications. All of our auction rate securities retained at least one "AAA" rating at December 31, 2007. Subsequent to December 31, 2007, the two securities rated "A3/AAA" and the one security rated "A2/AAA" were further downgraded to "A3/CCC" and "A2/CC", respectively, with negative implications. One of our other auction rate securities with a rating of "Aaa/AAA" and a principal amount of $2.8 million has been placed on credit watch. Our remaining auction rate securities have retained their initial credit ratings of "Aaa/AAA".

        The estimated fair value of our auction rate securities at December 31, 2007 was $18.0 million, which reflected an $8.8 million write-down to the cost basis of $26.8 million. Although these securities continue to pay interest according to their stated terms, based on our analysis of other-than-temporary impairment factors, we have recorded an impairment charge of $6.0 million at December 31, 2007, reflecting the portion of our auction rate securities that we have concluded has an other-than-temporary decline in estimated fair value. That charge does not have a material impact on our liquidity. In addition, we recorded an unrealized loss of $2.8 million in other comprehensive income, reflecting adjustments to our auction rate securities that we have concluded have a temporary decline in estimated fair value.

        Due to the lack observable market quotes for these securities, we utilized valuation models in order to estimate the fair value of our auction rate securities at December 31, 2007, including models that consider the expected cash flow streams, and collateral values as reported in the Trustee Reports for the respective securities, which include adjustments for defaulted securities and further adjustments for purposes of collateralization tests as outlined in Trust Indentures. The key assumptions used in those models relate to the timing of cash flows, discount rates, estimated amount of recovery, and probabilities assigned to various liquidation scenarios. The valuation of our auction rate securities is subject to uncertainties that are difficult to predict. Factors that may impact our valuation include changes to the credit ratings of these securities, the underlying assets supporting these securities, the rates of default of the underlying assets, the underlying collateral value, and overall market liquidity.

        The credit and capital markets have continued to deteriorate in 2008. If uncertainties in these markets continue, or these markets deteriorate further, or we experience any additional ratings downgrades on our auction rate securities, we may incur additional impairments to these securities, which could have a material impact on our results of operations, financial condition and cash flows. We have discontinued additional investments in auction rate securities.

Debt Capacity

        We currently do not have any outstanding borrowings under our $250 million credit facility. In June 2007, we received lender consent, pursuant to our request under the annual extension option, to extend the maturity date of this facility for an additional year to June 2010. This facility may be used for general corporate purposes, including acquisitions, and includes an accordion feature, which allows it to be increased up to $400 million. At December 31, 2007, we were in compliance with all financial and non-financial covenants associated with this facility.

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Credit Ratings

        Our current corporate credit ratings from Standard & Poor's ("S&P") are as follows:

 
  Rating
Overall   BB
Credit facility   BBB-
Outlook   Stable
   

        In December 2007, S&P lowered its corporate rating on our company from "BB+" to "BB", citing a weakening business profile. At the same time, S&P affirmed the "BBB-" senior secured debt rating on our credit facility.

        In October 2007, Moody's Investors Service ("Moody's") withdrew its previous corporate family rating and probability of default rating on our company citing Moody's business reasons since, following the redemption of our Notes, we have no rated debt outstanding.

CONTRACTUAL OBLIGATIONS

        The following table summarizes our contractual obligations at December 31, 2007:

 
  Payments Due by Period
 
  Total
  2008
  2009
and 2010

  2011
and 2012

  Thereafter
 
  ($ in 000s)

Operating lease obligations     29,687     6,022     8,649     7,149     7,867
Purchase obligations(1)     88,865     46,472     27,137     14,014     1,242
   
 
 
 
 
Total contractual obligations   $ 118,552   $ 52,494   $ 35,786   $ 21,163   $ 9,109
   
 
 
 
 

(1)
Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and include obligations for minimum inventory and capital expenditures, and outsourced information technology, product promotion, and clinical research services.

        The above table does not reflect any milestone payments in connection with research and development arrangements with third parties. These payments are contingent on the achievement of specific developmental, regulatory and/or commercial milestones. These arrangements generally permit us to unilaterally terminate development of the products, which would allow us to avoid making the contingent payments. From a business perspective, however, we view these payments favourably as they signify that the products are moving successfully through the development phase toward commercialization. In addition, under certain arrangements, we may have to make royalty payments based on a percentage of future sales of the products in the event regulatory approval for marketing is obtained. In connection with research and development agreements for BVF-068, BVF-203 and BVF-324, we may be required to make potential milestone payments of up to $16.5 million in the aggregate, as well as royalty payments based on a percentage of future sales of the products in the event regulatory approval is obtained.

        The above table also does not reflect any amounts related to additional payments that Sciele may be entitled to if certain tiered revenue targets are met each calendar year, due to the contingent nature of those payments.

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OFF-BALANCE SHEET ARRANGEMENTS

        In the normal course of business, we enter into agreements that include indemnification provisions for product liability and other matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These provisions are generally subject to maximum amounts, specified claim periods, and other conditions and limits. Other than the settlement of the lost profits claim by Kos, we did not pay or accrue any material amounts under these provisions in 2007.

OUTSTANDING SHARE DATA

        Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange.

        At March 12, 2008, we had 161,023,729 issued and outstanding common shares, as well as 4,761,655 stock options and 125,000 restricted share units ("RSUs") outstanding.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates on investments and debt obligations, and equity market prices on long-term investments. We have used derivative financial instruments from time to time as a risk management tool and not for trading or speculative purposes.

Inflation; Seasonality

        Our results of operations have not been materially impacted by inflation or seasonality.

Foreign Currency Risk

        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 denominated in Canadian dollars or euros. We also face foreign currency exposure on the translation of our operations in Canada and Ireland from their local currencies to the U.S. dollar. Where possible, we manage foreign currency risk by managing same currency assets in relation to same currency liabilities, and same currency revenue in relation to same currency expenses. As a result, both favourable and unfavourable foreign currency impacts to our non-U.S. dollar-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our non-U.S. dollar-denominated revenue. At December 31, 2007, the effect of a hypothetical 10% immediate and adverse change in foreign currency exchange rates (relative to the U.S. dollar) on our foreign currency-denominated cash, cash equivalent, accounts receivable, accounts payable, and intercompany balances would not have a material impact on our net income. Currently, we do not utilize forward contracts to hedge against foreign currency risk.

        The redemption of our Notes resulted in a Canadian dollar foreign exchange gain for Canadian income tax purposes of approximately $173.5 million (as converted to U.S. dollars at the December 31, 2007 rate of exchange). One-half of this foreign exchange gain is included in our Canadian taxable income for 2007, which resulted in a corresponding reduction in our available Canadian operating losses, Scientific Research and Experimental Development ("SR&ED") pool and/or investment tax credit ("ITC") carryforward balances (with an offsetting reduction to the valuation allowance provided against those balances). However, the redemption of our Notes did not result in a foreign exchange gain being recognized in our consolidated financial statements, as these statements are prepared in U.S. dollars.

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Interest Rate Risk

        The primary objective of our policy for the investment of temporary cash surpluses is the protection of principal, and, accordingly, we generally invest in investment-grade debt 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, and, as a result, a hypothetical 10% immediate and adverse change in interest rates would not have a material impact on the realized value of these investments.

        We are also exposed to interest rate risk on our auction rate securities. Interest rates on these securities are typically reset every month; however, following the failure to complete successful auctions and reset of the interest rates, interest on these securities is being calculated and paid based on prescribed spreads to LIBOR. As we are guaranteed a fixed spread to market interest rates, our interest rate risk exposure is minimal, and, as a result, a hypothetical 10% immediate and adverse change in interest rates would not have a material impact on the fair value of these securities.

        We do not currently have any long-term debt, nor do we currently utilize interest rate swap contracts to hedge against interest rate risk.

Investment Risk

        We are exposed to investment risks primarily on our cost-method and available-for-sale equity investments. The fair values of these investments are subject to significant fluctuations due to stock market volatility; changes in general economic conditions; and/or changes in the financial condition of each investee. 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. At December 31, 2007, a hypothetical 10% immediate and adverse change in the quoted market prices of our available-for-sale equity investments would not have a material impact on the fair value of those investments.

        We are also exposed to investment risks on our auction rate securities due to the current market liquidity issues (as described above under "Liquidity and Capital Resources — Auction Rate Securities").

RELATED PARTY TRANSACTIONS

        In 2006, we contracted with Global IQ, a clinical research organization, for a long-term safety study on BVF-146 (which was subsequently terminated). Prior to April 2007, during which time Dr. Silverstone, our Senior Vice-President, Medical and Scientific Affairs, retained an interest in Global IQ, we were invoiced $1.2 million in 2006 and $581,000 in 2007 by Global IQ for this study (excluding investigator and other pass-through costs). Dr. Silverstone has indicated to us that he disposed of his interest in Global IQ in April 2007.

        In March and April 2007, we received a total amount of $734,000 in full settlement of the principal and accrued interest on a relocation assistance loan granted to a former executive officer in March 2001.

        In 2006, Mr. Melnyk reimbursed us $420,000 for expenses incurred in connection with the analysis of a potential investment in a company that Mr. Melnyk decided to pursue personally following a determination by our Board of Directors that the investment opportunity was not, and would not in future be, of interest to us.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

(All dollar amounts expressed in U.S. dollars)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Critical accounting policies and estimates are those policies and estimates that are most important and material to the preparation of our consolidated financial statements, and which require management's most subjective and complex judgments due to the need to select policies from among alternatives available, and to make estimates about matters that are inherently uncertain. We base our estimates on historical experience and other factors that we believe to be reasonable under the circumstances. Under certain product manufacturing and supply agreements, we rely on estimates for future returns, rebates and chargebacks made by our strategic partners. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business and new information as it becomes available. If historical experience and other factors we use to make these estimates do not reasonably reflect future activity, our results of operations and financial position could be materially impacted.

        Our critical accounting policies and estimates relate to the following:

    Revenue recognition;

    Useful lives and impairment of intangible assets;

    Contingencies;

    Income taxes; and

    Stock-based compensation.

Revenue Recognition

        We recognize product sales revenue when title has transferred to the customer and the customer has assumed the risks and rewards of ownership. Revenue from product sales is recognized net of provisions for estimated cash discounts, allowances, returns, rebates and chargebacks, as well as distribution fees paid to certain of our wholesale customers. We establish these provisions concurrently with the recognition of product sales revenue.

        Our supply prices to our strategic partners in the U.S. for Wellbutrin XL ®, Ultram® ER, Cardizem® LA, Tiazac® and Generic products are determined after taking into consideration estimates for future returns, rebates and chargebacks provided to us by each partner. We make adjustments as needed to state those estimates on a basis consistent with our revenue recognition policy and our methodology for estimating returns, rebates and chargebacks related to our own direct product sales. Revenue from sales of these products accounted for approximately 55% of our total gross product sales in 2007, compared with 70% and 55% in 2006 and 2005, respectively.

        We continually monitor our product sales provisions and evaluate the estimates used as additional information becomes available. We make adjustments to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We are required to make subjective judgments based primarily on our evaluation of current market conditions and trade inventory levels related to our products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or an adjustment related to past sales, or both.

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Continuity of Product Sales Provisions

        The following table presents the activity and ending balances for our product sales provisions for each of the last three years.

 
  Cash
Discounts

  Allowances
  Returns
  Rebates and
Chargebacks

  Distribution
Fees

  Total
 
 
  ($ in 000s)

 
Balance at January 1, 2005   $ 789   $ 889   $ 30,421   $ 10,201   $ 1,319   $ 43,619  
Current year provision     6,844     2,549     23,007     24,232     6,276     62,908  
Prior year provision             11,715     (1,766 )       9,949  
Payments or credits     (7,266 )   (2,605 )   (41,938 )   (24,035 )   (2,710 )   (78,554 )
   
 
 
 
 
 
 
Balance at December 31, 2005     367     833     23,205     8,632     4,885     37,922  
   
 
 
 
 
 
 
Current year provision     5,365     1,427     23,176     16,251     7,411     53,630  
Prior year provision             (3,838 )   442     (1,292 )   (4,688 )
Payments or credits     (5,423 )   (1,919 )   (17,422 )   (18,583 )   (8,654 )   (52,001 )
   
 
 
 
 
 
 
Balance at December 31, 2006     309     341     25,121     6,742     2,350     34,863  
   
 
 
 
 
 
 
Current year provision     6,304     1,110     13,868     18,969     12,583     52,834  
Prior year provision             (563 )   (1,500 )       (2,063 )
Payments or credits     (5,871 )   (1,152 )   (19,064 )   (16,248 )   (10,607 )   (52,942 )
   
 
 
 
 
 
 
Balance at December 31, 2007   $ 742   $ 299   $ 19,362   $ 7,963   $ 4,326   $ 32,692  
   
 
 
 
 
 
 

Use of Information from External Sources

        We use information from external sources to estimate our product sales provisions. We obtain prescription data for our products from IMS Health, an independent pharmaceutical market research firm. We use this data to identify sales trends based on prescription demand and to estimate inventory requirements. We obtain inventory data directly from our three major U.S. wholesalers, Cardinal Health, Inc. ("Cardinal"), McKesson Corporation ("McKesson") and AmerisourceBergen Corporation ("ABC"), which together accounted for approximately 70% of our direct product sales in the U.S. over the past three years. The inventory data received from these wholesalers excludes inventory held by customers to whom they sell. Third-party data with respect to prescription demand and inventory levels are subject to the inherent limitations of estimates that rely on information from external sources, as this information may itself rely on certain estimates, and reflect other limitations.

        The following table indicates information about the inventories of our products owned by Cardinal, McKesson and ABC at December 31, 2007 (which excludes inventories owned by regional wholesalers, warehousing chains, and indirect customers in the U.S., and inventories owned by wholesalers and retailers in Canada). Our distribution agreements with Cardinal, McKesson and ABC limit the amount of inventory they can own to between 1/2 and 11/2 months of supply of our products. The inventory data from those wholesalers is provided to us in the aggregate rather than by specific lot number, which is the level of detail that would be required to determine the original sale date and remaining shelf life of the inventory. However, the inventory reports we receive from those wholesalers include data with respect to inventories on hand with less than 12 months remaining shelf life. As indicated in the following table, those wholesalers owned overall 1.5 months of supply of our products at December 31, 2007, of which only $135,000 had less than 12 months remaining shelf

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life. Therefore, we believe the collection of lot information would provide limited additional benefit in estimating our product sales provisions.

 
   
  At December 31, 2007
  At December 31, 2006
 
  Original Shelf Life (In Months)
  Total Inventory
  Months On Hand (In Months)
  Inventory With Less Than 12 Months Remaining Shelf Life
  Total Inventory
  Months On Hand (In Months)
  Inventory With Less Than 12 Months Remaining Shelf Life
 
  ($ in 000s)

Zovirax®   36-48   $ 15,863   1.5   $ 93   $ 4,465   0.5   $ 88
Cardizem®   36-48     8,437   1.6     12     2,404   0.5     43
Ativan®   24     2,425   1.0     9     1,189   0.6     9
Vasotec® and Vaseretic®   24     1,705   1.2     17     885   0.7     39
Isordil®   36-60     376   2.4     4     255   1.3     1
       
     
 
     
Total   24-60   $ 28,806   1.5   $ 135   $ 9,198   0.6   $ 180
   
 
 
 
 
 
 

Cash Discounts and Allowances

        We offer cash discounts for prompt payment and allowances for volume purchases to customers. Provisions for cash discounts are estimated at the time of sale and recorded as direct reduction to accounts receivable and revenue. Provisions for allowances are recorded in accrued liabilities. We estimate provisions for cash discounts and allowances based on contractual sales terms with customers, an analysis of unpaid invoices, and historical payment experience. Estimated cash discounts and allowances have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience, and the fact that we generally settle these amounts within one month of incurring the liability.

Returns

        Consistent with industry practice, we generally allow customers to return product within a specified period before and after its expiration date. We utilize the following information to estimate our provision for returns:

    Historical return and exchange levels;

    External data with respect to inventory levels in the wholesale distribution channel;

    External data with respect to prescription demand for our products;

    Original shelf lives of our products; and

    Estimated returns liability to be processed by year of sale based on analysis of lot information related to actual historical returns.

        In determining our estimates for returns, we are required to make certain assumptions regarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, we make certain assumptions with respect to the extent and pattern of decline associated with generic competition. To make these assessments we utilize market data for similar products as analogs for our estimations. We use our best judgment to formulate these assumptions based on past experience and information available to us at the time. We continually reassess and make the appropriate changes to our estimates and assumptions as new information becomes available to us.

        The provisions for returns related to sales made in the current year were between 1.5% and 2.5% of gross product sales in each of the last three years. The decline in the returns provision in 2007, compared with 2006, was due mainly to the inclusion of the $7.8 million recall provision for Ultram® ER in 2006. The decline in the

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returns provision in 2006 (excluding the Ultram® ER recall provision), compared with 2005, reflected the transition to distribution agreements with Cardinal, McKesson and ABC, which limited the amount of inventory each could own, thereby reducing the risk of product expiration and overstocking.

        Our estimate for returns may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel. When we are aware of an increase in the level of inventory of our products in the distribution channel, we consider the reasons for the increase to determine if the increase may be temporary or other-than-temporary. Increases in inventory levels assessed as temporary will not result in an adjustment to our provision for returns. Other-than-temporary increases in inventory levels, however, may be an indication that future product returns could be higher than originally anticipated, and, as a result, we may need to adjust our estimate for returns. Some of the factors that may suggest that an increase in inventory levels will be temporary include:

    Recently implemented or announced price increases for our products;

    New product launches or expanded indications for our existing products; and

    The timing of purchases around holiday shutdowns.

        Conversely, factors that may suggest that an increase in inventory levels will be other-than-temporary include:

    Declining sales trends based on prescription demand;

    Introduction of new product or generic competition;

    Increasing price competition from generic competitors;

    Recent regulatory approvals to extend the shelf life of our products, which could result in a period of higher returns related to older product with the shorter shelf life; and

    Recent changes to the National Drug Codes ("NDC") of our products, which could result in a period of higher returns related to product with the old NDC, as our customers generally permit only one NDC per product for identification and tracking within their inventory systems.

        We made adjustments to reduce our provision for returns by $563,000 and $3.8 million in 2007 and 2006, respectively, and to increase our provision for returns by $11.7 million in 2005. These adjustments generally related to sales made in preceding years, as the shelf lives of our products are in excess of one year, and customers are not permitted to return product with more than six months of shelf life remaining. The adjustment in 2006 was primarily related to lower-than-anticipated returns of Tiazac® product following its genericization in Canada in January 2006. The adjustment in 2005 was primarily due to our entry into distribution agreements with Cardinal, McKesson and ABC. As a result, we received higher than anticipated returns from these wholesalers, as they reduced their inventories of our products in order to restock their inventories with product with full shelf life, and to minimize inventories of those products that had lower prescription demand. The adjustment in 2005 also included slow-moving 90-tablet bottles of Cardizem® LA, due to lower than anticipated end-customer demand for this particular packaging size.

Rebates and Chargebacks

        We are subject to rebates on sales made under governmental and managed-care pricing programs. The largest of these rebates is associated with sales covered by Medicaid. We participate in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be as much as 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, our Medicaid rebate provision includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed, and

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an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. Our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Periodically, we adjust the Medicaid rebate provision based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of that provision for several periods.

        Chargebacks relate to our contractual agreements to sell products to group purchasing organizations and other indirect customers at contractual prices that are lower than the list prices we charge wholesalers. When these group purchasing organizations or other indirect customers purchase our products through wholesalers at these reduced prices, the wholesaler charges us for the difference between the prices they paid us and the prices at which they sold the products to the indirect customers.

        In estimating our provisions for rebates and chargebacks, we consider relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. We estimate the amount of our product sales subject to these programs based on historical utilization levels. Changes in the level of utilization of our products through private or public benefit plans and group purchasing organizations will affect the amount of rebates and chargebacks that we owe. We continually update these factors based on new contractual or statutory requirements, and significant changes in sales trends that may impact the percentage of our products subject to rebates or chargebacks.

        The provisions for rebates and chargebacks related to sales made in the current year were between 1.5% and 2.5% of gross product sales in each of the last three years. Our estimate for rebates and chargebacks may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel. If the level of inventory of our products in the distribution channel increased or decreased by a one-month supply, our provision for rebates and chargebacks would increase or decrease by approximately $1 million.

        We do not process or track actual rebate payments or credits by period in which the original sale was made, as the necessary lot information is not required to be provided to us by the private or public benefit providers. Accordingly, we generally assume that adjustments made to rebate provisions relate to sales made in the prior years due to the delay in billing. However, we assume that adjustments made to chargebacks are generally related to sales made in the current year as we settle these amounts within a few months of original sale. The adjustments made to the provision for rebates and chargebacks have not been significant in the past three years, and generally resulted from other-than-expected Medicaid utilization of our products.

Intangible Assets

        Intangible assets are stated at cost, less accumulated amortization generally computed using the straight-line method based on estimated useful lives ranging from seven to 20 years. Useful life is the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We determine the useful lives of intangible assets based on a number of factors, such as legal, regulatory, or contractual provisions that may limit the useful life, and the effects of obsolescence, anticipated demand, existence or absence of competition, and other economic factors on useful life.

        Intangible assets acquired through asset acquisitions or business combinations are initially recorded at fair value based on an allocation of the purchase price. We often engage independent valuation specialists to perform valuations of the assets acquired. We subsequently evaluate intangible assets annually for impairment and more frequently if events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Our evaluation is based on an assessment of potential indicators of impairment, such as:

    An adverse change in legal factors or in the business climate that could affect the value of an asset. For example, a successful challenge of our patent rights resulting in earlier than expected generic competition;

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    An adverse change in the extent or manner in which an asset is used or is expected to be used. For example, a decision not to pursue a product line-extension strategy to enhance existing products due to changes in market conditions and/or technological advances; or

    Current or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of an asset. For example, the introduction of a competing product that results in a significant loss of market share.

        Impairment exists when the carrying amount of an asset is not recoverable and its carrying amount exceeds its estimated fair value. There are several methods that can be used to determine fair value. For intangible assets, an "income approach" is generally used. This approach starts with a forecast of all of the estimated future cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income approach include the amount and timing of the future cash flows; and the discount rate used to reflect the risks inherent in the future cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on our results of operations. In cases of an impairment review, we will also re-evaluate the remaining useful life of the intangible asset and modify it, as appropriate.

Contingencies

        In the normal course of business, we are subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings; contractual indemnities; product and environmental liabilities; and tax matters. We are required to accrue for such loss contingencies if it is probable that the outcome will be unfavourable, and if the amount of the loss can be reasonably estimated. We evaluate our exposure to loss based on the progress of each contingency, experience in similar contingencies and consultation with internal and external legal counsel. We re-evaluate all contingencies as additional information becomes available. Given the uncertainties inherent in complex litigation and other contingencies, these evaluations can involve significant judgment about future events. The ultimate outcome of any litigation or other contingency may be material to our results of operations, financial position and cash flows. For a discussion of our current legal proceedings, see note 23 to the audited consolidated financial statements for the fiscal year ended December 31, 2007.

        We are self-insured for a portion of our product liability coverage. Reserves are established for all reported but unpaid claims and for estimates of incurred but not reported claims. Significant judgment is applied to estimate those reserves, and we engage an independent actuary to conduct an actuarial assessment of our liability. If actual claims are in excess of these estimates, additional reserves may be required, which could have a material impact on our results of operations.

Income Taxes

        We have operations in various countries that have differing tax laws and rates. A significant portion of our revenue and income is earned in a foreign country, which has low domestic tax rates. 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. Our income tax reporting is subject to audit by domestic and foreign tax authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income allocated or earned among the different jurisdictions in which we operate; changes in tax laws in these jurisdictions; changes in tax treaties between various countries in which we operate; changes in our eligibility for benefits under those tax treaties; and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in an increase in the effective tax rate on all or a portion of the income of our company and/or any of our subsidiaries to a rate possibly exceeding the statutory tax rate of Canada or the U.S.

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        Our provision for income taxes is based on a number of estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of income earned in our various operating jurisdictions, the availability of benefits under tax treaties, and the rates 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 applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries 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 income tax provisions and accruals. This could result in a material effect on our consolidated income tax provision, results of operations and financial position for the period in which such determinations are made.

        We have recorded a valuation allowance on deferred tax assets primarily relating to operating losses, SR&ED pool, ITC carryforward balances, provisions for legal settlements, and future tax depreciation. 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 our provision for income taxes in a given period.

Stock-Based Compensation

        Effective January 1, 2006, we adopted the fair value-based method for recognizing employee stock-based compensation. Prior to 2006, we did not recognize stock-based compensation expense for stock options granted to employees at fair market value. We use the Black-Scholes option-pricing model to calculate stock option values, which requires certain assumptions related to the expected life of the option, future stock price volatility, risk-free interest rate, and dividend yield. The expected life of the option is based on historical exercise and forfeiture patterns. Future stock price volatility is based on historical volatility of our common shares over the expected life of the option. The risk-free interest rate is based on the rate at the time of grant for zero-coupon Canadian government bonds with a remaining term equal to the expected life of the option. Dividend yield is based on the option's exercise price and expected annual dividend rate at the time of grant. Changes to any of these assumptions, or the use of a different option-pricing model, such as the lattice model, could produce a different fair value for stock-based compensation expense, which could have a material impact on our results of operations.

        Commencing in 2008, we expect stock-based compensation related to employee stock options to decline significantly, due to our decision to award RSUs, rather than stock options, to most employees under our 2007 Equity Compensation Plan. We will determine the fair value of each RSU granted based on the trading price of our common shares on the date of grant, unless the vesting of the RSU is conditional on the attainment of any applicable performance goals specified by our Board of Directors, in which case we will use a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that the performance condition will be achieved.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Standards

        On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on the recognition and derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. The cumulative effect of the application of the

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provisions of FIN 48 as of January 1, 2007 resulted in a reclassification of $31.4 million from current income taxes payable to non-current income taxes payable, a $2.2 million decrease in the valuation allowance against the net deferred tax asset, and a corresponding increase in the non-current income taxes payable of $2.2 million. Upon the adoption of FIN 48, we classified uncertain tax positions as non-current income taxes payable unless expected to be paid within one year. The adoption of FIN 48 is more fully described in note 20 to the audited consolidated financial statements for the fiscal year ended December 31, 2007.

Recently Issued Accounting Standards, Not Adopted as of December 31, 2007

        In September 2006, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 establishes a framework for measuring fair value in U.S. GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS 157, as issued, was effective beginning January 1, 2008. In February 2008, however, the FASB agreed to a one-year deferral of the effective date for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. We do not expect the adoption of SFAS 157 for financial assets and financial liabilities will have a material effect on our consolidated financial statements, or result in any significant changes to our valuation methodologies or key considerations used in valuations. We are currently evaluating the effect that the adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities will have on our consolidated financial statements.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), providing companies with an option to report many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Accordingly, we are required to adopt SFAS 159 beginning January 1, 2008. We do not expect to elect the fair value option for any financial assets and financial liabilities that are not currently recorded at fair value.

        In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141R") and SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). These standards significantly change the accounting for, and reporting of, business combination transactions and noncontrolling (minority) interests in consolidated financial statements, including requirements to recognize noncontrolling interests at fair value; capitalize in-process research and development assets acquired; and expense acquisition related costs as incurred. SFAS 141R and SFAS 160 are required to be adopted simultaneously and are effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. Accordingly, we are required to adopt these standards beginning January 1, 2009. We are currently evaluating the effect that the adoption of SFAS 141R and SFAS 160 will have on our consolidated financial statements.

UNRESOLVED SEC STAFF COMMENTS

        The staff of the SEC has advised us that they have reviewed the 2006 Form 20-F/A. Based on their review of that document, the staff provided comments regarding certain accounting disclosures and methods. On July 16, 2007, we provided our responses to the staff's comments. On August 15, 2007, we provided further clarification to the staff with respect to additional comments that were raised by the staff based on their review of our July 16, 2007 responses. Since August 15, 2007, we have not had any further communication with the staff in relation to this matter. However, based on our communications to date, we have incorporated certain amended disclosures into this MD&A, and our 2007 Form 20-F. The eventual outcome of this matter may result in modifications to the 2006 Form 20-F/A, and/or the incorporation of additional disclosure items into future documents filed with the SEC.

OSC CONTINUOUS DISCLOSURE REVIEW

        On February 5, 2008, we were advised that the OSC's Corporate Finance Branch had recently selected our company for a full review of its continuous disclosure record. On the basis of this review, the OSC staff has

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raised questions regarding certain accounting disclosures and methods. We are currently in the process of preparing our response to the OSC staff. The eventual outcome of this matter may result in modifications to past filings with the CSA, and/or the incorporation of additional disclosure items into future documents filed with the CSA.

MANAGEMENT'S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

Disclosure Controls and Procedures

        We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that the material financial and non-financial information required to be disclosed in filings with the SEC is recorded, processed, summarized, and reported in a timely manner. Based on our evaluation, our management, including the CEO and Chief Financial Officer ("CFO"), has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2007 are effective. Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within our company to disclose material information otherwise required to be set forth in our reports.

Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal accounting controls systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records are adequate for preparation of financial statements in accordance with GAAP and other financial information.

        Under the supervision and with the participation of management, including the CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under this framework, management concluded that our internal controls over financial reporting were effective as of December 31, 2007.

Changes in Internal Control Over Financial Reporting

        There were no changes in our internal controls over financial reporting identified in connection with the evaluation thereof by our management, including the CEO and CFO, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, other than as described below.

        During the 2007 first quarter financial close process, an error was discovered in a spreadsheet used to (a) track quantities of Zovirax® products that we may purchase at reduced supply prices from GSK, and (b) calculate amortization expense on a related long-term asset that is being amortized to cost of goods sold. This error caused us to amend our annual report on Form 20-F for the fiscal year ended December 31, 2006, in order to restate our previously issued financial statements. In connection with that restatement, we evaluated the impact of the accounting error on our assessment of internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as at December 31, 2006. This re-evaluation was conducted in accordance with the provisions of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2.

        Based on the information and facts available during our evaluation, we concluded that the data-input errors occurring within the tracking of quantities of Zovirax® product, and the calculation of amortization of the related long-term asset, represented a material weakness. We also concluded that the failure of subsequent

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evaluation and analysis performed by local management to detect those errors on a timely basis also represented a material weakness.

        To address the material weaknesses identified, management implemented measures to remediate the control deficiency in the location where the foregoing error occurred. With respect to spreadsheets, these measures included strengthening internal controls around their development and usage, and the review and related analysis of those spreadsheets by local management. These measures were implemented in the second quarter of 2007.

        Management also examined the possibility of incorporating the automation of the spreadsheet-based data into our company's Enterprise Resource Planning ("ERP") application, but determined that the extraction of this information from the ERP application to be an inefficient and cost prohibitive process. Management therefore decided to continue the use of the existing spreadsheet in tracking the quantities of Zovirax® product purchased and the calculation of amortization expense on the related long-term asset. This spreadsheet has been tested to ensure no processing errors exist. Management also provided additional training with respect to the development and testing of spreadsheets to the finance and accounting groups throughout the Company.

        Management has assessed the effectiveness of the foregoing measures as of December 31, 2007, and has concluded that the material weaknesses identified have been effectively remediated.

CANADIAN GAAP SUPPLEMENTAL INFORMATION

        The following supplemental information is provided to summarize the material differences that would have resulted in the MD&A had it been based on consolidated financial statements prepared in accordance with Canadian GAAP. Material differences between U.S. GAAP and Canadian GAAP related to recognition, measurement and presentation, together with a reconciliation of certain items, are explained in note 27 to the audited consolidated financial statements for the fiscal year ended December 31, 2007.

Results of Operations

 
  Years Ended December 31
 
  2007
  2006
  2005
 
  ($ in 000s, except per share data)

Income from continuing operations — U.S. GAAP   $ 195,539   $ 215,474   $ 257,015
Income from continuing operations — Canadian GAAP     154,838     153,131     109,821

Net income — U.S. GAAP

 

 

195,539

 

 

211,626

 

 

246,440
Net income — Canadian GAAP     154,838     149,283     99,246

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 
Income from continuing operations — U.S. GAAP   $ 1.22   $ 1.35   $ 1.61
Income from continuing operations — Canadian GAAP   $ 0.96   $ 0.96   $ 0.69

Net income — U.S. GAAP

 

$

1.22

 

$

1.32

 

$

1.54
Net income — Canadian GAAP   $ 0.96   $ 0.93   $ 0.62
   
 
 

        In 2007, 2006 and 2005, income from continuing operations and net income under Canadian GAAP would have been $40.7 million, $62.3 million and $147.2 million lower, respectively, than income from continuing operations and net income reported under U.S. GAAP.

        The principal reconciling difference that affects our results of operations under Canadian GAAP relates to the treatment of acquired research and development assets. Under Canadian GAAP, additional amortization expense of $40.1 million, $49.3 million and $98.1 million in 2007, 2006 and 2005, respectively, would have been

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recognized related to acquired research and development assets that were capitalized at the time of acquisition. In addition, under Canadian GAAP, we recorded impairment charges of $2.4 million, $9.5 million and $45.0 million in 2007, 2006 and 2005, respectively, to write down the carrying value of acquired research and development assets associated with product-development projects that were discontinued. Under U.S. GAAP, those assets were written off at the time of acquisition.

Financial Condition

 
  At December 31
 
  2007
  2006
 
  ($ in 000s)

Long-lived assets — U.S. GAAP   $ 1,005,147   $ 1,072,699
Long-lived assets — Canadian GAAP     1,077,531     1,185,850

Shareholders' equity — U.S. GAAP

 

 

1,297,819

 

 

1,302,257
Shareholders' equity — Canadian GAAP     1,370,203     1,409,498
   
 

Long-Lived Assets

        At December 31, 2007 and 2006, long-lived assets under Canadian GAAP would have been higher by $72.4 million and $113.2 million, respectively, than long-lived assets reported under U.S. GAAP. The principal reconciling difference that affects long-lived assets under Canadian GAAP relates to the unamortized carrying value of capitalized acquired research and development assets. The carrying value of those assets under Canadian GAAP amounted to $69.8 million and $112.3 million at December 31, 2007 and 2006, respectively.

Shareholders' Equity

        At December 31, 2007 and 2006, shareholders' equity under Canadian GAAP would have been higher by $72.4 million and $107.2 million, respectively, than shareholders' equity reported under U.S. GAAP. The principal reconciling difference that affects shareholders' equity under Canadian GAAP relates to the aforementioned unamortized carrying value of capitalized acquired research and development assets.

        At December 31, 2006, an additional reconciling difference that affected shareholders' equity related to the valuation of available-for-sale investments. Prior to January 1, 2007, available-for-sale investments were reported at cost under Canadian GAAP. Effective January 1, 2007, we adopted The Canadian Institute of Chartered Accountants (CICA) Handbook Sections 1506, "Accounting Changes", 1530, "Comprehensive Income" and 3855, "Financial Instruments — Recognition and Measurement", and remeasured those investments at fair value. Under U.S. GAAP, unrealized gains on available-for-sale investments prior to January 1, 2007, were recorded in the accumulated other comprehensive income component of shareholders' equity. At December 31, 2006, the cost of available-for-sale investments under Canadian GAAP would have been lower by $5.8 million than the estimated fair value of those investments reported under U.S. GAAP.

Cash flows

        There were no material differences between our cash flows as reported under U.S. GAAP and our cash flows that would have been reported under Canadian GAAP.

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Item 6. Directors, Senior Management and Employees

A.    Directors and Senior Management

Directors

        The name, municipality of residence, age as of March 12, 2008 and position with us of each of the current directors are set forth below.

Name and Residence
  Age
  Position
Dr. Douglas J.P. Squires(1)
Carversville, Pennsylvania, USA
  59   Interim Chairman and Chief Executive Officer
William (Bill) Wells(1)(2)(3)(4)
Briarcliff Manor, New York, USA
  47   Lead Director
Wilfred G. Bristow(1)(5)
Campbellville, Ontario, Canada
  76   Director
Dr. Laurence E. Paul(1)(3)(5)
Los Angeles, California, USA
  43   Director
Lloyd M. Segal(1)(4)(6)
Montreal, Quebec, Canada
  43   Director
Jamie Sokalsky(1)(3)
Toronto, Ontario, Canada