Timothy C. Tyson

President and Chief Executive Officer


In many ways, 2006 was a life-changing year for Valeant Pharmaceuticals.  It was a challenging year – one that certainly stretched us and tested our resolve.  Yet, it was also a year that produced many successes.  We expanded the array of medicines that we provide physicians and their patients, continued to grow our business and streamline operations, and improve our earnings performance for the year.  In spite of the year’s challenges, we continued to make excellent progress toward our goal of delivering long-term sustainable value for our stockholders.

One of Valeant’s enduring strengths is its team of leaders and professionals and the deep industry experience that each brings to the company.  There are few challenges that we have not faced in our careers, and those that occurred this past year were certainly not unique.  How we approached these challenges strengthened our team, enabling us to respond quickly and make the difficult decisions needed to deliver forecasted results.

Without a doubt, one of the biggest challenges of the year was the outcome of our taribavirin Phase 3 trials.  While we cured 38-40 percent of the patients treated, and did so while maintaining a superior safety advantage over ribavirin with respect to anemia, the efficacy results did not achieve the non-inferiority criteria set forth in the study protocol.  Our analysis of the Phase 3 trial results leads us to believe that the dosage of taribavirin, like that of ribavirin, likely needs to be based on patient’s weight to achieve efficacy equal to that of ribavirin.  We initiated a Phase 2b study to investigate the weight-based dosing effect.  We expect the 12-week results of this study by the end of 2007.  We will make a decision about whether to proceed with an additional Phase 3 trial at that time.

We were prepared to deal with this contingency and responded rapidly and decisively with a restructuring plan to streamline operations, reduce costs and enhance earnings performance.  While it was difficult to impact the lives of many of our colleagues, the restructuring plan was essential to achieving our goals.

Our execution of the restructuring has gone smoothly and the plan remains on track for completion in 2007.  We have strategically realigned our operating regions from four to three, significantly reduced our overhead costs, refocused our clinical resources, and made progress toward further reductions in our manufacturing facilities.  We also successfully out-licensed pradefovir and divested certain pre-clinical and discovery operations.

The restructuring plan reduced costs by $30 million in 2006 and is expected to result in overall cost savings of more than $50 million in 2007 and beyond.  The plan establishes a platform from which our base business can continue to achieve average or above-average sales growth and improved earnings performance.

Our base business continued to perform better than the average for the pharmaceutical industry in 2006.  Much of the growth was led by the acquisition and launch of new products and strong performance from many of our promoted brands.  Overall, sales increased 13 percent in 2006 compared to 2005, led by a 27 percent increase in promoted products, including the acquisition of Infergen.  After Infergen, the strongest contributors to 2006 performance included Efudex, Cesamet, Kinerase, Diastat AcuDial, Mestinon and Bedoyecta.

Infergen experienced strong growth in the first half of the year, but trends reversed in the latter half due to increased competition and an overall decline in the interferon market.  With added focus and new clinical data and resources, we expect to see stronger demand for Infergen – still the only product approved for the treatment of hepatitis C in refractory patients.

We launched two important products in the U.S. market in 2006.  Zelapar, an MAO-B inhibitor used in the treatment of Parkinson’s disease, was launched in July.  Initial uptake was slower than expected, but demand trends are positive.  We routinely receive comments from physicians which confirm our belief in the product.  Zelapar is making a difference in the lives of their patients.  Cesamet, a cannibinoid indicated for the treatment of breakthrough emesis, was launched in May 2006.  We expect Cesamet sales in the United States to grow as we launch a new commercial strategy, study the drug in new indications, and pursue a less restrictive scheduling of the product.  We recently filed an investigational new drug application fro Cesamet in treating pain and acquired rights to the drug in the United Kingdom and Europe.  Cesamet was recently approved for pain and emesis in Mexico and continues to perform exceptionally well in Canada where it holds 87 percent market share.

With the restructuring of our research and development operations completed, our pipeline currently consists of two new chemical compounds: taribavirin and retigabine.  As mentioned previously, we are conducting a Phase 2b study with taribavirin to determine the proper dose.  Our protocol for the Phase 2b study was reviewed with the FDA and we are enrolling patients now.  When we complete the interim analysis from the Phase 2b study, we will meet with the FDA and decide whether to pursue an additional Phase 3 study.  If we initiate a new Phase 3 study, we plan to seek a partner to share the investment and risk of this larger development program.  We believe that there remains a need for ribavirin or ribavirin analogues in the hepatitis C treatment armamentarium even if new molecules are successful in clinical trials and come to market, and we remain hopeful that taribavirin can fulfill this need.

Retigabine is a first-in-class, selective neuronal potassium channel opener that we are developing as an adjunctive treatment for partial onset seizures in patients with refractory epilepsy.  We are currently conducting two pivotal Phase 3 studies in the first half of 2007.  We believe that retigabine has significant clinical and market potential.  We plan to study the drug in treating other indications such as neuropathic pain and intend to develop additional formulations.  We plan to seek a partner for the development of retigabine as we pursue additional indications.

We are please with our progress to date in growing our base businesses and developing our pipeline.  To continue growing our base business at average or better than industry average rates, we intend to pursue new opportunities.  We laid out a plan in 2006 to this through the acquisition of products in multiple markets around the world and early state clinical candidates.  We believe this strategy provides a balanced approach to growth by increasing the number of new product offering in all of our markets, and limiting development risk through the pursuit of a balanced portfolio.  This strategy will allow us to broaden our pipeline and pursue near-term growth prospects.

As we continue to grow our base business, we remain firmly focused on streamlining operations and reducing cots.  We were successful during the year in lowering overhead, and research and development expenses through our restructuring plan.  The combination of top-line growth and cost reductions enabled us to achieve our adjusted earnings per share goals of more than $0.50 per share.

We also faced the challenge in 2006 of restating our financial statements for errors in accounting for stock option grants.  During the year, we received a request from the Securities and Exchange Commission for data on our stock option granting practices as part of an informal inquiry.  We formed a special committee of the board, comprised solely of independent directors, who conducted an extensive review f the company’s historical stock option grating practices and related accounting.  The special committee concluded its comprehensive investigation and, as discussed more in the accompanying report on Form 10-K, we restated our financial statements accordingly.

On a personal note, one of the low points in 2006 was the passing of a dear friend and our chairman, Robert W. O’Leary.  Rob was a man of enormous vision, courage, and character – values central to everything he touched.  He led Valeant through a remarkable turn around and emphasized integrity, accountability and transparency.  We will miss Robs’ counsel and wisdom, and his mark will long be felt by Valeant.

In accordance with our cession process, the board elected Robert A. Ingram as our new chairman.  Mr. Ingram serves as Vice Chairman, Pharmaceuticals at GlaxoSmithKline and has been a Valeant board member since 2003.  He is a veteran of the pharmaceutical industry and one of its preeminent leaders.  Bob and I both share the same vision and passion for making Valeant a leading specialty pharmaceutical company.

Reflecting on 2006, it was a year of momentous change and exceptional performance.  We expect 2007 to be another year of growth and improvement.  Our strategic focus will be to aggressively acquire, develop and commercialize new products.  Through strategic acquisitions, growth in our promoted brands, and continued management of expenses, we expect to make further progress toward our goal of creating long-term value for our stockholders.

At Valeant, we make life-changing medicines that help patients whose lives are impacted by disease and suffering.  That mission will never change.  We have talented and experienced professional, good products and a sound business strategy.  The management team continues to be committed to delivering on its promises.

Thank you for your continued support and ongoing interest in Valeant Pharmaceuticals.