##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, 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
    June 30, 2006oro

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

33-0628076(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. EmployerIdentification No.)3300 Hyland Avenue
    Costa Mesa, California(Address of principal
    executive offices)

92626(Zip Code)   (714) 545-0100
 (Registrants telephone
    number, including area code)
  þ o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ




---



##### 



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  INDEX
  
  PageNumberPART I 
    FINANCIAL INFORMATIONItem 1.

Financial Statements


2Consolidated
    Condensed Balance Sheets as of June 30, 2006 and
    December 31, 2005


2Consolidated
    Condensed Statements of Operations for the three months and six
    months ended June 30, 2006 and 2005


3Consolidated
    Condensed Statements of Comprehensive Income for the three
    months and six months ended June 30, 2006 and
    2005


4Consolidated
    Condensed Statements of Cash Flows for the six months ended
    June 30, 2006 and 2005


5Notes to
    Consolidated Condensed Financial Statements


6Item 2.

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


25Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


42Item 4.

Controls and
    Procedures


43PART II 
    OTHER INFORMATIONItem 1.

Legal
    Proceedings


44Item 1A.

Risk
    Factors


44Item 5.

Other
    Information


45Item 6.

Exhibits


45SIGNATURES


46EXHIBIT 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 June 30, 2006 and December 31, 2005
 (In thousands, except par value data)
  June 30,


December 31,2006


2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
244,607


$
224,856Marketable securities


8,208



10,210Accounts receivable, net


201,567



187,987Inventories, net


144,505



136,034Prepaid expenses and other current
    assets


33,118



36,652Total current assets


632,005



595,739Property, plant and equipment, net


174,648



230,126Deferred tax assets, net


24,767



45,904Goodwill


79,977



79,486Intangible assets, net


506,117



536,319Other assets


48,781



43,176Assets of discontinued operations


49



127Total non-current assets


834,339



935,138$
1,466,344


$
1,530,877LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Trade payables

$
59,587


$
55,279Accrued liabilities


141,808



136,701Notes payable and current portion
    of long-term debt


487



495Income taxes


40,648



42,452Total current liabilities


242,530



234,927Long-term debt, less current
    portion


779,483



788,439Deferred tax liabilities, net


2,796



28,770Other liabilities


22,542



16,372Liabilities of discontinued
    operations


23,078



23,118Total non-current liabilities


827,899



856,699Commitments and contingenciesStockholders Equity:Common stock, $0.01 par
    value; 200,000 shares authorized; 92,873 (June 30,
    2006) and 92,760 (December 31, 2005) shares
    outstanding (after deducting shares in treasury of 1,068 as of
    June 30, 2006 and December 31, 2005)


929



928Additional capital


1,216,908



1,203,814Accumulated deficit


(809,740
)


(743,950
)Accumulated other comprehensive
    income (loss)


(12,182
)


(21,541
)Total stockholders equity


395,915



439,251$
1,466,344


$
1,530,877    2




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  CONSOLIDATED
    CONDENSED STATEMENTS OF OPERATIONS
 For the three months and six months ended June 30,
    2006 and 2005
 (Unaudited, in thousands, except per share data)
  Three Months Ended


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Revenues:Product sales

$
208,517


$
180,828


$
389,274


$
342,631Ribavirin royalties


21,635



24,206



39,726



43,541Total revenues


230,152



205,034



429,000



386,172Costs and expenses:Cost of goods sold (excluding
    amortization)


65,744



52,940



124,324



101,661Selling expenses


66,268



61,454



130,538



114,269General and administrative expenses


31,553



25,985



60,093



50,562Research and development costs


26,842



27,559



56,377



53,283Acquired in-process research and
    development














126,399Gain on litigation settlement










(34,000
)


Restructuring charges


53,082



(1,324
)


79,548



371Amortization expense


17,514



17,211



35,037



31,179Total costs and expenses


261,003



183,825



451,917



477,724Income (loss) from operations


(30,851
)


21,209



(22,917
)


(91,552
)Other income (loss), net,
    including translation and exchange


757



(2,631
)


1,694



(4,422
)Interest income


2,715



3,119



5,372



6,134Interest expense


(10,861
)


(10,063
)


(21,298
)


(19,744
)Income (loss) from continuing
    operations before income taxes and minority interest


(38,240
)


11,634



(37,149
)


(109,584
)Provision (benefit) for income
    taxes


6,633



10,059



13,875



26,426Minority interest, net






134



1



305Income (loss) from continuing
    operations


(44,873
)


1,441



(51,025
)


(136,315
)Loss from discontinued operations


(197
)


(1,988
)


(409
)


(3,491
)Net loss

$
(45,070
)

$
(547
)

$
(51,434
)

$
(139,806
)Basic and diluted income (loss)
    per share:Income (loss) from continuing
    operations

$
(0.49
)

$
0.02


$
(0.55
)

$
(1.50
)Loss from discontinued operations


(0.00
)


(0.03
)


(0.00
)


(0.04
)$
(0.49
)

$
(0.01
)

$
(0.55
)

$
(1.54
)Shares used in per share
    computation


92,818



92,568



92,794



90,712Dividends paid per share of common
    stock

$
0.08


$
0.08


$
0.16


$
0.16Dividends declared per share of
    common stock

$
0.08


$
0.08


$
0.16


$
0.16    3




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  CONSOLIDATED
    CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 For the three months and six months ended June 30,
    2006 and 2005
 (Unaudited, in thousands)
  Three Months Ended


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Net loss

$
(45,070
)

$
(547
)

$
(51,434
)

$
(139,806
)Other comprehensive income (loss):Foreign currency translation
    adjustments


(4,643
)


(16,378
)


10,626



(31,740
)Unrealized gain (loss) on
    marketable equity securities and other


(144
)


2,993



(1,267
)


6,251Comprehensive (loss)

$
(49,857
)

$
(13,932
)

$
(42,075
)

$
(165,295
)    4




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##### Table of Contents



VALEANT
    PHARMACEUTICALS
  CONSOLIDATED
    CONDENSED STATEMENTS OF CASH FLOWS
 For the six months ended June 30, 2006 and 2005
 (Unaudited, in thousands)
  Six Months EndedJune 30,2006


2005Cash flows from operating
    activities:Net Loss

$
(51,434
)

$
(139,806
)Loss from discontinued operations


(409
)


(3,491
)Loss from continuing operations


(51,025
)


(136,315
)Adjustments to reconcile net loss
    to net cash provided by operating activities:Depreciation and amortization


47,070



45,498Provision for losses on accounts
    receivable and inventory obsolescence


7,671



3,805Stock compensation expense


10,700



1,052Translation and exchange (gains)
    losses, net


(1,694
)


4,422Impairment charges and other
    non-cash items


67,913



1,355Acquired in-process research and
    development






126,399Deferred income taxes


(3,787
)


(18,215
)Change in assets and liabilities,
    net of effects of acquisitions:Accounts receivable


(11,428
)


2,154Inventories


(12,435
)


(13,518
)Prepaid expenses and other assets


(1,933
)


3,916Trade payables and accrued
    liabilities


4,787



(21,176
)Income taxes payable


(6,442
)


21,744Other liabilities


1,732



1,284Cash flow from operating
    activities in continuing operations


51,129



22,405Cash flow from operating
    activities in discontinued operations


(418
)


(1,129
)Net cash provided by operating
    activities


50,711



21,276Cash flows from investing
    activities:Capital expenditures


(19,840
)


(15,021
)Proceeds from sale of assets


8,037



5,876Proceeds from investments


6,665



506,600Purchase of investments


(8,900
)


(299,672
)Acquisition of businesses, license
    rights and product lines


(2,932
)


(281,781
)Cash flow from investing
    activities in continuing operations


(16,970
)


(83,998
)Cash flow from investing
    activities in discontinued operations


(1
)


(132
)Net cash used in investing
    activities


(16,971
)


(84,130
)Cash flows from financing
    activities:Payments on long-term debt and
    notes payable


(6,137
)


(708
)Proceeds capitalized lease
    financing


578



Stock option exercises and
    employee stock purchases


2,395



1,646Proceeds from stock offering






189,030Dividends paid


(14,354
)


(13,650
)Net cash provided by (used in)
    financing activities


(17,518
)


176,318Effect of exchange rate changes on
    cash and cash equivalents


3,501



(9,033
)Net increase (decrease) in cash
    and cash equivalents


19,723



104,431Cash and cash equivalents at
    beginning of period


224,903



222,719Cash and cash equivalents at end
    of period


244,626



327,150Cash and cash equivalents
    classified as part of discontinued operations


(19
)


(995
)Cash and cash equivalents of
    continuing operations

$
244,607


$
326,155    5




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONALNOTES TO CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTSJune 30, 2006
    (Unaudited)
   Form 10-K
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization:
  Principles of Consolidation:
  Marketable Securities: available-for-sale
  Acquired In-Process Research and Development
    (IPR&D): AICPA Practice Aid, Assets Acquired in a
    Business Combination to Be Used in Research and Development
    Activities: A Focus on Software, Electronic Devices, and
    Pharmaceutical Industries.
     6




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
   Derivative Financial Instruments:
  Comprehensive Income: Reporting Comprehensive
    Income.
  Per Share Information:
  Stock-Based Compensation Expense:
      Six MonthsThree Months Ended June 30,


Ended June 30,2006


2005


2006


2005Employee stock options

$
4,483


$



$
9,408


$
Employee Stock Purchase Plan


148







268



Restricted stock grants


387



544



1,024



1,052Total stock compensation expense

$
5,018


$
544


$
10,700


$
1,052      7




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##### Table of Contents





VALEANT
    PHARMACEUTICALS INTERNATIONAL




NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)








Recent
    Accounting Pronouncement








Dividends:




Use of Estimates:




|   |              
|-- | -------------
|2. | Restructuring





















8



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##### Table of Contents



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


Six Months EndedMarch 31,


June 30,


June 30,2006


2006


2006(In thousands)Employee Severances
    (135 Employees)

$
6,644


$
5,369


$
12,013Contract cancellation and other
    cash costs






992



992Subtotal: Cash-related Charges


6,644



6,361



13,005Abandoned software and other
    capital assets


19,822



3,031



22,853Impairment of manufacturing assets






43,690



43,690Subtotal: Non-cash charges


19,822



46,721



66,543Total:

$
26,466


$
53,082


$
79,548   Reconciliation
    of Cash Restructuring Payments with Restructuring
    Accrual
  March 31,


June 30,2006


2006(In thousands)Opening Accrual

$



$
5,425Cash Charges


6,644



5,369Cash Paid


(1,219
)


(3,235
)Closing Accrual

$
5,425


$
7,559       3.
    Acquisitions  Infergen:
 9




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Xcel Pharmaceuticals, Inc.:
        Three Months


Six MonthsEnded


EndedJune 30,


June 30,2005


2005Net revenues

$
212,412


$
412,883Loss from continuing operations


(12,367
)


(207,889
)Net loss


(14,355
)


(211,380
)Basic and diluted net loss per
    share:Loss from continuing operations

$
(0.13
)

$
(2.25
)Net loss

$
(0.16
)

$
(2.28
)    10




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Discontinued
    Operations      Three Months Ended


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Revenues

$



$
5,630


$



$
7,722Loss before income taxes

$
(82
)

$
(2,421
)

$
(325
)

$
(3,706
)Provision for income taxes














Loss from discontinued operations,
    net


(82
)


(2,421
)


(325
)


(3,706
)Income (loss) on disposal of
    discontinued operation


(114
)


433



(83
)


215Income (loss) from discontinued
    operations

$
(197
)

$
(1,988
)

$
(409
)

$
(3,491
)     June 30,


December 31,2006


2005Cash

$
19


$
47Accounts receivable, net


30



45Property, plant and equipment, net






18Other assets






17Assets of discontinued operations

$
49


$
127Accounts payable

$
7


$
13Accrued liabilities


18,888



19,118Other liabilities


4,183



3,987Liabilities of discontinued
    operations

$
23,078


$
23,118    11




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##### Table of Contents



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


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Income (loss):Numerator for basic and dilutive
    earnings per share  loss to stockholders

$
(45,070
)

$
(547
)

$
(51,434
)

$
(139,806
)Shares:Denominator for basic and dilutive
    earnings per share  adjusted weighted-average shares
    after assumed conversions


92,818



92,568



92,794



90,712Basic and diluted income (loss)
    per share:Income (loss) from continuing
    operations

$
(0.49
)

$
0.02


$
(0.55
)

$
(1.50
)Loss from discontinued operations


(0.00
)


(0.03
)


(0.00
)


(0.04
)Basic and diluted net loss per
    share

$
(0.49
)

$
(0.01
)

$
(0.55
)

$
(1.54
)      12




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##### Table of Contents





VALEANT
    PHARMACEUTICALS INTERNATIONAL




NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)






|   |                               
|-- | ------------------------------
|6. | Detail of
    Certain Accounts







|                                              |  |          |          |   |              |   |          |  
|--------------------------------------------- |  | -------- | -------- | - | ------------ | - | -------- | -
|                                              |  | June 30, |          |   | December 31, |  
|                                              |  | 2006     |          |   | 2005         |  
|                                             
|Accounts receivable,
    net:                 |  |          |          |   |              |   |          |  
|Trade accounts receivable                     |  | $        | 154,297  |   |              | $ | 149,017  |  
|Royalties receivable                          |  |          | 22,888   |   |              |   | 27,306   |  
|Other receivables                             |  |          | 29,567   |   |              |   | 17,149   |  
|                                              |  |          |          |   |              |   |          |  
|                                              |  |          | 206,752  |   |              |   | 193,472  |  
|Allowance for doubtful accounts               |  |          | (5,185   | ) |              |   | (5,485   | )
|                                              |  |          |          |   |              |   |          |  
|                                              |  | $        | 201,567  |   |              | $ | 187,987  |  
|                                              |  |          |          |   |              |   |          |  
|Inventories, net:                             |  |          |          |   |              |   |          |  
|Raw materials and supplies                    |  | $        | 37,176   |   |              | $ | 34,931   |  
|Work-in-process                               |  |          | 26,875   |   |              |   | 28,726   |  
|Finished goods                                |  |          | 97,105   |   |              |   | 85,152   |  
|                                              |  |          |          |   |              |   |          |  
|                                              |  |          | 161,156  |   |              |   | 148,809  |  
|Allowance for inventory
    obsolescence      |  |          | (16,651  | ) |              |   | (12,775  | )
|                                              |  |          |          |   |              |   |          |  
|                                              |  | $        | 144,505  |   |              | $ | 136,034  |  
|                                              |  |          |          |   |              |   |          |  
|Property, plant and equipment,
    net:       |  |          |          |   |              |   |          |  
|Property, plant and equipment, at
    cost    |  | $        | 389,239  |   |              | $ | 401,613  |  
|Accumulated depreciation and
    amortization |  |          | (214,591 | ) |              |   | (171,487 | )
|                                              |  |          |          |   |              |   |          |  
|                                              |  | $        | 174,648  |   |              | $ | 230,126  |  
|                                              |  |          |          |   |              |   |          |  





Intangible assets:




|                        |  |               |         |  |                   |   |          |        |  |   |              |  |  |   |          |  
|----------------------- |  | ------------- | ------- |  | ----------------- | - | -------- | ------ |  | - | ------------ |  |  | - | -------- | -
|                        |  | June 30, 2006 |         |  | December 31, 2005 |  
|                        |  | Gross         |         |  | Accumulated       |   |          | Gross  |  |   | Accumulated  | 
|                        |  | Amount        |         |  | Amortization      |   |          | Amount |  |   | Amortization | 
|                       
|Intangible assets:      |  |               |         |  |                   |   |          |        |  |   |              |  |  |   |          |  
|Product rights          |  | $             | 769,601 |  |                   | $ | (287,213 | )      |  | $ | 763,652      |  |  | $ | (257,379 | )
|License agreement       |  |               | 67,376  |  |                   |   | (43,647  | )      |  |   | 67,376       |  |  |   | (37,330  | )
|                        |  |               |         |  |                   |   |          |        |  |   |              |  |  |   |          |  
|Total intangible assets |  | $             | 836,977 |  |                   | $ | (330,860 | )      |  | $ | 831,028      |  |  | $ | (294,709 | )
|                        |  |               |         |  |                   |   |          |        |  |   |              |  |  |   |          |  









|   |                 
|-- | ----------------
|7. | Income
    Taxes





13



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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
            8.
    Common
    Stock and Share Compensation    2006 Equity Incentive Plan:
 14




---



##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
   Stock Options Issued Under our Equity Incentive
    Plans:
  WeightedAverageNumber of


ExerciseShares


PriceShares under option,
    December 31, 2004


13,336



17.93Granted


2,192



18.16Exercised


(160
)


20.10Canceled


(736
)


22.28Shares under option,
    December 31, 2005


14,632



17.80Granted


152



17.14Exercised


(114
)


12.78Canceled


(828
)


16.83Shares Under Option,
    June 30, 2006


13,842


$
17.66Exercisable at December 31,
    2005


7,197


$
17.82Exercisable at June 30, 2006


7,675


$
17.28Options available for grant at
    December 31, 2005


513Options available for grant at
    June 30, 2006


5,358     Outstanding


Exercisable


WeightedWeighted





Weighted


AverageAverage





Average


RemainingNumber


Exercise


Number


Exercise


ContractualRange of Exercise Prices

of Shares


Price


of Shares


Price


Life (Years)$8.10 to $13.83


4,726


$
10.32



3,632


$
10.34



6.47$14.99 to $18.55


4,894


$
17.99



1,581


$
18.19



8.14$18.70 to $46.25


4,222


$
25.50



2,462


$
26.94



6.8613,842







7,675     2006


2005Weighted-average life (years)


4.1



4.1Volatility


38
%


41
%Expected dividend per share

$
0.31


$
0.31Risk-free interest rate


4.88
%


4.33
%Weighted-average fair value of
    options

$
5.47


$
6.10    15




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##### Table of Contents





VALEANT
    PHARMACEUTICALS INTERNATIONAL




NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)








Restricted Stock Units Issued Under our Incentive
    Plan:




2003 Employee Stock Purchase Plan:








|                                           |  |                  |        |  |             |   |        | 
|------------------------------------------ |  | ---------------- | ------ |  | ----------- | - | ------ | 
|                                           |  |                  |        |  | To Be       |  
|                                           |  | Recorded as      |        |  | Recorded as |  
|                                           |  | Expense in the   |        |  | Expense in  |  
|                                           |  | Six Months Ended |        |  | Future      |  
|                                           |  | June 30, 2006    |        |  | Periods     |  
|                                          
|Employee stock options                     |  | $                | 9,408  |  |             | $ | 18,809 | 
|Phantom and restricted stock units         |  |                  | 1,024  |  |             |   | 1,970  | 
|Employee stock purchase plan               |  |                  | 268    |  |             |   |       | 
|                                           |  |                  |        |  |             |   |        | 
|Total stock-based compensation
    expense |  | $                | 10,700 |  |             | $ | 20,779 | 
|                                           |  |                  |        |  |             |   |        | 



16



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##### Table of Contents





VALEANT
    PHARMACEUTICALS INTERNATIONAL




NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)










|                                    |  |                    |       |  |                  |   |        | 
|----------------------------------- |  | ------------------ | ----- |  | ---------------- | - | ------ | 
|                                    |  | Three Months Ended |       |  | Six Months Ended |  
|                                    |  | June 30, 2006      |       |  | June 30, 2006    |  
|                                   
|Cost of goods sold                  |  | $                  | 352   |  |                  | $ | 765    | 
|Selling expenses                    |  |                    | 858   |  |                  |   | 1,705  | 
|General and administrative expenses |  |                    | 3,050 |  |                  |   | 6,692  | 
|Research and development costs      |  |                    | 758   |  |                  |   | 1,538  | 
|                                    |  |                    |       |  |                  |   |        | 
|                                    |  | $                  | 5,018 |  |                  | $ | 10,700 | 
|                                    |  |                    |       |  |                  |   |        | 









|                    |  |   |        | 
|------------------- |  | - | ------ | 
|Remainder of 2006   |  | $ | 8,284  | 
|2007                |  |   | 8,492  | 
|2008                |  |   | 3,188  | 
|2009 and thereafter |  |   | 815    | 
|                    |  |   |        | 
|                    |  | $ | 20,779 | 
|                    |  |   |        | 





|   |                                        
|-- | ---------------------------------------
|9. | Legal
    Proceedings and Contingencies







Securities
    Class Actions:




Section 10b-5
    Litigation: Rule 10b-5








Derivative Actions: James Herrig, IRA v.
    Milan Panic et al. and/or




Paul Gerstley v. Norman
    Barker, Jr. et al.


17



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##### Table of Contents





VALEANT
    PHARMACEUTICALS INTERNATIONAL




NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)












Ribapharm Bonuses.








Indemnification of Directors:


18



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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
    Patent Oppositions:
    Argentina Antitrust Matter:
  Permax Product Liability Cases.
    Kali Litigation: No. 76-843 ® No. 04-3238 No. 76-843
 19




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
      Trademark litigation:
  Breach of Contract:
  Other:
 20




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##### Table of Contents



VALEANT
    PHARMACEUTICALS INTERNATIONAL
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
   10.
    Business
    Segments    
    North America, comprising the United States and Canada.
    International. The Latin America, Asia, and Australasia regions
    are now described as International.
    Europe, Middle East, and Africa (EMEA).     21




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##### Table of Contents



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


Six Months EndedJune 30,


June 30,2006


2005


2006


2005RevenuesSpecialty pharmaceuticalsNorth America

$
72,065


$
60,398


$
147,277


$
109,341International


64,471



54,430



109,661



96,346EMEA


71,981



66,000



132,336



136,944Total specialty pharmaceuticals


208,517



180,828



389,274



342,631Ribavirin royalties


21,635



24,206



39,726



43,541Consolidated revenues

$
230,152


$
205,034


$
429,000


$
386,172Operating Income
    (Loss)Specialty pharmaceuticalsNorth America


13,850



16,552



36,342



33,246International


22,934



15,431



32,106



25,761EMEA


12,393



8,867



16,609



20,87949,177



40,850



85,057



79,886Corporate expenses(1)


(16,262
)


(14,344
)


(39,452
)


(28,711
)Total specialty pharmaceuticals


32,915



26,506



45,605



51,175Restructuring charges(2)


(53,082
)


1,324



(79,548
)


(371
)Gain on litigation settlement










34,000



Research and development


(10,684
)


(6,621
)


(22,974
)


(15,957
)Acquired IPR&D(2)














(126,399
)Consolidated segment operating
    income (loss)


(30,851
)


21,209



(22,917
)


(91,552
)Interest income


2,715



3,119



5,372



6,134Interest expense


(10,861
)


(10,063
)


(21,298
)


(19,744
)Other, net


757



(2,631
)


1,694



(4,422
)Income (loss) from continuing
    operations before provision for income taxes and minority
    interest

$
(38,240
)

$
11,634


$
(37,149
)

$
(109,584
)     (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)
    
    Restructuring charges and IPR&D 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)
     Total AssetsJune 30,


December 31,2006


2005North America

$
489,121


$
503,196International


184,787



183,740EMEA


373,987



384,191Corporate


208,746



240,680Research and Development Division


209,654



218,943Discontinued operations


49



127Total

$
1,466,344


$
1,530,877     Long Term AssetsJune 30,


December 31,2006


2005North America

$
392,841


$
426,745International


60,578



61,049EMEA


115,746



129,952Corporate


117,556



158,801Research and Development Division


147,618



158,464Total

$
834,339


$
935,011     Three Months Ended


Six Months EndedJune 30,


June 30,2006


2005


2006


2005DermatologyEfudix/Efudex®(P)

$
14,978


$
12,231


$
30,560


$
31,507Kinerase®(P)


9,024



5,821



15,884



10,256Oxsoralen-Ultra®(P)


3,593



4,126



7,101



7,094Dermatixtm(P)


2,977



2,566



4,811



4,462Eldoquin(P)


1,571



1,116



2,753



2,521Other Dermatology


10,612



7,783



17,826



14,511Infectious DiseaseInfergen®(P)(a)


11,309







25,014



Virazole®(P)


3,541



4,039



8,698



8,234Other Infectious Disease


4,890



4,245



9,622



10,098 23




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##### Table of Contents



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


Six Months EndedJune 30,


June 30,2006


2005


2006


2005NeurologyDiastat(P)(b)


11,709



14,291



23,731



19,468Mestinon®(P)


12,326



10,434



22,143



20,294Librax(P)


5,004



1,670



7,924



5,751Cesamet(P)


4,042



1,919



7,345



3,974Migranal(P)(b)


2,701



4,130



5,816



4,904Dalmane/Dalmadorm(P)


2,544



3,329



5,010



5,971Tasmar®(P)


1,666



1,533



2,851



2,472Limbitrol(P)


1,318



1,623



2,828



2,917Other Neurology


15,575



15,525



30,165



26,092Other Therapeutic
    ClassesBedoyectatm(P)


12,512



10,976



23,092



20,220Solcoseryl


4,597



3,911



7,974



8,105Bisocard(P)


3,912



3,363



7,477



6,018Nyal(P)


4,803



5,366



6,557



7,840Calcitonin(P)


2,228



2,733



4,078



5,318Espaven(P)


2,983



1,509



4,285



3,071Aclotin(P)


1,219



1,370



2,591



2,890Other Pharmaceutical Products


56,883



55,219



103,138



108,643Total product sales

$
208,517


$
180,828


$
389,274


$
342,631Total Promoted Product sales(P)

$
120,557


$
98,056


$
228,523


$
183,287     (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 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



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
      Specialty
    Pharmaceuticals
  Specialty Pharmaceutical Revenues:
  Clinical
    Development
      Ribavirin
    Royalties
  year-to-date
  Company
    Strategy and Restructuring
    Targeted Growth of Existing Products.
 25




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##### Table of Contents



Efficient Manufacturing and Supply Chain
    Organization.
  Clinical Development Activities.
  Product Acquisitions.
    
    North America, comprising the United States and Canada.
    International. The Latin America, Asia, and Australasia regions
    are now described as International.
    Europe, Middle East, and Africa (EMEA).     26




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##### Table of Contents



Restructuring
    Charge Details
  Three Months Ended


Six Months Ended


Anticipated Total(In thousands)

March 31, 2006


June 30, 2006


June 30, 2006


Restructuring ChargeEmployee Severances (135 Employees)

$
6,644


$
5,369


$
12,013


$
19,000 - 28,000Contract cancellation and other
    cash costs






992



992



1,000 -  2,000Subtotal: Cash-related Charges


6,644



6,361



13,005



20,000 - 30,000Abandoned software and other
    capital assets


19,822



3,031



22,853



23,000 - 24,000Impairment of manufacturing assets






43,690



43,690



47,000 - 71,000Subtotal: Non-cash charges


19,822



46,721



66,543



70,000 - 95,000Total:

$
26,466


$
53,082


$
79,548


$
90,000-$115,000   Reconciliation
    of Cash Restructuring Payments with Restructuring
    Accrual
  (In thousands)

March 31, 2006


June 30, 2006Opening Accrual

$



$
5,425Cash Charges


6,644



5,369Cash Paid


(1,219
)


(2,243
)Closing Accrual

$
5,425


$
8,551   Results
    of Operations
   27




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##### Table of Contents



Three Months EndedJune 30,


Increase/


Percent2006


2005


(Decrease)


ChangeRevenuesSpecialty pharmaceuticalsNorth America

$
72,065


$
60,398


$
11,667



19
%International


64,471



54,430



10,041



18EMEA


71,981



66,000



5,981



9Total specialty pharmaceuticals


208,517



180,828



27,689



15Ribavirin royalties


21,635



24,206



(2,571
)


(11
)Total revenues


230,152



205,034



25,118



12Costs and ExpensesCost of goods sold (excluding
    amortization)


65,744



52,940



12,804



24Selling expenses


66,268



61,454



4,814



8General and administrative expenses


31,553



25,985



5,568



21Research and development costs


26,842



27,559



(718
)


(3
)Restructuring charges


53,082



(1,324
)


54,406



NMAmortization expense


17,514



17,211



303



2Operating income

$
(30,851
)

$
21,209


$
(52,060
)


NMGross profit on product sales
    (excluding amortization)

$
142,773


$
127,888


$
14,885



12Gross profit margin on product
    sales


68
%


71
%   28




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##### Table of Contents



Six Months EndedJune 30,


Increase/


Percent2006


2005


(Decrease)


ChangeRevenuesSpecialty pharmaceuticalsNorth America

$
147,277


$
109,341


$
37,936



35
%International


109,661



96,346



13,315



14EMEA


132,336



136,944



(4,608
)


(3
)Total specialty pharmaceuticals


389,274



342,631



46,643



14Ribavirin royalties


39,726



43,541



(3,815
)


(9
)Total revenues


429,000



386,172



42,828



11Costs and ExpensesCost of goods sold (excluding
    amortization)


124,324



101,661



22,663



22Selling expenses


130,538



114,269



16,269



14General and administrative expenses


60,093



50,562



9,531



19Research and development costs


56,377



53,283



3,094



6IPR&D






126,399



(126,399
)


NMGain on litigation settlement


(34,000
)










NMRestructuring charges


79,548



371



79,177



NMAmortization expense


35,037



31,179



3,858



12Operating loss

$
(22,917
)

$
(91,552
)

$
34,635



(38
)Gross profit on product sales
    (excluding amortization)

$
264,950


$
240,970


$
23,980



10Gross profit margin on product
    sales


68
%


70
%        29




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##### Table of Contents



Ribavirin Royalties:
  Gross Profit Margin (excluding
    amortization):
  Selling Expenses:
  General and Administrative Expenses:
  Research and Development:
 30




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##### Table of Contents



Acquired In-Process Research and
    Development:
  Restructuring Charges:
  Amortization:
  Other Income (expense),Net, Including Translation and
    Exchange:
  Interest Expense, net:
  Income Taxes:
  Loss from Discontinued Operations, Net of
    Taxes:
 31




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##### Table of Contents



Liquidity
    and Capital Resources
                  Off-Balance
    Sheet Arrangements
  Form 10-K.
  Products
    in Development
  Late
    Stage Development of New Chemical Entities
  Viramidine (taribavirin):
 32




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##### Table of Contents



Retigabine: End-of-Phase 2
    Other
    Development Activities
  Infergen:
 33




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##### Table of Contents



24-week follow-up
  Zelapar: ®
  Pradefovir (formerly called
    remofovir): once-a-day
  Foreign
    Operations
      Critical
    Accounting Estimates
     34




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##### Table of Contents



Revenue
    Recognition
                 35




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##### Table of Contents



Sales
    Incentives
  ordinary-course-of-business
  Income
    Taxes
            Impairment
    of Property, Plant and Equipment
   36




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##### Table of Contents



Valuation
    of Intangible Assets
        Purchase
    Price Allocation Including Acquired In-Process Research and
    Development
    Assets
    Acquired in Business Combinations to be Used in Research and
    Development Activities: A Focus in Software, Electronic Devices
    and Pharmaceutical Industries.
   37




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##### Table of Contents



Stock-based
    Compensation Expense
      2006Weighted-average life (years)


4.1Volatility


38
%Expected dividend per share

$
0.31Risk-free interest rate


4.88
%Weighted-average fair value of
    options

$
5.47         Contingencies
  Accounting for Contingencies
 38




---



##### Table of Contents



Other
    Financial Information
    Forward-Looking
    Statements
  Form 10-Q Form 10-Q, Form 10-K Form 10-Q
    
    The future growth of our business depends on the development,
    approval, and commercialization of new products, including
    Viramidine (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 successfully 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 may negatively impact future
    financial results.
    Trade secret protection is less effective than patent protection
    because competitors may discover the technology or develop
    parallel technology. 39




---



##### Table of Contents




    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 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.
    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. At June 30, 2006 we have in place foreign
    currency hedge transactions to reduce our exposure to
    variability in the Polish Zloty. We continue to evaluate the
    possibility of entering into additional hedge arrangements.
    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. Viramidine (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. 40




---



##### Table of Contents




    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 notes to consolidated condensed
    financial statements, any of which could result in substantial
    cost and divert managements attention and resources.
    Dependence on key personnel leaves us vulnerable to a negative
    impact if they leave. Our continued success will depend, to a
    significant extent, upon the efforts and abilities of the key
    members of management. The loss of their services could have a
    negative impact on us.
    Our research and development activities involve the controlled
    use of potentially harmful biological materials as wells as
    hazardous materials, chemicals and various radioactive
    compounds. We cannot completely eliminate the risk of accidental
    contamination or injury from the use, storage, handling or
    disposal of these materials. In the event of contamination or
    injury, we could be held liable for damages that result. Any
    liability could exceed our 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.
    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. 41




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##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk      Notional/


Assets (Liabilities)Contract


Carrying


FairDescription

Amount


Value


ValueForward contracts

$
45,376


$
(2,698
)

$
(2,698
)Interest rate swaps


150,000



(9,092
)


(9,092
)Outstanding fixed-rate debt


780,000



(780,000
)


(712,000
)      42




---



##### Table of Contents



Item 4.
    Controls
    and Procedures       43




---



##### Table of Contents



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
    do not realize the expected benefits from the restructuring plan
    we announced in April 2006, our operating results and financial
    conditions would be negatively impacted.
  and/or
  If we
    or our third-party manufacturers are unable to manufacture our
    products or the manufacturing process is interrupted due to
    failure to comply with regulations or for other reasons, the
    manufacture of our products could be interrupted.
       44




---



##### Table of Contents



Item 5.
    Other
    Information    Item 6.
    Exhibits  (a)
    Exhibits  ExhibitNumber

Description10
.1

Valeant Pharmaceuticals
    International Executive Incentive Plan, previously described in
    Item 1.01 of Registrants Current Report on
    Form 8-K
    filed on April 19, 2006, which is incorporated herein by
    reference.10
.2

Valeant Pharmaceuticals
    International 2006 Equity Incentive Plan, previously filed as
    Exhibit 10.1 to the Current Report on
    Form 8-K
    filed on May 25, 2006, which is incorporated herein by
    reference.10
.3

Form of Restricted Stock Unit
    Award Agreement under the 2003 Equity Incentive Plan, previously
    filed as Exhibit 99.1 to the Current Report on
    Form 8-K
    filed on June 27, 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.     
    
    Management contract or compensatory plan or arrangement. 45




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##### Table of Contents



SIGNATURES  Form 10-Q
  Valeant Pharmaceuticals
    International
  Timothy
    C. Tyson
    President and Chief Executive Officer
    Bary
    G. Bailey
    Executive Vice President and Chief Financial Officer
  (Principal Financial and Accounting Officer)
   46




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Description10
.1

Valeant Pharmaceuticals
    International Executive Incentive Plan, previously described in
    Item 1.01 of Registrants Current Report on
    Form 8-K
    filed on April 19, 2006, which is incorporated herein by
    reference.10
.2

Valeant Pharmaceuticals
    International 2006 Equity Incentive Plan, previously filed as
    Exhibit 10.1 to the Current Report on
    Form 8-K
    filed on May 25, 2006, which is incorporated herein by
    reference.10
.3

Form of Restricted Stock Unit
    Award Agreement under the 2003 Equity Incentive Plan, previously
    filed as Exhibit 99.1 to the Current Report on
    Form 8-K
    filed on June 27, 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.     
    
    Management contract or compensatory plan or arrangement. 47