##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file
    number: 1-11397
      Valeant Pharmaceuticals
    International
 (Exact name of registrant as
    specified in its charter)
  Delaware(State or other jurisdiction
    of
    incorporation or organization)

33-0628076(I.R.S. Employer
    Identification No.)One Enterprise,
    Aliso Viejo, California(Address of principal
    executive offices)

92656(Zip
    Code)   (949) 461-6000
 (Registrants telephone
    number, including area code)
  þ o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ




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##### 



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  INDEX
  PageNumberPART I  FINANCIAL
    INFORMATIONItem 1.


Financial Statements


2Consolidated Condensed Balance Sheets as of
    September 30, 2007 and December 31, 2006


2Consolidated Condensed Statements of Operations
    for the three months and nine months ended September 30,
    2007 and 2006


3Consolidated Condensed Statements of
    Comprehensive Income (Loss) for the three months and nine months
    ended September 30, 2007 and 2006


4Consolidated Condensed Statements of Cash Flows
    for the nine months ended September 30, 2007 and 2006


5Notes to Consolidated Condensed Financial
    Statements


6Item 2.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


26Item 3.


Quantitative and Qualitative Disclosures About
    Market Risk


42Item 4.


Controls and Procedures


42PART II  OTHER
    INFORMATIONItem 1.


Legal Proceedings


43Item 1A.


Risk Factors


43Item 2.


Purchases of Equity Securities by the Issuer and
    Affiliated Purchasers


44Item 6.


Exhibits


45SIGNATURES


46EXHIBIT 3.3EXHIBIT 15.1EXHIBIT 15.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   1




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION
  Item 1.
    Financial
    Statements  VALEANT
    PHARMACEUTICALS INTERNATIONAL
    CONSOLIDATED CONDENSED BALANCE SHEETS
    As of September 30, 2007 and December 31, 2006
    (In thousands, except par value data)
  September 30,


December 31,2007


2006(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
354,996


$
326,002Marketable securities


13,833



9,743Accounts receivable, net


200,742



227,452Inventories, net


117,105



130,747Assets held for sale and assets of discontinued operations


65,395



124,821Prepaid expenses and other current assets


14,831



16,398Current deferred tax assets, net


6,561



8,071Income taxes receivable


8,365



2,526Total current assets


781,828



845,760Property, plant and equipment, net


110,591



94,121Deferred tax assets, net


65,824



21,514Goodwill


80,346



75,346Intangible assets, net


411,414



414,915Other assets


46,408



53,555Assets of discontinued operations






226Total non-current assets


714,583



659,677$
1,496,411


$
1,505,437LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade payables

$
39,476


$
60,621Accrued liabilities


142,009



142,532Notes payable and current portion of long-termdebt


2,842



9,237Income taxes


6,424



39,818Current liabilities of discontinued operations


6,380



Total current liabilities


197,131



252,208Long-term debt, less current portion


780,318



778,196Deferred tax liabilities, net


1,610



3,255Liabilities for uncertain tax positions


59,242



Other liabilities


20,145



18,182Liabilities of discontinued operations


2,104



18,343Total non-current liabilities


863,419



817,976Total liabilities


1,060,550



1,070,184Commitments and contingenciesStockholders Equity:Common stock, $0.01 par value; 200,000 shares
    authorized; 90,964 (September 30, 2007) and 94,415
    (December 31, 2006) shares outstanding (after
    deducting shares in treasury of 5,817 as of September 30,
    2007 and 1,094 as of December 31, 2006)


910



944Additional capital


1,209,194



1,263,318Accumulated deficit


(837,029
)


(848,467
)Accumulated other comprehensive income


62,786



19,458Total stockholders equity


435,861



435,253$
1,496,411


$
1,505,437    2




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  CONSOLIDATED
    CONDENSED STATEMENTS OF OPERATIONS
    For the three months and nine months ended September 30,
    2007 and 2006
    (Unaudited, in thousands, except per share data)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Revenues:Product sales

$
194,545


$
189,872


$
565,166


$
555,015Alliance revenue (including ribavirin royalties)


14,078



20,968



69,503



60,694Total revenues


208,623



210,840



634,669



615,709Costs and expenses:Cost of goods sold (excluding amortization)


59,033



57,326



167,089



173,804Selling expenses


64,396



62,634



190,482



183,254General and administrative expenses


29,276



26,621



83,738



85,084Research and development costs


24,886



20,328



68,612



73,999Gain on litigation settlements






(17,550
)






(51,550
)Restructuring charges and asset impairment






17,139



13,575



96,687Amortization expense


18,130



16,774



54,277



48,511Total costs and expenses


195,721



183,272



577,773



609,789Income from operations


12,902



27,568



56,896



5,920Other income (loss), net, including translation and exchange


(262
)


(454
)


2,556



1,240Interest income


3,601



3,209



12,881



8,581Interest expense


(10,365
)


(10,960
)


(32,199
)


(32,258
)Income (loss) from continuing operations before income taxes


5,876



19,363



40,134



(16,517
)Provision for income taxes


8,081



11,659



8,154



24,360Minority interest, net


1



1



2



2Income (loss) from continuing operations


(2,206
)


7,703



31,978



(40,879
)Income (loss) from discontinued operations


(9,813
)


6,004



(18,979
)


6,097Net income (loss)

$
(12,019
)

$
13,707


$
12,999


$
(34,782
)Basic income (loss) per share:Income (loss) from continuing operations

$
(0.02
)

$
0.08


$
0.34


$
(0.44
)Income (loss) from discontinued operations


(0.11
)


0.07


$
(0.20
)

$
0.07Basic income (loss) per share:

$
(0.13
)

$
0.15


$
0.14


$
(0.37
)Diluted income (loss) per share:Income (loss) from continuing operations

$
(0.02
)

$
0.08


$
0.34


$
(0.44
)Income (loss) from discontinued operations


(0.11
)


0.06



(0.20
)


0.07Diluted income (loss) per share:

$
(0.13
)

$
0.14


$
0.14


$
(0.37
)Shares used in per share computations


91,705



93,093



93,705



92,907Shares used in per share computation  Diluted


91,705



95,265



95,003



92,907Dividends paid per share of common stock

$



$
0.08


$



$
0.24Dividends declared per share of common stock

$



$



$



$
0.16    3




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  CONSOLIDATED
    CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
    For the three months and nine months ended September 30,
    2007 and 2006
    (Unaudited, in thousands)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Net income (loss)

$
(12,019
)

$
13,707


$
12,999


$
(34,782
)Other comprehensive income (loss):Foreign currency translation adjustments


25,454



4,745



37,365



15,371Unrealized gain (loss) on marketable equity securities and other


(1,262
)


155



6,375



(817
)Pension liability adjustment


(189
)


(57
)


(412
)


(352
)Comprehensive income (loss)

$
11,984


$
18,550


$
56,327


$
(20,580
)    4




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  CONSOLIDATED CONDENSED STATEMENTS OF CASH
    FLOWS
 For the nine months ended September 30, 2007 and 2006
 (Unaudited, in thousands)
  Nine Months EndedSeptember 30,2007


2006Cash flows from operating activities:Net income (loss)

$
12,999


$
(34,782
)Income (loss) from discontinued operations


(18,979
)


6,097Income (loss) from continuing operations


31,978



(40,879
)Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:Depreciation and amortization


66,170



64,987Provision for losses on accounts receivable and inventory


6,953



11,697Stock compensation expense


10,729



16,229Translation and exchange gains, net


(2,556
)


(1,240
)Impairment charges and other non-cash items


6,445



83,578Deferred income taxes


14,889



7,610Change in assets and liabilities, net of effects of acquisitions:Accounts receivable


29,086



(17,928
)Inventories


2,879



(11,886
)Prepaid expenses and other assets


(2,049
)


(2,203
)Trade payables and accrued liabilities


(17,520
)


(14,949
)Income taxes


(40,130
)


(17,744
)Other liabilities


208



1,742Cash flow from operating activities in continuing operations


107,082



79,014Cash flow from operating activities in discontinued operations


(22,095
)


1,050Net cash provided by operating activities


84,987



80,064Cash flows from investing activities:Capital expenditures


(24,683
)


(26,177
)Proceeds from sale of assets


37,923



8,337Proceeds from sale of businesses


30,120



Proceeds from investments


19,967



20,501Purchase of investments


(22,100
)


(20,200
)Acquisition of businesses, license rights and product lines


(35,487
)


(4,129
)Cash flow from investing activities in continuing operations


5,740



(21,668
)Cash flow from investing activities in discontinued operations


(5,942
)


(459
)Net cash provided by (used in) investing activities


(202
)


(22,127
)Cash flows from financing activities:Proceeds from issuance of long-term debt


1,923



Payments on long-term debt and notes payable


(8,935
)


(6,372
)Proceeds capitalized lease financing and long-term debt






120Stock option exercises and employee stock purchases


14,517



7,898Purchase of treasury stock


(79,599
)


Dividends paid






(21,550
)Cash flow from financing activities in continuing operations


(72,094
)


(19,904
)Cash flow from financing activities in discontinued operations


573



408Net cash used in financing activities


(71,521
)


(19,496
)Effect of exchange rate changes on cash and cash equivalents


15,527



4,679Net increase in cash and cash equivalents


28,791



43,120Cash and cash equivalents at beginning of period


326,205



224,903Cash and cash equivalents at end of period


354,996



268,023Cash and cash equivalents classified as part of discontinued
    operations






(136
)Cash and cash equivalents of continuing operations

$
354,996


$
267,887    5




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS
 September 30, 2007
 (Unaudited)
  Form 10-K
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization:
  Principles of Consolidation:
  Marketable Securities:
  Derivative Financial Instruments:
  Comprehensive Income (Loss): Reporting Comprehensive
    Income.
  Per Share Information:
  Stock-Based Compensation Expense:
 6




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Assets Held for Sale:
  Discontinued Operations:
  Use of Estimates:
  Treasury Stock:
  Recent
    Accounting Pronouncements:
  FIN 48.
    SFAS No. 157.
 7




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    SFAS 159. (
  FASB Proposed Statement of Position APB
    14-a (not
    yet implemented). 14-a 14-a) 14-a 14-a 14-a
  2.
    Restructuring      24-month
 8




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
          Restructuring
    Charge Details (in thousands)
  Three Months


Nine Months


YearEnded


Ended


EndedSeptember 30,


September 30,


December 31,2006


2006


2006Employee severances

$
1,922


$
13,935


$
16,997Contract cancellation and other cash costs


665



1,657



1,662Subtotal: cash charges


2,587



15,592



18,659Abandoned software and other capital assets


193



21,546



22,178Impairment of manufacturing and research facilities


14,359



59,549



97,344Subtotal: non-cash charges


14,552



81,095



119,522Total:

$
17,139


$
96,687


$
138,181   Three Months


Nine Months


CumulativeEnded


Ended


TotalSeptember 30,


September 30,


Incurred2007


2007Employee severances (approximately 490 employees)

$



$
5,130


$
22,127Contract cancellation and other cash costs






3,115



4,777Subtotal: cash charges






8,245



26,904Abandoned software and other capital assets










22,178Write-off of accumulated foreign currency translation adjustments






2,891



2,891Impairment of manufacturing and research facilities






2,439



99,783Subtotal: non-cash charges






5,330



124,852Total:

$



$
13,575


$
151,7561  9




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
  Reconciliation
    of Cash Restructuring Payments with Restructuring
    Accrual
    Three MonthsEndedSeptember 30,2007Opening accrual

$
9,977Charges to earnings


Cash paid


(4,771
)Closing accrual

$
5,206   3.
    Acquisitions  paid-up
    4.
    Discontinued
    Operations     10




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30


September 302007


2006


2007


2006Infergen:Product sales

$
8,636


$
9,134


$
26,959


$
34,148Costs and expenses:Cost of goods sold (excluding amortization)


8,365



2,978



14,523



10,860Selling expenses


6,586



4,948



19,619



14,874General and administrative expenses


679



591



1,367



1,241Research and development costs


1,279



521



5,279



3,271Amortization expense


1,650



1,650



4,950



4,950Total costs and expenses


18,559



10,688



45,738



35,196Loss from discontinued operations, Infergen


(9,923
)


(1,554
)


(18,779
)


(1,048
)Other discontinued operations:Other income






6,064







5,738Consolidated discontinued operations:Income (loss) from discontinued operations


(9,923
)


4,510



(18,779
)


4,690Benefit for income taxes


160



12



231



9Income (loss) from discontinued operations


(9,763
)


4,522



(18,548
)


4,699Disposal of discontinued operation, net


(50
)


1,482



(431
)


1,398Income (loss) from discontinued operations, net

$
(9,813
)

$
6,004


$
(18,979
)

$
6,097    11




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    September 30,


December 31,2007


2006(Unaudited)ASSETSCash and cash equivalents

$



$
203Accounts receivable, net






21Inventories, net


5,986



11,932Prepaid expenses and other current assets






2Property, plant and equipment, net


143



158Goodwill


4,816



4,816Intangible assets, net


54,450



59,400Assets of discontinued operations

$
65,395


$
76,532LIABILITIESCurrent Liabilities:Accrued liabilities

$
6,380


$
12,777Other liabilities


2,104



5,566Liabilities of discontinued operations

$
8,484


$
18,343    12




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
  5.
    Earnings
    Per Share    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Income:Numerator for basic and dilutive earnings (loss) per shareIncome (loss) from continuing operations

$
(2,206
)

$
7,703


$
31,978


$
(40,879
)Income (loss) from discontinued operations


(9,813
)


6,004



(18,979
)


6,097Net income (loss)

$
(12,019
)

$
13,707


$
12,999


$
(34,782
)Shares:Denominator for basic earnings (loss) per share 
    weighted-average shares outstanding


91,705



93,093



93,705



92,907Employee stock options






1,939



1,046



Other dilutive securities






233



252



Dilutive potential common shares






2,172



1,298



Denominator for diluted earnings (loss) per share 
    adjusted weighted-average shares after assumed conversions


91,705



95,265



95,003



92,907Basic earnings (loss) per share:Income (loss) from continuing operations

$
(0.02
)

$
0.08


$
0.34


$
(0.44
)Discontinued operations, net of taxes


(0.11
)


0.07


$
(0.20
)


0.07Basic net income (loss) per share

$
(0.13
)

$
0.15


$
0.14


$
(0.37
)Diluted earnings (loss) per share:Income (loss) from continuing operations

$
(0.02
)

$
0.08


$
0.34


$
(0.44
)Discontinued operations, net of taxes


(0.11
)


0.06


$
(0.20
)


0.07Diluted net income (loss) per share

$
(0.13
)

$
0.14


$
0.14


$
(0.37
)      13




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
  6.
    Detail of
    Certain Accounts    September 30,


December 31,2007


2006Accounts receivable, net:Trade accounts receivable

$
166,199


$
180,767Royalties receivable


15,272



22,212Other receivables


27,311



31,486208,782



234,465Allowance for doubtful accounts


(8,040
)


(7,013
)$
200,742


$
227,452Inventories, net:Raw materials and supplies

$
30,932


$
37,045Work-in-process


16,087



21,477Finished goods


85,306



86,522132,325



145,044Allowance for inventory obsolescence


(15,220
)


(14,297
)$
117,105


$
130,747Property, plant and equipment, net:Property, plant and equipment, at cost

$
214,124


$
183,597Accumulated depreciation and amortization


(103,533
)


(89,476
)$
110,591


$
94,121   Intangible assets:
  Weighted


September 30, 2007


December 31, 2006Average


Gross


Accumulated


Net


Gross


Accumulated


NetLives


Amount


Amortization


Amount


Amount


Amortization


AmountProduct rightsNeurology


13


$
305,624


$
(121,016
)

$
184,608


$
292,339


$
(100,990
)

$
191,349Infectious diseases


11



6,480



(3,690
)


2,790



6,480



(3,420
)


3,060Dermatology


19



111,879



(51,553
)


60,326



85,337



(42,786
)


42,551Other products


11



347,419



(192,264
)


155,155



325,470



(165,025
)


160,445Total product rights


14



771,402



(368,523
)


402,879



709,626



(312,221
)


397,405License agreement


5



67,376



(58,841
)


8,535



67,376



(49,866
)


17,510Total intangible assets





$
838,778


$
(427,364
)

$
411,414


$
777,002


$
(362,087
)

$
414,915  14




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Scheduled Future Amortization ExpenseRemainingThree Months of2007


2008


2009


2010


2011


ThereafterProduct rightsNeurology

$
7,349


$
29,262


$
29,262


$
29,178


$
22,593


$
66,964Infectious diseases


90



360



360



360



360



1,260Dermatology


2,580



10,439



10,110



9,798



9,672



17,728Other products


4,708



19,145



18,392



17,802



17,300



77,808Total product rights


14,726



59,206



58,124



57,138



49,925



163,760License agreement


2,363



6,172















Total

$
17,089


$
65,378


$
58,124


$
57,138


$
49,925


$
163,760     7.
    Income
    Taxes    Three MonthsEndedSeptember 30, 2007Taxes payable on earnings in tax jurisdictions outside the
    U.S.

$
8,521Interest and penalties on U.S. liabilities, state taxes and other


(440
)$
8,081    15




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
            8.
    Common
    Stock and Share Compensation  24-month
   16




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    WeightedAverageNumber of


ExerciseShares


PriceShares under option, December 31, 2005


14,632


$
17.80Granted


2,014


$
18.54Exercised


(1,592
)

$
19.38Canceled


(1,703
)

$
21.81Shares under option, December 31, 2006


13,351


$
18.28Granted


185


$
16.66Exercised


(1,208
)

$
17.49Canceled


(1,604
)

$
21.78Shares under option, September 30, 2007


10,724


$
18.47Exercisable at December 31, 2005


7,197


$
17.82Exercisable at December 31, 2006


8,374


$
18.00Exercisable at September 30, 2007


6,854


$
18.08Awards available for grant at December 31, 2006


4,376Awards available for grant at September 30, 2007


5,742     Outstanding


ExercisableWeighted





Weighted


WeightedAverage





Average


AverageNumber


Exercise


Number


Exercise


RemainingRange of Exercise Prices

of Shares


Price


of Shares


Price


Life (Years)$ 8.10 - $17.72


4,158


$
13.63



2,871


$
11.88



6.40$18.55 - $18.75


3,589


$
18.61



1,700


$
18.55



6.43$18.84 - $46.25


2,977


$
25.07



2,283


$
25.52



5.2310,724







6,854   SFAS No. 123(R) Assumptions and Fair
    Value:
  2007

2006Average life of option (years)

5.73

4.10 - 5.80Stock price volatility

35% - 37%

37% - 39%Expected dividend per share

$0.00

$0.00 - $0.31Risk-free interest rate

4.24% - 4.76%

4.54% - 4.80%Weighted-average fair value of options

$7.00

$7.83    17




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    2003 Employee Stock Purchase Plan:
  Restricted Stock Units:
    Nine MonthsThree Months Ended


EndedSeptember 30,


September 30,2007


2006


2007


2006Employee stock options

$
2,916


$
5,086


$
9,479


$
14,407Employee stock purchase plan


79



69



158



337Restricted stock units


368



462



1,092



1,485Total stock-based compensation expense

$
3,363


$
5,617


$
10,729


$
16,229     Nine MonthsThree Months Ended


EndedSeptember 30,


September 30,2007


2006


2007


2006Cost of goods sold


151



226



504



1,026Selling expenses


846



707



2,660



2,335General and administrative expenses


2,219



4,151



6,932



10,752Research and development costs


147



533



633



2,116Total stock-based compensation expense

$
3,363


$
5,617


$
10,729


$
16,229  18




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Remainder of 2007

$
2,1532008


6,0362009


2,3942010 and thereafter


800$
11,383   Dividends:
  9.
    Commitments
    and Contingencies    Securities
    Class Actions:
  Derivative Actions Related to Ribapharm
    Bonuses: and/or
  Paul Gerstley v. Norman
    Barker, Jr. et al.
     19




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
  SEC Investigation:
  Derivative Actions Related to Stock
    Option and/or
  and/or
  Patent Oppositions:
  Argentina Antitrust Matter:
  Permax Product Liability Cases:
 20




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Kali Litigation: No. 76-843 ® No. 04-3238 No. 76-843
    Former ICN Yugoslavia Employees:
  Other:
 21




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
  10.
    Business
    Segments    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Revenues from continuing operationsSpecialty pharmaceuticalsNorth America

$
65,295


$
62,091


$
196,504


$
185,237International


54,273



60,530



146,514



170,191EMEA


74,977



67,251



222,148



199,587Total specialty pharmaceuticals


194,545



189,872



565,166



555,015Alliance revenues (including ribavirin royalties)


14,078



20,968



69,503



60,694Consolidated revenues

$
208,623


$
210,840


$
634,669


$
615,709Operating income (loss) from continuing operationsSpecialty pharmaceuticalsNorth America

$
21,179


$
17,429


$
65,060


$
51,313International


12,689



18,589



22,486



50,695EMEA


11,890



10,658



43,019



27,26845,758



46,676



130,565



129,276Corporate expenses(1)(2)


(20,394
)


(16,674
)


(56,132
)


(55,150
)Total specialty pharmaceuticals


25,364



30,002



74,433



74,126Restructuring charges and asset impairment(3)






(17,139
)


(13,575
)


(96,687
)Gain on litigation settlement






17,550







51,550Research and development


(12,462
)


(2,845
)


(3,962
)


(23,069
)Consolidated segment operating income


12,902



27,568



56,896



5,920Interest income


3,601



3,209



12,881



8,581Interest expense


(10,365
)


(10,960
)


(32,199
)


(32,258
)Other, net


(262
)


(454
)


2,556



1,240Income (loss) from continuing operations before provision for
    income taxes

$
5,876


$
19,363


$
40,134


$
(16,517
)     (1)
    
    All stock-based compensation expense has been considered a
    corporate cost as management excludes this item in assessing the
    financial performance of individual business segments and
    considers it a function of valuation factors that pertain to
    overall corporate stock performance.(2)
    
    The corporate expense total above includes certain corporate
    marketing expenses in 2007 for our products in development. In
    the three months and the nine months ended September 30,
    2006, $1,700,000 and $6,400,000 of similar costs were allocated
    out of the corporate segment and reassigned to the research and
    development division, due to the ownership of certain
    intellectual property by a foreign subsidiary within this
    division. This foreign subsidiary no longer owns this
    intellectual property and the corresponding costs in 2007 are
    recognized as corporate expenses.(3)
    
    Restructuring charges are not included in the applicable
    segments as management excludes these items in assessing the
    financial performance of these segments, primarily due to their
    non-operational nature. 22




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
     September 30,


December 31,Total Assets

2007


2006North America

$
351,233


$
381,198International


220,525



202,369EMEA


481,815



515,267Corporate


329,633



207,803Research and Development Division


47,810



122,268Discontinued operations


65,395



76,532Total

$
1,496,411


$
1,505,437     September 30,


December 31,Long-term Assets

2007


2006North America

$
286,144


$
288,889International


78,537



58,763EMEA


213,163



201,188Corporate


110,056



75,506Research and Development Division


26,683



35,105Total

$
714,583


$
659,451    23




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,Therapeutic Area/Product

2007


2006


2007


2006NeurologyDiastat
    AcuDialtm(P)

$
15,676


$
14,802


$
39,134


$
38,533Mestinon®(P)


13,820



11,449



38,402



33,592Cesamet®(P)


7,279



6,487



20,051



13,832Librax®


4,301



3,002



12,423



10,926Migranal®(P)


2,614



1,133



9,395



6,949Dalmane®/Dalmadorm®(P)


3,046



2,538



8,138



7,548Tasmar®(P)


2,714



1,635



7,067



4,487Melleril(P)


1,972



1,567



5,326



4,340Zelapar®(P)


1,825



3,824



3,401



3,824Other Neurology


15,264



16,092



47,257



46,311Total Neurology


68,511



62,529



190,594



170,342DermatologyEfudix/Efudex®(P)


16,997



15,502



46,991



46,061Kinerase®(P)


5,729



6,622



22,255



22,506Dermatixtm(P)


4,056



2,553



10,394



7,364Oxsoralen-Ultra®(P)


1,032



613



8,968



7,714Other Dermatology


9,231



10,315



26,686



30,894Total Dermatology


37,045



35,605



115,294



114,539Infectious DiseaseVirazole®(P)


2,453



2,142



11,064



11,723Other Infectious Disease


5,916



4,448



16,310



14,069Total Infectious Disease


8,369



6,590



27,374



25,792Other therapeutic classesBedoyectatm(P)


14,268



13,879



31,478



36,970Solcoseryl(P)


4,993



4,908



18,788



12,882Bisocard(P)


5,864



4,045



16,133



11,522Nyal(P)


3,340



2,134



9,094



8,691MVI (multi-vitamin infusion)(P)


3,176



3,629



8,425



9,396Espaven(P)


1,841



3,340



5,955



7,625Protamin(P)


1,532



1,397



4,956



4,722Other products


45,606



51,816



137,075



152,534Total other therapeutic classes


80,620



85,148



231,904



244,342Total product sales

$
194,545


$
189,872


$
565,166


$
555,015Total promoted product sales

$
114,227


$
104,199


$
325,415


$
300,281     (P)
    
    Promoted Products represent products promoted in at least one
    major territory with estimated global annual sales greater than
    $5 million. 24




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
     11.
    Alliance
    Revenue    For the Three Months Ended


For the Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Ribavirin royalty

$
14,078


$
20,968


$
50,253


$
60,694Licensing payment










19,200



Other










50



Total alliance revenue

$
14,078


$
20,968


$
69,503


$
60,694      25




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
      Company
    Strategy and Restructuring
    Targeted Growth Opportunities.
  Product Acquisitions.
  Efficient Manufacturing and Supply Chain
    Organization.
  Clinical Development Activities.
 26




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##### Table of Contents



Results
    of Operations
    ® tm ® ® ® tm tm
      Three Months EndedSeptember 30,


Increase/


Percent2007


2006


(Decrease)


ChangeRevenuesSpecialty pharmaceuticalsNorth America

$
65,295


$
62,091


$
3,204



5
%International


54,273



60,530



(6,257
)


(10
)%EMEA


74,977



67,251



7,726



11
%Total specialty pharmaceuticals


194,545



189,872



4,673



2
%Alliance revenue (including ribavirin royalties)


14,078



20,968



(6,890
)


(33
)%Total revenues


208,623



210,840



(2,217
)


(1
)%Costs and ExpensesCost of goods sold (excluding amortization)


59,033



57,326



1,707



3
%Selling expenses


64,396



62,634



1,762



3
%General and administrative expenses


29,276



26,621



2,655



10
%Research and development costs


24,886



20,328



4,558



22
%Gain on litigation settlement






(17,550
)


17,550



NMRestructuring charges






17,139



(17,139
)


(100
)%Amortization expense


18,130



16,774



1,356



8
%Operating income

$
12,902


$
27,568


$
(14,666
)Gross profit on product sales (excluding amortization)

$
135,512


$
132,546


$
2,966



2
%Gross profit margin on product sales


70
%


70
%  27




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##### Table of Contents



Nine Months EndedSeptember 30,


Increase/


Percent2007


2006


(Decrease)


ChangeRevenuesSpecialty pharmaceuticalsNorth America

$
196,504


$
185,237


$
11,267



6
%International


146,514



170,191



(23,677
)


(14
)%EMEA


222,148



199,587



22,561



11
%Total specialty pharmaceuticals


565,166



555,015



10,151



2
%Alliance revenue (including ribavirin royalties)


69,503



60,694



8,809



15
%Total revenues


634,669



615,709



18,960



3
%Costs and ExpensesCost of goods sold (excluding amortization)


167,089



173,804



(6,715
)


(4
)%Selling expenses


190,482



183,254



7,228



4
%General and administrative expenses


83,738



85,084



(1,346
)


(2
)%Research and development costs


68,612



73,999



(5,387
)


(7
)%Gain on litigation settlement






(51,550
)


51,550



NMRestructuring charges


13,575



96,687



(83,112
)


(86
)%Amortization expense


54,277



48,511



5,766



12
%Operating income

$
56,896


$
5,920


$
50,976Gross profit on product sales (excluding amortization)

$
398,077


$
381,211


$
16,866



4
%Gross profit margin on product sales


70
%


69
%        28




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##### Table of Contents



Alliance Revenue (including Ribavirin
    royalties):
        Gross Profit Margin (excluding
    amortization):
 29




---



##### Table of Contents



paid-up
  Selling Expenses:
  General and Administrative Expenses:
  Research and Development:
  Gain on Litigation Settlement:
  Restructuring
    Charges:
  24-month
   30




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##### Table of Contents



Restructuring
    Charge Details (in thousands)
  Three Months


Nine Months


YearEnded


Ended


EndedSeptember 30,


September 30,


December 31,2006


2006


2006Employee severances

$
1,922


$
13,935


$
16,997Contract cancellation and other cash costs


665



1,657



1,662Subtotal: cash charges


2,587



15,592



18,659Abandoned software and other capital assets


193



21,546



22,178Impairment of manufacturing and research facilities


14,359



59,549



97,344Subtotal: non-cash charges


14,552



81,095



119,522Total:

$
17,139


$
96,687


$
138,181   Three Months


Nine MonthsEnded


Ended


CumulativeSeptember 30,


September 30,


Total2007


2007


IncurredEmployee severances (approximately 490 employees)

$



$
5,130


$
22,127Contract cancellation and other cash costs






3,115



4,777Subtotal: cash charges






8,245



26,904Abandoned software and other capital assets










22,178Write-off of accumulated foreign currency translation adjustments






2,891



2,891Impairment of manufacturing and research facilities






2,439



99,783Subtotal: non-cash charges






5,330



124,852Total:

$



$
13,575


$
151,756  31




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##### Table of Contents



Reconciliation
    of Cash Restructuring Payments with Restructuring
    Accrual
    Three MonthsEndedSeptember 30,2007Opening accrual

$
9,977Charges to earnings


Cash paid


(4,771
)Closing accrual

$
5,206   Amortization:
  Other Income (expense), Net, Including Translation and
    Exchange:
  Interest Expense, net:
  Income Taxes:
  Income (loss) from Discontinued Operations, Net of
    Taxes:
  Liquidity
    and Capital Resources
   32




---



##### Table of Contents



33




---



##### Table of Contents



24-month
  Form 10-K
  Off-Balance
    Sheet Arrangements
  Form 10-K.
  Products
    in Development
  Late
    Stage Development of New Chemical Entities
  Retigabine:
     34




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##### Table of Contents



Taribavirin:
    38-40 percent
  30 mg/kg
    Other
    Development Activities
  Infergen (Reported in Discontinued
    Operations):
   35




---



##### Table of Contents



Cesamet:
  Foreign
    Operations
    Critical
    Accounting Estimates
      Revenue
    Recognition
         36




---



##### Table of Contents



Sales
    Incentives
    Income
    Taxes
   37




---



##### Table of Contents



Impairment
    of Property, Plant and Equipment
    Valuation
    of Intangible Assets
        Stock-based
    Compensation Expense
     38




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##### Table of Contents



2007

2006Average life of option (years)

5.73

4.10 - 5.80Stock price volatility

35% - 37%

37% - 39%Expected dividend per share

$0.00

$0.00 - $0.31Risk-free interest rate

4.24% - 4.76%

4.54% - 4.80%Weighted-average fair value of options

$7.00

$7.83         Contingencies
  Accounting for Contingencies
    Other
    Financial Information
    Forward-Looking
    Statements
  Form 10-Q
 39




---



##### Table of Contents



Form 10-Q,
    
    The future growth of our business depends on the development and
    approval of new products by us and our licensees, including
    taribavirin and retigabine. The process of developing new drugs
    has an inherent risk of failure. For example, product candidates
    may turn out to be ineffective or unsafe in clinical testing;
    their patent protection may become compromised; other therapies
    may prove safer or more effective; or the prevalence of the
    disease for which they are being developed may decrease. Our
    inability to develop our products due to these or other factors
    could have a material adverse effect on future revenues.
    We can protect our products from generic substitution by third
    parties only to the extent that our technologies are covered by
    valid and enforceable patents, are effectively maintained as
    trade secrets or are protected by data exclusivity. However, our
    pending or future patent applications may not issue as patents.
    Any patent issued may be challenged, invalidated, held
    unenforceable or circumvented. Furthermore, our patents may not
    be sufficiently broad to prevent third parties competing
    products. The expiration of patent protection for ribavirin has
    resulted in significant competition from generic substitutes and
    declining royalty revenues and has negatively impacted future
    financial results.
    Trade secret protection is less effective than patent protection
    because competitors may discover our technology or develop
    parallel technology.
    The scope of protection afforded by a patent can be highly
    uncertain. A pending claim or a result unfavorable to us in a
    patent dispute may preclude development or commercialization of
    products or impact sales of existing products, result in
    cessation of royalty payments to us
    and/or
    result in payment of monetary damages.
    Obtaining drug approval in the United States and other countries
    is costly and time consuming. Uncertainties and delays inherent
    in the process can preclude or delay development and
    commercialization of our products.
    Our relationships with wholesale distributors, including those
    in Mexico, can affect sales results and, if there is a change in
    any of these relationships, our results may not meet our
    expectations.
    The successful commercialization of product candidates and the
    conduct of clinical trials are subject to many risks, including
    the ability to complete enrollment of the requisite number of
    patients in clinical trials and to conclude clinical trials
    within expected timeframes, adverse events that would require
    clinical trials to be prematurely terminated, clinical results
    that indicate continuing clinical and commercial pursuit of
    clinical candidates is not advisable, and the fact that Phase 2
    clinical trial results are not always indicative of those seen
    in Phase 3 clinical trials.
    Our current business plan includes targeted expansion through
    acquisitions of compatible businesses and product lines and the
    formation of strategic alliances, joint ventures and other
    business combinations, in addition to the development of new
    products. If we are unable to successfully execute on our
    expansion plans to find attractive acquisition candidates at
    appropriate prices, and to integrate successfully any acquired
    companies or products, the expected growth of our business may
    be negatively affected.
    Although we expect to divest assets held for sale, we may not be
    able to sell such assets or may receive less consideration than
    expected. 40




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##### Table of Contents




    We and our competitors are always striving to develop products
    that are more effective, safer, more easily tolerated or less
    costly. If our competitors succeed in developing better
    alternatives to our current products before we do, we will lose
    sales and revenues to their alternative products. If vaccines
    are introduced to prevent the diseases treated by our products,
    our potential sales and revenues will decrease.
    The pharmaceutical industry is subject to substantial government
    regulation, including the approval of new pharmaceutical
    products, labeling, advertising and, in most countries, pricing,
    as well as inspection and approval of manufacturing facilities.
    The costs of complying with these regulations are high, and
    failure to comply could result in fines or interruption in our
    business.
    We collect and pay a substantial portion of our sales and
    expenditures in currencies other than the U.S. dollar. As a
    result, fluctuations in foreign currency exchange rates affect
    our operating results. Additionally, future exchange rate
    movements, inflation or other related factors may have a
    material adverse effect on our sales, gross profit or operating
    expenses.
    A significant part of our revenue is derived from products
    manufactured by third parties. We rely on their quality level,
    compliance with the FDA regulations or similar regulatory
    requirements enforced by regulatory agencies in other countries
    and continuity of supply. Any failure by them in these areas
    could disrupt our product supply and negatively impact our
    revenues.
    Our flexibility in maximizing commercialization opportunities
    for our compounds may be limited by our obligations to
    Schering-Plough. In November 2000, we entered into an agreement
    that provides Schering-Plough with an option to acquire the
    rights to up to three of our products intended to treat
    hepatitis C that Schering-Plough designates prior to our
    entering Phase 2 clinical trials and a right for first/last
    refusal to license various compounds we may develop and elect to
    license to others. Taribavirin was not subject to the option of
    Schering-Plough, but it would be subject to their right of
    first/last refusal if we elected to license it to a third party.
    The interest of potential collaborators in obtaining rights to
    our compounds or the terms of any agreement we ultimately enter
    into for these rights may be hindered by our agreement with
    Schering-Plough.
    To purchase our products, many patients rely on reimbursement by
    third party payors such as insurance companies, HMOs and
    government agencies. These third party payors are increasingly
    attempting to contain costs by limiting both coverage and the
    level of reimbursement of new drug products. The reimbursement
    levels established by third party payors in the future may not
    be sufficient for us to realize an appropriate return on our
    investment in product development and our continued manufacture
    and sale of existing drugs.
    All drugs have potential harmful side effects and can expose
    drug manufacturers and distributors to liability. In the event
    one or more of our products is found to have harmed an
    individual or individuals, we may be responsible for paying all
    or substantially all damages awarded. A successful product
    liability claim against us could have a material negative impact
    on our financial position and results of operations.
    Our debt agreements permit us to incur additional debt, subject
    to certain restrictions, but there is no guaranty that we will
    actually be able to borrow any money should the need for it
    arise.
    We are involved in several legal proceedings, including those
    described in note 9 to consolidated condensed financial
    statements, any of which could result in substantial cost and
    divert managements attention and resources.
    Our stockholder rights plan, provisions of our certificate of
    incorporation and provisions of the Delaware General Corporation
    Law could provide our Board of Directors with the ability to
    deter hostile takeovers or delay, deter or prevent a change in
    control of our company, including transactions in which
    stockholders might otherwise receive a premium for their shares
    over then current market prices.
    We are authorized to issue, without stockholder approval,
    approximately 10,000,000 shares of preferred stock,
    200,000,000 shares of common stock and securities
    convertible into either shares of common stock or preferred
    stock. If we issue additional equity securities, the price of
    our securities may be materially and adversely affected. The
    Board of Directors can also use issuances of preferred or common
    stock to deter a hostile takeover or change in control of our
    company. 41




---



##### Table of Contents




    We are subject to a consent order with the Securities and
    Exchange Commission, which permanently enjoins us from violating
    securities laws and regulations. The consent order also
    precludes protection for forward-looking statements under the
    safe harbor provisions of the Private Securities Litigation
    Reform Act of 1995 with respect to forward-looking statements we
    made prior to November 28, 2005. The existence of the
    permanent injunction under the consent order, and the lack of
    protection under the safe harbor with respect to forward-looking
    statements made prior to November 28, 2005 may limit
    our ability to defend against future allegations.  Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk      Notional/


Assets (Liabilities)Contract


Carrying


FairDescription

Amount


Value


ValueForward contracts

$
89,050


$
1,440


$
1,440Interest rate swaps


150,000



(2,648
)


(2,648
)Outstanding fixed-rate debt


780,000



(780,000
)


(732,553
)       Item 4.
    Controls
    and Procedures   42




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##### Table of Contents



Rule 13a-15(c)
    PART II 
    OTHER INFORMATION
  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K Form 10-Q, Form 10-K. Form 10-K Form 10-Q.
  If we,
    our partners or licensees cannot successfully develop or obtain
    future products and commercialize those products, our growth
    would be delayed.
      The
    current SEC investigation could adversely affect our business
    and the trading price of our securities.
   43




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##### Table of Contents



Item 2.
    Purchases
    of Equity Securities by the Issuer and Affiliated
    Purchasers  24-month
    ApproximateDollar Valueof Shares thatAverage


May Yet BeTotal Number


Price Paid


PurchasedPeriod

of Shares Purchased


per Share


(in thousands)7/2/07 - 7/31/07


2,100,000


$
16.95


$
136,8638/1/07 - 8/17/07


1,022,600


$
16.08



120,401Total Share Repurchases


3,122,600


$
16.68


$
120,401  44




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##### Table of Contents



Item 6.
    Exhibits  (a)
    Exhibits  Exhibit3
.1

Restated Certificate of Incorporation, as amended to date,
    previously filed as Exhibit 3.1 to the Registrants
    Form 10-Q
    for the quarter ended September 30, 2003, which is
    incorporated herein by reference.3
.2

Certificate of Designation, Preferences and Rights of
    Series A Participating Preferred Stock previously filed as
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K,
    dated October 6, 2004, which is incorporated herein by
    reference.3
.3

Certificate of Correction, dated April 3, 2006.3
.4

Amended and Restated Bylaws of the Registrant previously filed
    as Exhibit 3.1 to the Registrants Current Report on
    Form 8-K,
    dated November 6, 2006, which is incorporated herein by
    reference.15
.1

Review Report of Independent Registered Public Accounting Firm.15
.2

Awareness Letter of Independent Registered Public Accounting
    Firm.31
.1

Certification of Chief Executive Officer pursuant to
    Rule 13a-14(a)
    under the Exchange Act and Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a)
    under the Exchange Act and Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of Chief Executive Officer and Chief Financial
    Officer of Periodic Financial Reports pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350.  45




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##### Table of Contents



SIGNATURES
  Form 10-Q
  Valeant Pharmaceuticals
    International
   /s/  Timothy
    C. Tyson   President and Chief Executive Officer
    Peter
    J. Blott
   Executive Vice President and Chief Financial Officer
 (Principal Financial and Accounting Officer)
   46




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##### Table of Contents



EXHIBIT INDEX
  Exhibit3
.1

Restated Certificate of Incorporation, as amended to date,
    previously filed as Exhibit 3.1 to the Registrants
    Form 10-Q
    for the quarter ended September 30, 2003, which is
    incorporated herein by reference.3
.2

Certificate of Designation, Preferences and Rights of
    Series A Participating Preferred Stock previously filed as
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K,
    dated October 6, 2004, which is incorporated herein by
    reference.3
.3

Certificate of Correction, dated April 3, 2006.3
.4

Amended and Restated Bylaws of the Registrant previously filed
    as Exhibit 3.1 to the Registrants Current Report on
    Form 8-K,
    dated November 6, 2006, which is incorporated herein by
    reference.15
.1

Review Report of Independent Registered Public Accounting Firm.15
.2

Awareness Letter of Independent Registered Public Accounting
    Firm.31
.1

Certification of Chief Executive Officer pursuant to
    Rule 13a-14(a)
    under the Exchange Act and Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a)
    under the Exchange Act and Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of Chief Executive Officer and Chief Financial
    Officer of Periodic Financial Reports pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350.