Valeant Pharmaceuticals Files Restated Financial Statements and September 30, 2006 Form 10-Q

Valeant Pharmaceuticals International (NYSE:VRX) today announced that it has filed with the United States Securities and Exchange Commission (SEC) an amended annual report on Form 10-K for the year ended December 31, 2005. The company also filed its quarterly report on Form 10-Q for the quarter ended September 30, 2006. The company expects to file its amended quarterly reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 in the next few days. The company has restated its financial statements primarily to reflect the results of its review of historical stock option granting practices. The company recorded a cumulative pretax charge of $31.1 million for additional compensation expense on stock options granted from 1982 through June 2006 as a result of the completed review. The company also restated its financial statements to correct certain additional accounting errors that were considered immaterial at the time the financial statements were prepared, and to record the tax effect of these items and other issues. The cumulative after-tax impact of all restatement charges was $23.5 million. Stock Option Review: As previously announced, the company received a request from the SEC for data on its stock option granting practices as part of an informal inquiry. Following this request, a special committee of the board, comprised solely of independent directors (the Special Committee), conducted an extensive review of the company’s historical stock option granting practices and related accounting. The Special Committee has concluded its comprehensive investigation and reported its findings to the board of directors. For the period between November 1994 and July 2006, the Special Committee reviewed paper and electronic documents supporting or related to the company’s stock option grants, the accounting for those grants, compensation-related financial and securities disclosures and e-mail communications, and conducted interviews with numerous current and former employees and current and former members of the board of directors. The Special Committee also analyzed supporting documentation for awards granted between 1982 and 1994. While the Special Committee concluded that there were some errors as late as January 2006, the majority of errors in accounting for options pertained to those options granted prior to the change in the company’s board of directors and management in mid-2002 (the Change in Control). None of the errors that occurred in periods after the Change in Control related to options granted to the chief executive officer, chief financial officer or members of the board of directors. The Special Committee found that the recorded grant dates for the majority of the stock options awarded prior to the Change in Control differed from the actual grant dates for those transactions. In connection with that finding, the Special Committee concluded that, with respect to many broad-based grants of stock options prior to the Change in Control, prior management used a methodology of selecting a recorded grant date based on the lowest closing price during some time period (e.g., quarter, ten trading days) preceding the actual grant date. While the Special Committee did not reach a conclusion as to how prior management selected other recorded grant dates for broad-based or individual grants that did not use the lowest closing price methodology, there is some evidence that dates were selected based on the occurrence of an event or when the company’s former chief executive officer, Milan Panic, agreed in principle to the grant. The Special Committee also found that, due to flaws in the processes relied on to make its annual broad-based grants after the Change in Control, the company did not correctly apply the requirements of Accounting Principles Board Opinion No. 25. These option accounting errors, however, differ significantly from those made prior to the Change in Control. Unlike the broad-based grants made prior to the Change in Control, for which the recorded grant dates were selected from a period prior to the approval dates, all of the broad-based grants after the Change in Control were approved either at regularly scheduled meetings of the compensation committee or at meetings of the board of directors, and the exercise price for each of these grants was the closing price on the date of such meetings. The stock option accounting errors after the Change in Control resulted from allocation adjustments to the list of grants to individual rank-and-file employees after the compensation committee or the board of directors had approved the allocation of an aggregate number of shares to be available to rank-and-file employees. In no event did the adjustments result in shares being granted in excess of the aggregate number of shares approved by the compensation committee or the board of directors. The Special Committee concluded that there was no evidence that management operating since the Change in Control were aware that the processes used to grant and account for broad-based grants were flawed or that the process employed was for the purpose of granting in-the-money stock options. In reaching this conclusion, the Special Committee took note that that process had been consistently employed even for the November 2005 grants in which the process resulted in stock option grants at higher exercise prices than the closing price of the company’s common stock on the date of finalization of the allocation list for rank-and-file employees. The Special Committee also concluded that there was no evidence that current management was aware of any financial statement impact, tax consequences or disclosure implications of its flawed processes. Based on the findings of the Special Committee, the board of directors has concluded that the company’s consolidated financial statements as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003, and the selected financial data as of and for the years ended December 31, 2002 and 2001, should be restated to record additional stock-based compensation expense, correct certain accounting errors, and record related tax effects. The impacts of the restatement adjustments on Valeant’s statement of operations for the periods are presented in Table 10 to this release. Adjustments for periods prior to 2003 have been made to the Selected Financial Data in item 6 of the amended annual report on Form 10-K for the year ended December 31, 2005 and a cumulative adjustment has been made to the December 31, 2004 balance sheet for all adjustments for periods prior to that time. Valeant has not amended and does not intend to amend any of its other previously filed annual reports on Form 10-K for the periods affected by the restatements or adjustments. The board of directors also concluded that the company’s condensed consolidated financial statements and related disclosures for the quarters ended March 31, 2006 and 2005, the quarters ended June 30, 2006 and 2005 and the quarter ended September 30, 2005 should be restated. Revised September 30, 2006 Results: On November 2, 2006, Valeant released preliminary financial information for the quarter ended September 30, 2006. Today, the company released final financial results for the quarter and year-to-date periods ended September 30, 2006. The results were revised to reflect the effects of the restatement associated with the stock option review, as well as information that has subsequently become available which has altered certain estimates and assumptions used in the preparation of the September 30, 2006 preliminary information. Income from continuing operations for the September 30, 2006 quarter improved to $0.18 per diluted share from the preliminary $0.14 per diluted share released earlier, adjusted for non-GAAP items. The improvement is due to adjustments made to certain estimates and assumptions used in the preparation of the preliminary financial information to recognize new information received, principally to eliminate an inventory provision for Infergen(R) for $4.8 million following positive stability testing results allowing for extension of the shelf life of the product. The company also restated its results for the quarter and nine months ended September 30, 2005 primarily as a result of the stock option review. Revised Third Quarter 2006 vs. Third Quarter 2005 Highlights: Revenues increased 7 percent to $220.0 million, compared to $205.4 million. Product sales increased 8 percent to $199.0 million, compared to $183.4 million. Ribavirin royalties decreased 4 percent to $21.0 million, compared to $22.0 million. Income from continuing operations was $6.2 million, or $0.06 per diluted share, compared to a loss of $3.8 million, or $0.04 per diluted share. Adjusted for non-GAAP items, income from continuing operations was $16.8 million, or $0.18 per diluted share, compared to $8.2 million, or $0.09 per diluted share. The company’s financial results for the quarter and year-to-date periods ended September 30, 2006, compared to the same periods in 2005 are attached to this release. A reconciliation of GAAP to non-GAAP results is provided in Tables 2-4. A reconciliation of revised financial results for the September 30, 2006 quarter to the previously released preliminary information is provided in Table 9. Fourth Quarter 2006 Results Conference Call Information: Valeant Pharmaceuticals will host a conference call on Wednesday, February 28, 2007 at 10:00 a.m. EST (7:00 a.m. PST) to discuss its 2006 fourth quarter and year results. The dial-in number to participate on this call is 877-295-5743, confirmation code 6658657. International callers should dial 706-679-0845, confirmation code 6658657. A replay will be available approximately two hours following the conclusion of the conference call through Wednesday, March 7, 2007 and can be accessed by dialing 800-642-1687, confirmation code 6658657. The company also will webcast the call live over the Internet, which will be hosted in the investor relations section of its corporate Web site at www.valeant.com. Participants should allow approximately five to ten minutes prior to the call’s start time to visit the site and download any streaming media software needed to listen to the Internet webcast. An online archive of the webcast will be available following the end of the live call in the webcast archive portion of the investor relations section at www.valeant.com. About Valeant: Valeant Pharmaceuticals International (NYSE:VRX) is a global specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of neurology, infectious disease and dermatology. More information about Valeant can be found at www.valeant.com. FORWARD-LOOKING STATEMENTS: This press release contains forward-looking statements, including, but not limited to, statements regarding the company’s plans to file amended quarterly reports on Form 10-Q. These statements are based upon the current expectations and beliefs of management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the risks and uncertainties relating to its ability to file amended quarterly reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, the completion of the SEC’s informal inquiry, and other risks and uncertainties discussed in the company’s filings with the SEC. Valeant wishes to caution the reader that these factors are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements. Valeant also cautions the reader that undue reliance should not be placed on any of the forward-looking statements, which speak only as of the date of this release. The company undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this release or to reflect actual outcomes. NON-GAAP INFORMATION: To supplement the consolidated financial results prepared in accordance with generally accepted accounting principles (GAAP), the company uses non-GAAP financial measures that exclude certain items, such as in-process research and development expenses, special charges and credits, stock compensation expense, gain on litigation settlement, and results of discontinued businesses. Management does not consider the excluded items part of day-to-day business or reflective of the core operational activities of the company as they result from transactions outside the ordinary course of business, or, as in the case of stock compensation expense, adjusts for this impact since such amounts were not included in comparative periods. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. By disclosing non-GAAP financial measures, management intends to provide investors with a more meaningful, consistent comparison of the company’s core operating results and trends for the periods presented. Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Financial Tables Follow Valeant Pharmaceuticals International Table 1 Consolidated Condensed Statement of Income For the Three and Nine Months Ended September 30, 2006 and 2005   Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share data) 2006  2005  % Change  2006  2005  % Change    Product sales $ 199,006  $ 183,442  8% $ 589,163  $ 526,166  12% Ribavirin royalties 20,968  21,953  -4% 60,694  65,494  -7% Total revenues 219,974  205,395  7% 649,857  591,660  10%   Cost of goods sold (a) 60,305  54,637  10% 184,665  156,423  18% Selling expenses (a) 67,582  59,052  14% 198,127  173,391  14% General and admini-strative expenses (a) 27,212  26,792  2% 86,325  77,607  11% Research and development costs (a) 20,849  28,961  -28% 77,270  82,421  -6% Acquired in-process research and development (b) -  -  -  126,399  -  Gain on litigation settlement (c) (17,550) -  (51,550) -  Restructuring charges (d) 17,139  135  -  96,687  506  -  Amortization expense 18,424  15,782  17% 53,461  46,961  14% 193,961  185,359  5% 644,985  663,708  -3% Income (loss) from operations 26,013  20,036  4,872  (72,048)   Interest expense, net (7,751) (6,884) (23,677) (20,494) Other income (expense), net including translation and exchange (454) (1,207) 1,240  (5,629)   Income (loss) from continuing operations before provision for income taxes and minority interest 17,808  11,945  (17,565) (98,171)   Provision for income taxes 11,646  15,569  24,351  42,340  Minority interest 1  184  2  489  Income (loss) from continuing operations 6,161  (3,808) (41,918) (141,000)   Income (loss) from discontinued operations, net 7,546  1,123  7,137  (2,367)     Net income (loss) $ 13,707  $ (2,685) $ (34,781) $(143,367)     Basic earnings per common share Income (loss) from continuing operations $ 0.07  $ (0.04) $ (0.45) $ (1.54) Discontinued operations, net 0.08  0.01  0.08  (0.03) Net income (loss) $ 0.15  $ (0.03) $ (0.37) $ (1.57) Shares used in per share computation 93,093  92,626  92,907  91,357    Diluted earnings per common share Income (loss) from continuing operations $ 0.06  $ (0.04) $ (0.45) $ (1.54) Discontinued operations, net 0.08  0.01  0.08  (0.03) Net income (loss) $ 0.14  $ (0.03) $ (0.37) $ (1.57) Shares used in per share computation 95,265  92,626  92,907  91,357    (a) In 2006 Valeant adopted a new accounting standard FAS 123R which requires that the estimated value of employee stock options and stock purchase plans be recorded as an expense. Stock compensation expense in the three months ended September 30, 2006 totaled $5.7 million, consisting of $0.2 million in cost of sales, $0.8 million in selling expenses, $0.5 million in research and development and $4.2 million in general and administrative expenses. In the nine months ended September 30, 2006 stock compensation expense totaled $16.4 million, consisting of $1.0 million in cost of sales, $2.5 million in selling expenses, $2.1 million in research and development and $10.8 million in general and administrative expenses. In 2005, Valeant recorded $0.8 million and $2.5 million of stock compensation expense in the three and nine month periods ended September 30, 2005, respectively. Had the new accounting standard been adopted in 2005, stock compensation expense would have been increased by $5.1 million and $10.1 million in the three and nine month periods ended September, 30 2005, respectively.   (b) In-process research and development (IPR&D) charges related to the acquisition of Xcel.   (c) For the three months ended September 30, 2006, the $17.6 million gain relates to the settlement of disclosed litigation with Milan Panic. For the nine months ended September 30, 2006, the $51.6 million total comprises this gain and the settlement with the Republic of Serbia.   (d) Charges relate to our restructuring program which includes the write-down of manufacturing plants which will be sold, the write off of certain information system costs and a portion of the employee severance costs associated with our restructuring plan. The $96.7 million for the nine months ended September 30, 2006 includes approximately $13.9 million for employee severance benefits associated with the restructuring program. Valeant Pharmaceuticals International Table 2 Consolidated Condensed Statements of Operations and Reconciliation of Non-GAAP Adjustments     Three Months Ended September 30, 2006 Non-GAAP GAAP Adjustments Adjusted (In thousands, except per share data)   Product sales $ 199,006  $ -  $ 199,006  Ribavirin royalties 20,968  -  20,968  Total revenues 219,974  -  219,974    Cost of goods sold 60,305  (225) (a) 60,080  Selling expenses 67,582  (745) (a) 66,837  General and administrative expenses 27,212  (4,151) (a) 23,061  Research and development costs 20,849  (533) (a) 20,316  Acquired in-process research and development -  -  -  Gain on litigation settlement (17,550) 17,550  (b) -  Restructuring charges 17,139  (17,139) (c) -  Amortization expense 18,424  (683) 17,741  193,961  (5,926) 188,035  Income from operations 26,013  5,926  31,939    Interest expense, net (7,751) -  (7,751) Other expense, net including translation and exchange (454) -  (454)   Income from continuing operations before provision for income taxes and minority interest 17,808  5,926  23,734    Provision for income taxes 11,646  (4,749) (d) 6,897  Minority interest 1  -  1  Income from continuing operations 6,161  10,675  16,836    Income from discontinued operations, net 7,546  -  7,546      Net Income $ 13,707  $ 10,675  $ 24,382      Basic earnings per common share Income from continuing operations $ 0.07  $ 0.18  Discontinued operations, net 0.08  0.08  Net Income $ 0.15  $ 0.26  Shares used in per share computation 93,093  93,093    Diluted earnings per common share Income (loss) from continuing operations $ 0.06  $ 0.18  Discontinued operations, net 0.08  0.08  Net income $ 0.14  $ 0.26  Shares used in per share computation 95,265  95,265    (a) Consists of stock-based compensation expense totaling $5.7 million. After income taxes, the effect on non-GAAP adjusted net income is $4.1 million or $.04 per share.   (b) Gain of $17.6 milion results from settlement of disclosed litigation with Milan Panic.   (c) Charges relate to our restructuring program which includes the write-down of manufacturing plants which will be sold and a portion of the employee severance costs associated with our restructuring plan. The $17.1 million for the three months ended September 30, 2006 includes approximately $1.9 million for employee severance benefits associated with the restructuring program.   (d) Tax effect for non-GAAP adjustments, including tax benefits from U.S. net operating losses not recognized for GAAP purposes.   To supplement the consolidated financial results prepared in accordance with Generally Accepted Accounting Principles (GAAP), the company uses non-GAAP financial measures that exclude certain items, such as in-process research and development expenses, special charges and credits, stock compensation expense and results of discontinued businesses. Management does not consider the excluded items part of the day-to-day business or reflective of the core operational activities of the company as they result from transactions outside the ordinary course of business. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. Guidance is provided only on a non-GAAP basis due to the inherent difficulty in forecasting such items. By disclosing non-GAAP financial measures, management intends to provide investors with a more meaningful, consistent comparison of the company’s core operating results and trends for the periods presented. Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Valeant Pharmaceuticals International Table 3 Consolidated Condensed Statements of Operations and Reconciliation of Non-GAAP Adjustments     Nine Months Ended September 30, 2006 Non-GAAP GAAP Adjustments Adjusted (In thousands, except per share data)   Product sales $ 589,163  $ -  $ 589,163  Ribavirin royalties 60,694  -  60,694  Total revenues 649,857  -  649,857    Cost of goods sold 184,665  (1,026) (a) 183,639  Selling expenses 198,127  (2,458) (a) 195,669  General and administrative expenses 86,325  (10,752) (a) 75,573  Research and development costs 77,270  (2,116) (a) 75,154  Acquired in-process research and development -  -  -  Gain on litigation settlement (b) (51,550) 51,550  (b) -  Restructuring charges 96,687  (96,687) (c) -  Amortization expense 53,461  (683) 52,778  644,985  (62,172) 582,813  Income from operations 4,872  62,172  67,044    Interest expense, net (23,677) -  (23,677) Other income, net including translation and exchange 1,240  -  1,240    Income (loss) from continuing operations before provision for income taxes and minority interest (17,565) 62,172  44,607    Provision for income taxes 24,351  (11,417) (d) 12,934  Minority interest 2  -  2  Income (loss) from continuing operations (41,918) 73,589  31,671    Income from discontinued operations, net 7,137  -  7,137      Net Income (loss) $ (34,781) $ 73,589  $ 38,808      Basic earnings per common share Income (loss) from continuing operations $ (0.45) $ 0.34  Discontinued operations, net 0.08  0.08  Net income (loss) $ (0.37) $ 0.42  Shares used in per share computation 92,907  92,907    Diluted earnings per common share Income (loss) from continuing operations $ (0.45) $ 0.33  Discontinued operations, net 0.08  0.08  Net income (loss) $ (0.37) $ 0.41  Shares used in per share computation 92,907  94,880  (e)     (a) Consists of stock based compensation expense totalling $16.4 million. After income taxes, the effect on non-GAAP adjusted net income is $12.0 million or $.13 per share.   (b) Gain of $51.6 million results from settlements of litigation with Milan Panic and the dispute with the Republic of Serbia.   (c) Charges relate to our restructuring program which includes the write-down of manufacturing plants which will be sold, the write off of certain information system costs and a portion of the employee severance costs associated with our restructuring plan. The $96.7 million for the nine months ended September 30, 2006 includes approximately $13.9 million for employee severance benefits associated with the restructuring program.   (d) Tax effect for non-GAAP adjustments, including tax benefits from U.S. net operating losses not recognized for GAAP purposes.   (e) Shares used in adjusted diluted EPS includes the effect of diluted shares which are anti-dilutive to GAAP EPS.   See non-GAAP financial measure disclosure on Table 2. Valeant Pharmaceuticals International Table 2.1 Consolidated Condensed Statements of Operations and Reconciliation of Non-GAAP Adjustments     Three Months Ended September 30, 2005 Non-GAAP GAAP Adjustments Adjusted (In thousands, except per share data)   Product sales $ 183,442  $ -  $ 183,442  Ribavirin royalties 21,953  -  21,953  Total revenues 205,395  -  205,395    Cost of goods sold 54,637  (63) (a) 54,574  Selling expenses 59,052  (35) (a) 59,017  General and administrative expenses 26,792  (480) (a) 26,312  Research and development costs 28,961  (224) (a) 28,737  Acquired in-process research and development -  -  -  Restructuring charges 135  (135) (b) -  Amortization expense 15,782  -  15,782  185,359  (937) 184,422  Income from operations 20,036  937  20,973    Interest expense, net (6,884) -  (6,884) Other expense, net including translation and exchange (1,207) -  (1,207)   Income from continuing operations before provision for income taxes and minority interest 11,945  937  12,882    Provision for income taxes 15,569  (11,061) (c) 4,508  Minority interest 184  -  184  Income (loss) from continuing operations (3,808) 11,998  8,190    Income (loss) from discontinued operations, net 1,123  (1,777) (d) (654)     Net Income (loss) $ (2,685) $10,221  $7,536      Basic earnings per common share Income (loss) from continuing operations $ (0.04) $ 0.09  Discontinued operations, net 0.01  (0.01) Net income (loss) $ (0.03) $ 0.08  Shares used in per share computation 92,626  92,626    Diluted earnings per common share Income (loss) from continuing operations $ (0.04) $ 0.09  Discontinued operations, net 0.01  (0.01) Net income (loss) $ (0.03) $ 0.08  Shares used in per share computation 92,626  95,316  (e)   (a) Consists of stock-based compensation expense totaling $0.8 million.   (b) Related to net loss on sale of manufacturing sites.   (c) The tax adjustment of $11.1 million includes $5.5 million attributable to U.S. net operating losses ("NOL") not recognized for GAAP purposes and $3.9 million related to the repatriation of foreign earnings related to the American Jobs Creation Act of 2004.   (d) Net gain on sale of Hungary discontinued operations.   (e) Shares used in adjusted diluted EPS include the effect of diluted shares which are anti-dilutive to GAAP EPS.   See non-GAAP financial measure disclosure on Table 2. Valeant Pharmaceuticals International Table 3.1 Consolidated Condensed Statements of Operations and Reconciliation of Non-GAAP Adjustments     Nine Months Ended September 30, 2005 Non-GAAP GAAP Adjustments Adjusted (In thousands, except per share data)   Product sales $ 526,166  $ -  $ 526,166  Ribavirin royalties 65,494  -  65,494  Total revenues 591,660  -  591,660    Cost of goods sold 156,423  (188) (a) 156,235  Selling expenses 173,391  (105) (a) 173,286  General and administrative expenses 77,607  (1,485) (a) 76,122  Research and development costs 82,421  (674) (a) 81,747  Acquired in-process research and development 126,399  (126,399) (b) -  Restructuring charges 506  (506) (c) -  Amortization expense 46,961  (1,532) (d) 45,429  663,708  (130,889) 532,819  Income (loss) from operations (72,048) 130,889  58,841    Interest expense, net (20,494) -  (20,494) Other expense, net including translation and exchange (5,629) -  (5,629)   Income (loss) from continuing operations before provision for income taxes and minority interest (98,171) 130,889  32,718    Provision for income taxes 42,340  (30,889) (e) 11,451  Minority interest 489  -  489  Income (loss) from continuing operations (141,000) 161,778  20,778    Loss from discontinued operations, net (2,367) (1,779) (f) (4,146)     Net Income (loss) $(143,367) $ 159,999  $16,632      Basic earnings per common share Income (loss) from continuing operations $ (1.54) $ 0.23  Discontinued operations, net (0.03) (0.05) Net income (loss) $ (1.57) $ 0.18  Shares used in per share computation 91,357  91,357    Diluted earnings per common share Income (loss) from continuing operations $ (1.54) $ 0.22  Discontinued operations, net (0.03) (0.04) Net income (loss) $ (1.57) $ 0.18  Shares used in per share computation 91,357  94,612  (g)     (a) Consists of stock-based compensation expense totaling $2.5 million.   (b) In-process research and development charge related to the acquisition of Xcel.   (c) Impairment charge on our manufacturing site in China and net gain on sale of four manufacturing sites.   (d) Impairment charges on products sold in Spain and North America.   (e) The IPR&D charge and the restructuring charge are not deductible for income tax purposes. The tax adjustment of $30.9 million includes $22.2 million relating to our estimate of expenses associated with various tax issues raised by the Internal Revenue Service and $15.7 million attributable to U.S. NOLs not recognized for GAAP purposes partially offset by the reversal of foreign tax valuation allowances.   (f) Net gain on sale of Hungary discontinued operations.   (g) Shares used in adjusted diluted EPS includes the effect of diluted shares which are anti-dilutive to GAAP EPS.   See non-GAAP financial measure disclosure on Table 2. Valeant Pharmaceuticals International Table 4 GAAP reconciliation of basic and diluted earnings per share For the Three and Nine Months Ended September 30, 2006 and 2005     Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share data) 2006  2005  2006  2005    Income (loss) from continuing operations $ 6,161  $(3,808) $(41,918) $(141,000)   Non-GAAP adjustments: Acquired IPR&D -  -  -  126,399  Stock-based compen-sation expense 5,654  802  16,352  2,452  Product impairment 683  -  683  1,532  Gain on litigation settlement (17,550) -  (51,550) -  Restructuring charges 17,139  135  96,687  506  Tax effect on the above charges and tax settlements 4,749  11,061  11,417  30,889      Adjusted income from continuing operations before the above charges $ 16,836  $8,190  $ 31,671  $20,778    Adjusted basic EPS from continuing operations $ 0.18  $ 0.09  $ 0.34  $ 0.23    Adjusted diluted EPS from continuing operations $ 0.18  $ 0.09  $ 0.33  $ 0.22    Shares used in basic per share calculation 93,093  92,626  92,907  91,357    Shares used in diluted per share calculation 95,265  95,316  94,880  94,612          Reconciliation of consolidated operating income to non-GAAP adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA")   Three Months Ended Nine Months Ended September 30, September 30, 2006  2005  % Change  2006  2005  % Change    Consolidated operating income (loss) (GAAP) $ 26,013  $20,036  30% $ 4,872  $(72,048) --  Depreciation and amortization 23,637  22,823  4% 70,707  68,321  3% EBITDA (non-GAAP) (a) 49,650  42,859  16% 75,579  (3,727) --  Stock-based compensation expense (b) 5,654  802  605% 16,352  2,452  567% Other Non-GAAP adjustments (b) (411) 135  --  45,137  126,905  -64%   Adjusted EBITDA (non-GAAP) (a) $ 54,893  $43,796  25% $ 137,068  $125,630  9%     (a) We believe that EBITDA is a meaningful non-GAAP financial measure as an earnings-derived indicator of the cash flow generation ability of the company. We calculate EBITDA by adding depreciation and amortization back to consolidated operating income. Adjusted EBITDA excludes the additional costs set forth in note (b) below. Adjusted EBITDA, as defined and presented by us, may not be comparable to similar measures reported by other companies.   (b) See Tables 2 and 3 for explanation of non-GAAP adjustments.   See non-GAAP financial measure disclosure in Table 2. Valeant Pharmaceuticals International Table 5 Supplemental Sales Information For the Three and Nine Months Ended September 30, 2006 and 2005 (In thousands)   Three Months Ended % Nine Months Ended % September 30, Increase/ September 30, Increase/ 2006  2005  (Decrease) 2006  2005  (Decrease) Derma-tology Efudix/Efudex(P) $ 15,502  $ 14,365  8% $ 46,061  $ 45,872  0% Kiner-ase(P) 6,622  5,921  12% 22,506  16,177  39% Oxsor-alen-Ultra(P) 613  449  37% 7,714  7,544  2% Derma-tix(P) 2,553  2,249  14% 7,364  6,711  10% Eldoquin (P) 1,935  2,000  (3%) 4,688  4,521  4% Other Derma-tology 8,380  8,590  (2%) 26,206  23,100  13%   Infect-ious Disease Infer-gen(P) (a) 9,134  -  -  34,148  -  -  Vira-zole(P) 2,142  3,377  (37%) 11,723  11,704  0% Other Infect-ious Disease 4,448  4,952  (10%) 14,069  15,049  (7%)   Neurology Diastat(P) (b) 14,802  17,525  (16%) 38,533  36,993  4% Mesti-non(P) 11,449  12,206  (6%) 33,592  32,500  3% Cesa-met(P) 6,487  2,919  122% 13,832  6,893  101% Librax(P) 3,002  4,042  (26%) 10,926  9,792  12% Dalmane/Dalma-dorm(P) 2,538  2,597  (2%) 7,548  8,568  (12%) Migra-nal(P) (b) 1,133  3,744  (70%) 6,949  8,648  (20%) Limbi-trol(P) 1,721  1,430  20% 4,548  4,348  5% TASMAR(P) 1,635  1,438  14% 4,487  3,910  15% Zelapar (P) 3,824  -  -  3,824  -  -  Other Neuro-logy 15,938  10,958  45% 46,103  37,050  24%   Other Thera-peutic Classes Bedo-yecta(P) 13,879  14,549  (5%) 36,970  34,769  6% Solco-seryl(P) 4,908  5,837  (16%) 12,882  13,942  (8%) Biso-card(P) 4,045  3,284  23% 11,522  9,303  24% Nyal(P) 2,134  4,191  (49%) 8,691  12,031  (28%) Espa-ven(P) 3,340  2,324  44% 7,625  5,395  41% Calci-tonin(P) 1,149  1,835  (37%) 5,227  7,154  (27%) Espa-cil(P) 1,235  1,909  (35%) 4,092  4,000  2% Aclo-tin(P) 1,364  1,379  (1%) 3,956  4,269  (7%) Other Pharma-ceutical Products 53,094  49,372  8% 153,377  155,923  (2%)   Total Product Sales $ 199,006  $ 183,442  8% $ 589,163  $ 526,166  12%   Total Promoted Product Sales(P) $ 117,146  $ 109,570  7% $ 349,408  $ 295,044  18%   (a) Infergen was acquired from InterMune on December 30, 2005.   (b) Diastat and Migranal were acquired with the Xcel transaction on March 1, 2005.   (P) Promoted products represent promoted products with estimated annualized sales greater than $5 million. Valeant Pharmaceuticals International   Table 6 Consolidated Condensed Statement of Revenue and Operating Income - Regional For the Three and Nine Months Ended September 30, 2006 and 2005 (In thousands)   Three Months Ended Nine Months Ended September 30, September 30, Revenues 2006  2005  % Change  2006  2005  % Change      North America $ 71,225  $ 60,962  17% $ 219,385  $ 170,396  29% International 60,530  56,178  8% 170,191  152,524  12% EMEA 67,251  66,302  1% 199,587  203,246  -2% Total specialty pharma-ceuticals 199,006  183,442  8% 589,163  526,166  12%   Ribavirin royalty revenues 20,968  21,953  -4% 60,694  65,494  -7%   Consolidated revenues $ 219,974  $ 205,395  7% $ 649,857  $ 591,660  10%   Cost of goods sold $ 60,305  $ 54,637  10% $ 184,665  $ 156,423  18%   Gross profit margin on pharma-ceutical sales 70% 70% 69% 70%         Three Months Ended Nine Months Ended September 30, September 30, Operating Income (Loss) (a) 2006  2005  % Change  2006  2005  % Change      North America $ 16,433  $ 16,555  -1% $ 53,658  $ 49,893  8% International 18,589  17,235  8% 50,695  42,996  18% EMEA 10,658  10,568  1% 27,268  31,449  -13% 45,680  44,358  3% 131,621  124,338  6%   Corporate expenses $ (16,712) $ (15,257) 10% $ (55,272) $ (44,594) 24%   Total specialty pharma-ceuticals 28,968  29,101  0% 76,349  79,744  -4%   Restruct-uring charges (17,139) (135) --  (96,687) (506) --  Gain on litigation settlement 17,550  -  51,550  -  R&D (3,366) (8,930) -62% (26,340) (24,887) 6% Acquired IPR&D -  -  --  -  (126,399) --    Total consol-idated operating income (loss) $ 26,013  $20,036  $ 4,872  $(72,048)       Three Months Ended Nine Months Ended Gross Profit September 30, 2006 % September 30, 2005 % September 30, 2006 % September 30, 2005 %     North America $ 56,311  79% $ 49,467  81% $ 177,163  81% $ 137,000  80% International 43,312  72% 39,315  70% 115,686  68% 106,247  70% EMEA 39,078  58% 40,023  60% 111,649  56% 126,496  62%   Total specialty pharma-ceuticals $ 138,701  70% $ 128,805  70% $ 404,498  69% $ 369,743  70%         (a) Includes $5.7 million and $16.4 million of stock-based compensation expense in the three and nine months ended September 30, 2006, respectively, and $0.8 million and $2.5 million in the three and nine months ended September 30, 2005, respectively. Valeant Pharmaceuticals International Table 7 Consolidated Balance Sheet and Other Data (In thousands)   September 30, December 31, Balance Sheet Data 2006  2005    Cash and cash equivalents $ 267,887  $ 224,856  Marketable securities 9,563  10,210  Total cash and marketable securities $ 277,450  $ 235,066    Accounts receivable, net $ 211,823  $ 187,987  Inventory, net 148,578  136,034  Long-term debt 782,821  788,439  Total equity 416,062  433,944              Other Data Nine Months Ended September 30, September 30, 2006  2005  Cash flow provided by (used in) continuing operations   Operating activities $ 79,161  $ 67,500  Investing activities (22,126) (85,864) Financing activities (18,684) 173,662  Effect of exchange rate changes on cash and cash equivalents 4,680  (8,070)   Net increase in cash and cash equivalents 43,031  147,228  Net increase (decrease) in marketable securities (647) (223,696)   Net increase (decrease) in cash and marketable securities $ 42,384  $ (76,468) Valeant Pharmaceuticals International Table 8 Supplemental Non-GAAP Information on Currency Effect (In thousands)     Three Months Ended Nine Months Ended September 30, September 30, 2006  2005  2006  2005  Consolidated   Product sales $ 199,006  $ 183,442  $ 589,163  $ 526,166  Currency effect (2,403) (1,564) Product sales, excluding currency impact $ 196,603  $ 587,599    Operating income (loss) $ 26,013  $20,036  $ 4,872  $(72,048) Currency effect (160) (1,211) Operating income, excluding currency impact $ 25,853  $ 3,661    Geographic Product Sales   North America pharmaceuticals $ 71,225  $ 60,962  $ 219,385  $ 170,396  Currency effect (734) (2,141) North America pharmaceuticals, excluding currency impact $ 70,491  $ 217,244    International pharmaceuticals $ 60,530  $ 56,178  $ 170,191  $ 152,524  Currency effect 538  (300) International pharmaceuticals, excluding currency impact $ 61,068  $ 169,891    EMEA pharmaceuticals $ 67,251  $ 66,302  $ 199,587  $ 203,246  Currency effect (2,207) 877  EMEA pharmaceuticals, excluding currency impact $ 65,044  $ 200,464    Note: Currency effect is determined by comparing adjusted 2006 reported amounts, calculated using 2005 monthly average exchange rates, to the actual 2005 reported amounts. Constant currency sales is not a GAAP defined measure of revenue growth. Constant currency sales as defined and presented by us may not be comparable to similar measures reported by other companies. Valeant Pharmaceuticals International Table 9 Consolidated Condensed Statements of Operations including GAAP to Non-GAAP Reconciliation For the Three Months Ended September 30, 2006 reconciliation to previously reported numbers     Three Months Ended Three Months Ended September 30, 2006 September 30, 2006 Preliminary Adjustments Final (In thousands, except per share data)   Product sales $ 199,214  $ (208) (a) $ 199,006  Ribavirin royalties 20,185  783  (b) 20,968  Total revenues 219,399  575  219,974    Cost of goods sold 63,903  (3,598) (c)(d) 60,305  Selling expenses 67,671  (89) (d)(e) 67,582  General and administrative expenses 27,010  202  (d)(e) 27,212  Research and development costs 21,189  (340) (d)(e) 20,849  Gain on litigation settlement (17,550) (17,550) Restructuring charges 15,039  2,100  (f) 17,139  Amortization expense 17,732  692  (g) 18,424  194,994  (1,033) 193,961  Income from operations 24,405  1,608  26,013    Interest expense, net (7,751) (7,751) Other expense, net including translation and exchange (454) -  (454)   Income from continuing operations before provision for income taxes and minority interest 16,200  1,608  17,808    Provision for income taxes 12,287  (641) (h) 11,646  Minority interest 1  -  1  Income from continuing operations 3,912  2,249  6,161    Income from discontinued operations, net 7,546  -  7,546      Net Income $ 11,458  $ 2,249  $ 13,707      Income from continuing operations 3,912  2,249  6,161    Non-GAAP adjustments: Acquired IPR&D -  -  Stock-based compensation expense 5,615  39  5,654  Product impairment -  683  683  Gain on litigation settlement (17,550) (17,550) Restructuring charges 15,039  2,100  17,139  Tax effect on the above items and from U.S. net operating losses 6,609  (1,860) 4,749      Adjusted income from continuing operations before the above charges $ 13,625  $ 3,211  $ 16,836    Adjusted basic EPS from continuing operations $ 0.15  $ 0.18    Adjusted diluted EPS from continuing operations $ 0.14  $ 0.18      Shares - Basic 92,960  93,093  Shares - Diluted 95,131  95,265    (a) Amendment to accounting estimates of balance sheet accruals and reserves to recognize new information on Italian government reimbursement rebates on Mestinon -$0.3 million, Nyal instore rebate utilization -$0.3 million and Virazole exchange program $0.4 million. (b) Payment received for ribavirin royalties exceeded previously estimated amount. (c) Amended inventory provision following product life extension on Infergen products $4.8 million, offset by increased provisions for other inventory items and contractual obligations to product suppliers -$1.2 million. (d) Modification of stock based compensation charge to account for special committee findings (cost of goods sold $4,000, selling expenses $1,000, general and administrative expenses $16,000, research and development $18,000) (e) Amendment to accounting estimates of balance sheet accruals and reserves to recognize new information received since preliminary results announced (selling expenses -$52,000, general and administrative expenses -$185,000, research and development $359,000) (f) Additional non-cash impairment charge to reflect revised property appraisal value and other accounting estimate changes (g) Product impairment (h) Tax effect for non-GAAP adjustments, including tax benefits from U.S. net operating losses not recognized for GAAP purposes. Valeant Pharmaceuticals International Table 10 Restatement Summary   We have filed an amended Annual Report on Form 10K/A for the fiscal year ended December 31, 2005 and intend to file amended Quarterly Reports on Form 10-Q/A for the quarters ended March 31, and June 30, 2006, to restate our condensed consolidated financial statements and the related disclosures for these periods. The table below summarizes the effect of the restatement on net income:   Year Ended December 31, Cumulative Effect 1982 -2000 Total Additional Expense (Income) Through 12/31/2005 Six Months Ended June 30, 2006 Total Thru 6/30/2006 2005  2004  2003  2002  2001    Stock option grants prior to 2002 change in control: Broad-based option grants with improper measurement dates $ -  $ -  $ -  $ 2,657  $ 2,701  $6,130  $11,488  $ -  $11,488  Option grants to directors with improper measurement dates -  -  -  119  9  20  148  -  148  Other option grants with improper measurement dates -  -  -  546  999  2,993  4,538  -  4,538  Repriced option grant -  -  -  (482) 783  696  997  -  997  Improper measurement dates for option grants 1982-1994 -  -  -  -  -  1,375  1,375  -  1,375  Incremental charge in connection with Change in Control -  -  -  10,105  -  -  10,105  -  10,105  Sub-total pre-Change in Control -  -  -  12,945  4,492  11,214  28,651  -  28,651  Stock option grants after 2002 Change in Control: Company-wide option grants with improper measurement dates 1,171  1,085  172  -  -  -  2,428  (3) 2,425  Other stock option matters after June 2002 22  (7) 20  -  -  -  35  -  35  Sub total post-Change in Control 1,193  1,078  192  -  -  -  2,463  (3) 2,460  Total impact of additional stock compensation on operating income 1,193  1,078  192  12,945  4,492  11,214  31,114  (3) 31,111  Other items corrected in connection with restatement (2,273) (1,265) (90) 1,209  (1,184) 7,741  4,138  (1,772) 2,366  Tax effects of above and other tax items 963  (14,957) 1,785  (4,461) (2,471) 10,289  (8,852) (1,170) (10,022) Net income decrease (increase) resulting from all restatement items $ (117) $ (15,144) $1,887  $ 9,693  $ 837  $29,244  $ 26,400  $ (2,945) $23,455