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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o
Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934

OR

ý
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002

OR

o
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the transition period from                 to

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of Each Exchange on Which Registered

Common Shares, No Par Value
 
New York Stock Exchange
Toronto Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 158,120,144 common shares, no par value, as of December 31, 2002

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    ý                No    o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17    o                Item 18    ý


TABLE OF CONTENTS

GENERAL INFORMATION

PART 1

 
    
    
   Page
             
Item 1.   Identity of Directors, Senior Management and Advisors   1
Item 2.   Offer Statistics and Expected Timetable   1
Item 3.   Key Information   1
    A.   Selected Consolidated Financial Data   1
    B.   Capitalization and Indebtedness   2
    C.   Reasons for the Offer and Use of Proceeds   3
    D.   Risk Factors   3
Item 4.   Information on the Company   6
    A.   History and Development of the Company   6
    B.   Business Overview   7
    C.   Organizational Structure   35
    D.   Property, Plant and Equipment   35
Item 5.   Operating and Financial Review and Prospects   37
Item 6.   Directors, Senior Management and Employees   79
    A.   Directors and Officers of the Company   79
    B.   Compensation   81
    C.   Board Practices   84
    D.   Employees   90
    E.   Share Ownership   90
Item 7.   Major Shareholders and Related Party Transactions   91
    A.   Major Shareholders   91
    B.   Related Party Transactions   91
    C.   Interests of Experts and Counsel   92
Item 8.   Financial Information   92
    A.   Consolidated Statements and Other Financial Information   92
    B.   Significant Changes   95
Item 9.   The Offer and Listing   95
    A.   Nature of Trading Markets   95
    B.   Plan of Distribution   96
    C.   Markets   96
    D.   Selling Shareholders   96
    E.   Dilution   96
    F.   Expenses of the Issue   96
Item 10.   Additional Information   96
    A.   Share Capital   96
    B.   Memorandum and Articles of Association   96
    C.   Material Contracts   97
    D.   Exchange Controls   97
             

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    E.   Taxation   99
    F.   Dividends and Paying Agents   101
    G.   Statements by Experts   101
    H.   Documents on Display   101
    I.   Subsidiary Information   103
Item 11.   Quantitative and Qualitative Disclosures About Market Risk   104
Item 12.   Description of Securities Other Than Equity Securities   104

PART II
 
 
Item 13.   Defaults, Dividend Arrearages and Delinquencies   104
Item 14.   Material Modification to the Rights of Security Holders and Use of Proceeds   104
Item 15.   Controls and Procedures   104
Item 16.   [Reserved]   104

PART III
 
 
Item 17.   Financial Statements   104
Item 18.   Financial Statements   104
Item 19.   Exhibits   II-1
    Signatures   II-2
    Certificates    

Basis of Presentation

        Unless otherwise indicated, all references in this report to the "Company", "Biovail", "we", "us", "our" or similar terms refer to Biovail Corporation together with its subsidiaries.

        All dollar amounts in this report are expressed in United States dollars except where stated otherwise. In this report, unless stated otherwise, all references to "U.S.$" or "$" are to the lawful currency of the United States and all references to "C$" are to the lawful currency of Canada.

        The following words and logos are trademarks of the Company and may be registered in Canada, the United States and certain other jurisdictions: Biovail, Cardizem®, Tiazac®, Teveten®, Vasotec®, Vaseretic®, CEFORM™, Shearform™, FlashDose®, Instatab™, SportSafe™, DrinkUp™, and Cardisense®. All other product names referred to in this document are the property of their respective owners.

Forward Looking Statements

        "Safe Harbour" statement under the United States Private Securities Litigation Reform Act of 1995:

        To the extent any statements made or incorporated by reference in this report contain information that is not historical, these statements are essentially forward-looking. As such, they are subject to risks and uncertainties, including the difficulty of predicting U.S. Food and Drug Administration ("FDA") and Canadian Therapeutic Products Programme ("TPP") approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, new product development and launch, reliance on key strategic alliances, availability of raw materials, production interruptions or supply delays at third party suppliers or at our own manufacturing facilities, the outcome of litigation, the regulatory environment, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the United States Securities and Exchange Commission ("SEC") including the risks set forth in Item 3 of this report and securities commissions or other securities regulatory authorities in Canada ("Canadian Securities Authorities").

ii


PART I

Item 1.    Identity of Directors, Senior Management and Advisors

        Not applicable

Item 2.    Offer Statistics and Expected Timetable

        Not applicable

Item 3.    Key Information

A.    Selected Consolidated Financial Data

        Beginning January 1, 2000, we changed from publicly reporting our financial results prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") to publicly reporting those results prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). Our financial statements prepared in accordance with U.S. GAAP for each of the years ended December 31, 2002, 2001 and 2000 and our financial statements prepared in accordance with Canadian GAAP for each of the years ended December 31, 2002, 2001 and 2000 have been audited. The audited financial statements prepared in accordance with Canadian GAAP and U.S. GAAP are included under Item 18 "Financial Statements".

        The following tables of selected consolidated financial data of the Company have been derived from financial statements prepared in accordance with U.S. GAAP and Canadian GAAP, as indicated. The data is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes thereto prepared in accordance with U.S. GAAP and Canadian GAAP.


In accordance with U.S. GAAP
(All dollar amounts are expressed in thousands of U.S. dollars,
except number of shares and per share data)

 
   Years ended December 31,
 
   2002
  
   2001
  
   2000
    
   1999
    
   1998(1)
 
    
  
    
  
    
    
    
    
   Unaudited
Consolidated operating data:                                          
Revenue   $ 788,025     $ 583,263     $ 309,170       $ 172,464       $ 111,657
Operating income (loss)     134,284 (2)     171,156 (4)     (78,032 ) (6)     (40,160 ) (8)     45,303
Net income (loss)     87,795 (3)     87,448 (5)     (147,976 ) (7)     (109,978 ) (9)     41,577
Basic earnings (loss) per share     0.58 (3)     0.64 (5)     (1.16 ) (7)     (1.07 ) (9)     0.39
Diluted earnings (loss) per share   $ 0.55 (3)   $ 0.58 (5)   $ (1.16 ) (7)   $ (1.07 ) (9)   $ 0.38
 
   As at December 31,
 
   2002
   2001
   2000
   1999
   1998(1)
 
    
    
    
    
   Unaudited
Consolidated balance sheet data:                              
Cash and cash equivalents   $ 56,080   $ 434,891   $ 125,144   $ 178,086   $ 78,279
Working capital     (23,527 )   427,856     (25,295 )   266,068     114,898
Total assets     1,833,804     1,331,483     1,107,267     467,179     198,616
Long-term obligations     747,350     46,161     438,744     137,504     126,835
Convertible Subordinated Preferred
Equivalent Debentures		     —     —     299,985     —     —
Shareholders' equity   $ 845,686   $ 1,126,074   $ 237,458   $ 267,336   $ 49,888
Number of common shares issued and outstanding [000s](10)     158,120     157,496     131,461     124,392     99,444
1.
Figures for 1998 have been derived from the audited consolidated financial statements prepared in accordance with Canadian GAAP, and the reconciliation of material differences between Canadian and U.S. GAAP included in the notes thereto.

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2.
Including a charge of $31,944 relating to the write-down of certain assets and a charge of $167,745 for acquired research and development.

3.
Including charges of $31,944 relating to the write-down of certain assets, a charge of $167,745 for acquired research and development and $3,408 of other income.

4.
Including a charge of $80,482 relating to the write-down of certain assets.

5.
Including charges of $80,482 relating to the write-down of certain assets and $34,923 for the debt conversion premiums relating to the conversion of our 6.75% Convertible Subordinated Preferred Equivalent Debentures due 2025 ("Debentures").

6.
Including a charge of $208,424 for acquired research and development.

7.
Including charges of $208,424 for acquired research and development, $20,039 ($0.16 basic and diluted loss per share) for an extraordinary item relating to the premium paid on the early extinguishment of the 107/8% U.S. Dollar Senior Notes due 2005 ("Senior Notes"), and $43,500 ($0.34 basic and diluted loss per share) for the cumulative effect of a change in accounting principle relating to the recognition of revenue.

8.
Including a charge of $105,689 for acquired research and development.

9.
Including charges of $105,689 for acquired research and development and $58,399 in respect of the equity loss in Fuisz Technologies Ltd. ("Fuisz"), and a net gain of $1,948 on disposal of certain long-term investments.

10.
All share amounts have been adjusted to give effect to the 2 for 1 stock splits completed in December 1999 and October 2000.


In accordance with Canadian GAAP
(All dollar amounts are expressed in thousands of U.S. dollars,
except number of shares and per share data)

 
   Years ended December 31,
 
   2002
  
   2001
  
   2000
  
   1999
  
   1998
Consolidated operating data:                                      
Revenue   $ 788,025     $ 583,263     $ 311,457     $ 165,092     $ 98,836
Operating income     247,679 (1)     116,310 (2)     116,223       64,117       35,145
Net income attributable to
common shareholders		     207,553 (1)     85,553 (3)     81,163 (4)     51,080 (5)     31,419
Basic earnings per share     1.37 (1)     0.62 (3)     0.63 (4)     0.50 (5)     0.29
Diluted earnings per share   $ 1.29 (1)   $ 0.57 (3)   $ 0.57 (4)   $ 0.47 (5)   $ 0.29
 
   Years ended December 31,
 
   2002
   2001
   2000
   1999
   1998
Consolidated balance sheet data:                              
Cash and cash equivalents   $ 56,080   $ 434,891   $ 125,144   $ 178,086   $ 78,279
Working capital     (23,527 )   427,856     (25,295 )   256,768     109,124
Total assets     2,237,666     1,643,026     1,460,967     635,137     199,919
Long-term obligations     732,111     46,161     438,744     137,504     126,835
Shareholders' equity   $ 1,264,787   $ 1,425,417   $ 839,110   $ 391,794   $ 19,091
Number of common shares issued and outstanding [000s](6)     158,120     157,496     131,461     124,392     99,444
1.
Including a charge of $31,944 relating to the write-down of certain assets.

2.
Including a charge of $80,482 relating to the write-down of certain assets.

3.
Including charges of $48,246, net of tax of $32,236, relating to the write-down of certain assets and $10,001 for the debt conversion premiums relating to the conversion of the Debentures.

4.
Including a charge $20,039 relating to the premium paid on the early extinguishment of the Senior Notes.

5.
Including a charge of $1,618 in respect of the equity loss in Fuisz, and a net gain of $1,948 on disposal of certain long-term investments.

6.
All share amounts have been adjusted to give effect to the 2 for 1 stock splits completed in December 1999 and October 2000.

B.    Capitalization and Indebtedness

        Not applicable

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C.    Reasons for the Offer and Use of Proceeds

        Not applicable

D.    Risk Factors

The pharmaceutical industry is highly competitive and is subject to rapid and significant technological change, which could render our technologies and products obsolete or uncompetitive.

        Our products face intense competition from conventional forms of drug delivery and from controlled-release drug delivery systems developed, or under development, by other pharmaceutical companies. We compete with companies in North America and abroad, including major pharmaceutical and chemical companies, specialized contract research organizations, research and development firms, universities and other research institutions. Some of our competitors are also licensees of our products. Many of our competitors have greater financial resources and marketing capabilities, have greater experience in clinical testing and human clinical trials of pharmaceutical products and have greater experience in obtaining FDA and other regulatory approvals. Our competitors may succeed in developing technologies and products that are more effective or cheaper to use than any that we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which would have a material adverse effect on our business and financial results.

Our business is subject to limitations imposed by government regulations.

        The cost of complying with government regulation can be substantial. Governmental authorities in the United States and Canada and comparable authorities in foreign countries also regulate the research and development, manufacture, testing and safety of pharmaceutical products. The regulations applicable to our existing and future products may change. There can be long delays in obtaining required clearances from regulatory authorities in any country after applications are filed. Government agencies in the United States, Canada and other countries in which we carry on business regulate pharmaceutical products intended for human use. Regulations require extensive clinical trials and other testing and government review and final approval before we can market these products.

        Requirements for approval vary widely from country to country outside of the United States and Canada. Whether or not approved in the United States or Canada, regulatory authorities in other countries must approve a product prior to the commencement of marketing the product in those countries. The time required to obtain any such approval may be longer or shorter than in the United States or Canada.

        Any failure or delay in obtaining regulatory approvals could adversely affect the marketing of any products we develop and therefore our business, results of operations, financial condition and cash flows.

Uncertainty can arise regarding the applicability of our patents and proprietary technology and patent protection is unpredictable.

        Competitors may have filed patent applications, or hold issued patents, relating to products or processes competitive with those we are developing. Our patent applications for a product may not be approved or approved as desired. The patents of our competitors may impair our ability to do business in a particular area. Others may independently develop similar products or duplicate any of our unpatented products. Our success will depend, in part, on our ability in the future to obtain patents, protect trade secrets and other proprietary information and operate without infringing on the proprietary rights of others.

        Historically, we have relied on trade secrets, know-how and other proprietary information as well as requiring our employees and other vendors and suppliers to sign confidentiality agreements. However, these confidentiality agreements may be breached, and we may not have adequate remedies for such breaches. Others may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to our proprietary information and adopt it in a competitive manner.

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        With respect to the segment of our business where we manufacture and supply bioequivalent versions of existing drugs, there has been substantial litigation in the pharmaceutical industry concerning the manufacture, use and sale of new products that are the subject of conflicting patent rights. When we file an Abbreviated New Drug Application ("ANDA") for a bioequivalent version of a drug, we are required to certify to the FDA that any patent which has been listed with the FDA as covering the branded product has expired, the date any such patent will expire, or that any such patent is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the application is submitted. Approval of an ANDA is not effective until each listed patent expires, unless the applicant certifies that the patents at issue are not infringed or are invalid and so notifies the patent holder and the holder of the branded product New Drug Application ("NDA"). A patent holder may challenge a notice of non-infringement or invalidity by suing for patent infringement within 45 days of receiving notice. Such a challenge would prevent FDA approval for a period which ends 30 months after the receipt of notice, or sooner if an appropriate court rules that the patent is invalid or not infringed. From time to time, in the ordinary course of business, we face such challenges.

        The expense of litigation, whether or not we are successful, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Such lawsuits may be brought and the ultimate outcome of such litigation, if commenced, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Regardless of FDA approval, should anyone commence a lawsuit with respect to any alleged patent infringement by us, whether because of the filing of an ANDA or otherwise, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict.

There is no assurance that we will continue to be successful in our licensing and marketing operations.

        Certain of our products are marketed by third parties by way of license agreements or otherwise. Such third-party arrangements may not be successfully negotiated in the future. Any such arrangements may not be available on commercially reasonable terms. Even if acceptable and timely marketing arrangements are available, the products we develop may not be accepted in the marketplace, and even if such products are initially accepted, sales may thereafter decline. Additionally, our clients or marketing partners may make important marketing and other commercialization decisions with respect to products we develop without our input. As a result, many of the variables that may affect our revenues, cash flows and net income are not exclusively within our control.

We are not assured of successful development of our product pipeline.

        We have over 30 products at various stages of development or which are not yet marketed. We have filed with the FDA four ANDAs (Dilacor XR, Verelan, Tegretol and Procardia XL 90mg), two NDAs (FlashDose fluoxetine and FlashDose zolpidem) and GlaxoSmithKline plc ("GSK") has filed an NDA for our Wellbutrin XL product. FDA approval may not be granted for all or any of these products and we may not be successful in filing NDAs and ANDAs for the remaining pipeline products with the FDA.

We depend on key scientific and managerial personnel for our continued success.

        Much of our success to date has resulted from the particular scientific and management skills of personnel available to us. If these individuals were not available, we might not be able to attract or retain employees with similar skills. In particular, our success to date in developing new products has resulted from the activities of a core group of research scientists. The continued availability of such a group is important to our ongoing success.

We must successfully integrate any businesses or products that we have acquired or will acquire in the future.

        In October 2000, we purchased 100% of DJ Pharma, Inc. ("DJ Pharma") which we renamed Biovail Pharmaceuticals, Inc. ("BPI"). We acquired the Cardizem® family of products from Aventis Pharmaceuticals Inc. ("Aventis") effective December 29, 2000. In October 2001, we entered into a multi-faceted agreement with GSK under which we will collaborate on the final development and co-promotion of our novel controlled-release, once-daily formulation of bupropion hydrochloride ("HCl"), the co-promotion of

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Wellbutrin SR in the United States, GSK's existing sustained-release, twice-daily formulation of bupropion HCl, and the acquisition of the exclusive promotion and distribution rights to GSK's Zovirax topical products for the U.S. and Puerto Rico. In 2002, we have acquired numerous products and licenses including, the U.S. (marketing and distribution) rights to Vasotec® and Vaseretic® from Merck & Co. Inc. ("Merck"), licensing rights to six ongoing product development programs for marketing in North America from Ethypharm S.A., the U.S. marketing rights for Teveten® and Teveten® HCT from Solvay Pharmaceuticals Marketing & Licensing AG ("Solvay"), and certain products in development from Pharma PASS LLC, Pharmaceutical Technologies Corporation ("Pharma Tech"), and in 2003, we licensed one product from Flamel Technologies S.A. ("Flamel") and four products under development from Athpharma Limited ("Athpharma"). Acquisitions involve the integration of separate companies and product lines. This process of integration may be disruptive to our business.

        In addition, we may pursue product or business acquisitions that could complement or expand our business. However, there can be no assurance that we will be able to identify appropriate acquisition candidates in the future. If an acquisition candidate is identified, there can be no assurance that we will be able to successfully negotiate the terms of any such acquisition, finance such acquisition or integrate such acquired product or business into our existing products and business. Furthermore, the negotiation of potential acquisitions and integration of acquired companies and product lines could divert management's time and resources, and require significant resources to consummate. If we consummate one or more significant acquisitions through the issuance of common shares, holders of our common shares could suffer significant dilution of their ownership interests.

        See Item 4.B "Business Overview" and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in Item 5 of this report for additional discussion regarding our acquisitions since the end of 1999.

The success of the strategic investments we make depends upon the performance of the companies in which we invest.

        Economic, governmental, industry and internal company factors outside our control affect each of the companies in which we may invest. If these companies do not succeed, the value of our assets and the market price of our common shares could decline. Some of the material risks relating to the companies in which we may invest include:


        We may have limited or no control over the resources that any company in which we invest may devote to developing the products for which we collaborate with them. Any company in which we invest may not perform as expected. These companies may breach or terminate their agreements with us or otherwise fail to conduct product discovery and development activities successfully or in a timely manner. If any of these events occurs, it could have a material adverse effect on our business.

Our business may be adversely affected by environmental laws and regulations.

        We may incur substantial costs to comply with environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. We are subject to extensive federal, state,

5


provincial and local environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in, or result from, our operations. Environmental laws or regulations (or their interpretation) may become more stringent in the future. Any such event could have a material adverse effect on our business. We believe we are not currently using any hazardous materials in the manufacture of our products.

Our securities are subject to market price volatility.

        Market prices for the securities of pharmaceutical and biotechnology companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, the aftermath of our public announcements, concern as to the safety of drugs, and general market conditions, can have an adverse effect on the market price of our securities.

Our ability to obtain third-party reimbursement for the cost of products and related treatment may not be adequate.

        Our ability to successfully commercialize our products and product candidates, if FDA approval is obtained, depends in part on whether appropriate reimbursement levels for the cost of the products and related treatments are obtained from government authorities and private health insurers and other organizations, such as Health Maintenance Organizations ("HMOs") and Managed Care Organizations ("MCOs").

        Third-party payors increasingly challenge the pricing of pharmaceutical products. In addition, the trend toward managed health care in the United States, the growth of organizations such as HMOs and MCOs and legislative proposals to reform health care and government insurance programs could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Such cost containment measures and health care reform could affect our ability to sell our products and may have a material adverse effect on our business, results of operations and financial condition.

        Uncertainty exists about the reimbursement status of newly approved pharmaceutical products. Reimbursement in the United States or foreign countries may not be available for some of our products. Any reimbursement granted may not be maintained or limits on reimbursement available from third-party payors may reduce the demand for, or negatively affect the price of, those products. These issues could have a material adverse effect on our business, results of operations and financial condition. We are unable to predict if additional legislation or regulation impacting the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business.

Item 4.    Information on the Company

A.    History and Development of the Company

        Biovail Corporation ("Biovail" or the "Company") is incorporated under the Business Corporations Act (Ontario) R.S.O. 1990, as amended. Established on March 29, 1994 as a result of the amalgamation of Trimel Corporation ("Trimel") and its then subsidiary, Biovail Corporation International ("BCI"), we effected an amalgamation on February 18, 2000 to change our name from Biovail Corporation International to Biovail Corporation.

        Our principal executive office is located at 7150 Mississauga Road, Mississauga, Ontario, Canada, L5N 8M5, telephone (905) 286-3000. Our agent for service in the U.S. is CT Corporation System, located at 111 Eighth Avenue, New York, New York, 10219, telephone number (212) 590-9200.

        A description of our principal capital expenditures and divestitures and a description of acquisitions of material assets is found in our MD&A and consolidated financial statements included elsewhere in this annual report.

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B.    Business Overview

        We are an international, fully-integrated pharmaceutical company engaged in the development, manufacture and marketing of medications utilizing advanced drug delivery technologies for the treatment of chronic medical conditions. Our primary focus is on three major therapeutic areas: cardiovascular (including Type II diabetes), central nervous system (CNS) and pain management. Other areas of interest include antiviral medicine and select niche therapeutic categories with identified potential. A key element of our business is the development, manufacture and sale of high-margin branded once-daily pharmaceutical products incorporating our advanced proprietary drug delivery technologies.

        Biovail generates revenue primarily from sales of these products, which may be marketed directly by Biovail's own sales and marketing divisions in the United States and Canada or through partnerships with third party pharmaceutical companies in the U.S. and world markets. We also generate revenue by promoting and/or co-promoting products on behalf of third parties, providing clinical contract research services to third parties, and through royalties and/or licensing fees related to the sale of a number of our controlled-release products by third parties.

        We continually explore product, company and technology acquisition opportunities in the marketplace. Our acquisition strategy seeks to capitalize on opportunities in the global pharmaceutical industry, including those arising from consolidation or divestitures. We investigate and pursue attractive acquisitions or investment opportunities that will add to our product portfolio or pipeline, will enhance our drug delivery technology base, or will strategically expand our sales and marketing capability in target therapeutic areas. (For further discussion of our acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in Item 5 of this report.)

Our Markets

        Our primary market is the U.S., where our products are marketed directly by BPI, our U.S. sales and marketing organization, and indirectly through strategic licensing partners. During 2002, our U.S. sales force was expanded through the addition of over 250 BPI sales representatives, as well as a strategic partnership with Reliant Pharmaceuticals LLC ("Reliant"). Under the terms of this agreement, 250 Reliant sales representatives will co-promote a number of Biovail products for a period of three years. These initiatives bring the total number of sales representatives marketing Biovail products in the U.S. to over 800. In total, these professionals market our products to approximately 130,000 physicians. Revenue in 2002 was generated from the sales of the following key products: Cardizem, Cardizem CD, Zovirax Ointment, Tiazac, Teveten, Teveten HCT, Cedax, Rondec, Vasotec and Vaseretic. During 2002, the anti-hypertensive medication Cardizem CD was our leading revenue generator, accounting for approximately 40% of our total U.S. product revenue.

        Our products are also marketed directly in Canada through Biovail Pharmaceuticals Canada ("BPC"), our Canadian sales and marketing division. BPC's sales representatives total approximately 75 and currently target 10,000 physicians. Revenues are derived from the sales of the following key products: Tiazac, Cardizem CD, Retavase, Celexa and Monocor. During 2002, the anti-hypertensive, anti-angina medication Tiazac was BPC leading product, representing approximately 65% of total Canadian product revenue.

        Our products have been commercialized in more than 50 countries through licensing agreements with strategic marketing partners with expertise in their local markets.

Our Technologies

        We have developed and acquired a number of advanced proprietary drug delivery technologies, which we use to create pharmaceutical products with distinct clinical and competitive advantages. Through the application of these technologies we develop products that: (1) improve upon existing multiple daily dose immediate-release products by providing the therapeutic benefits of once-daily drug delivery; (2) are enhanced versions of existing medications (e.g., through the use of FlashDose®, taste masking, controlled-release, graded-release, or oral colonic drug delivery technologies) that offer superior efficacy, fewer side effects, improved patient convenience

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and compliance and other differentiations/benefits; or (3) are enhanced absorption formulations utilizing super bioavailability or absorption enhancing drug delivery technologies.

Our Products

        Originally, due to limited resources, our products were licensed early in the development cycle to third party pharmaceutical companies who controlled the clinical trials, regulatory process, manufacturing and sale of our products in return for payment of licensing fees and revenue sharing. However, since our evolution into a fully-integrated pharmaceutical company in the mid 1990s, we are involved in all aspects of the drug development process, from formulation and development to clinical testing, regulatory filing, manufacturing, marketing, promotion and distribution. This integrated approach results in operational synergies, increased flexibility and cost efficiencies, as well as maximized revenues.

        To date we have developed and filed with appropriate Regulatory Agencies 25 products utilizing advanced drug delivery technologies, which in total, have been commercialized in more than 50 countries. (See Chart.)

Branded Products
   Bioequivalent Controlled-
Release Products
Tiazac   Cardizem CD
Cardizem LA   Adalat CC
Wellbutrin XL   Procardia XL
FlashDose fluoxetine   Verelan
FlashDose zolpidem   Cardizem SR
Oruvail   Trental
Norpace   Voltaren XR
Theo-24   Dilacor XR
Isoket Retard   Tegretol
Elantan Long    
Sirdalud CR    
Gastro-Timelets Gastromax    
Novagent    
Beta-Timelets    
Tiamon Mono    
Regenon Retard    

Business Strategy

        Our business strategy revolves around three vital and inter-related components.

        The first is our inherent ability to efficiently and expeditiously exploit our pipeline products by commercialization either through our own sales force in the U.S. and Canada or through strategic out-licensing to marketing partners. This ability to access these two options appropriately to optimize the market opportunities offered by a new product effectively differentiates Biovail from its competitors. The decision on whether to market a new product directly or through marketing partnerships is based on critical evaluation of a number of factors.

        New branded products that complement BPI's and BPC's existing portfolio and that promise a suitable earnings return are prime candidates for launch by these internal sales divisions. One of our immediate priorities is to optimize the revenue opportunities represented by our expanding branded product portfolio through our own sales operations. Our strategy is to leverage and expand our sales and marketing presence in the U.S. and Canada to maximize sales of currently existing products and to support the pending commercialization of new products from our development pipeline, as well as established products which we may acquire.

        The second component is the strength of our drug delivery technology, which represents both our heritage of past successes and the promise of our future, specifically in terms of our extensive pipeline of products under development.

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        We currently develop products utilizing three distinct proprietary drug delivery technology platforms: (1) controlled-release technologies; (2) FlashDose technology; and (3) enhanced absorption/super bioavailable and oral colonic drug delivery technologies. Our pipeline consists of a growing number of products at various stages of development. These represent a combination of products developed by Biovail, products being developed by companies in which we have made a strategic investment, products provided by our development partners and high-promise products in various stages of development acquired under license from third parties. Our pipeline development program is complemented by the efforts of Biovail Ventures. The mandate of Biovail Ventures is to expand our product pipeline by identifying New Chemical Entities (NCEs), New Biological Entities (NBEs) and novel drug delivery technologies for future commercialization in North America through our fully-integrated sales and marketing organization.

        Our focus on the aforementioned key therapeutic areas allows us to channel our expertise and to concentrate our activities in those areas where we perceive the highest growth potential. While we will prudently continue to explore development potential outside the limits of these areas, we remain focused on three main therapeutic categories: cardiovascular (including Type II diabetes as a CV risk factor), CNS and pain management.

        The third key component of our business strategy is our ability to optimize the future market potential of established brands through product enhancements. This brand enhancement, or product line extension strategy, is currently being successfully adopted by many of the world's largest pharmaceutical companies as they look for ways to protect and further exploit the significant clinical and marketing investments they have made in establishing high value brands. The strategy is based on leveraging the marketability of an existing, well-established in-market brand through the development of a new and improved or 'enhanced' formulation.

        We have already implemented this strategy through our acquisition of the market-leading Cardizem and Vasotec brands, as well as through gaining access to the highly-respected Wellbutrin brand name through a strategic agreement with GSK. We will continue to exploit our drug delivery technology assets and rich pipeline by entering into multi-faceted agreements with leading global pharmaceutical companies. Under these agreements we will employ our drug delivery expertise to the development of enhanced formulations or product line extensions of established branded products that provide competitive advantages in the marketplace. We may manufacture and supply these new products for a significant percentage of the net sales. These enhanced products could be marketed by our own sales force, by our partners, or co-promoted as specific circumstances and market conditions dictate.

        We will also investigate and take advantage of promising opportunities to acquire in-market products from these strategic partners. Our recent agreement with GSK is an example of this type of transaction. Under the term of this agreement, we licensed our once-daily formulation of the antidepressant bupropion HCl (Wellbutrin) to GSK in return for a manufacturing and supply contract for this product. We also acquired the rights to distribute GSK's topical antiviral Zovirax® product line in North America and we acquired the rights to co-promote GSK's existing Wellbutrin SR product in the U.S. until March 31, 2003.

Our Business Process

        Implementation of our business strategy is achieved through a tested and proven three-step process designed specifically to leverage our extensive research, development and drug delivery technology asset base. The three steps essentially involve identification, development and commercialization of promising controlled-release pharmaceutical products.

        The process begins with the identification of drug compounds that effectively treat (or have the potential to treat) chronic medical conditions, that compete in large and growing markets (such as our three target therapeutic categories — cardiovascular, CNS and pain management) and, most importantly, that can be enhanced through the application of our proprietary drug delivery technologies to provide distinct clinical and competitive advantages. This includes the acquisition of well-established brand name medications that have significant brand equity in terms of proven efficacy, excellent safety profiles, physician acceptance, current usage by large patient populations, name recognition and proven marketability. Examples of this approach include our acquisitions of the Cardizem, Vasotec and Teveten product lines in the U.S. and/or Canada. In each case, we

9


acquired existing products with strong brand equity to which we believe significant clinical, compliance and convenience enhancements can be achieved through the application of our drug delivery technologies and the development of line extension products.

        The next step in the process is product development. This involves the efficient and timely advancement of promising products through clinical testing, late stage development and regulatory approval into the manufacturing stage. This is facilitated through internal research and development, clinical testing, regulatory approval and manufacturing capabilities.

        The third step in the process is product commercialization. Our unique structure provides us with a number of commercialization options. Each option is carefully evaluated based on the product and the existing competitive and marketing environments.

        For example, in cases where an out-licensing agreement may result in shortened time to market, eliminate potential litigation, higher profitability and/or provide us with immediate access to already established brand names medications, this option will be selected. A case in point is our agreement with GSK for the commercialization of Wellbutrin XL. (See Chronology of Strategic Events.)

        Alternatively, we have the option to commercialize the product under a new brand name through our own North American sales operations, or through a carefully selected marketing partner. An example of the latter is our successful agreement with Forest Laboratories Inc. ("Forest"), for the commercialization of Tiazac in the U.S. We also have the option of acquiring a well-established existing brand and exploiting a line extension or improved formulation through our internal sales force, as is currently being done with the recently launched Cardizem LA and future launch of Vasotec XL.

        This process of developing our own products and entering into brand enhancement agreements with third party pharmaceutical companies allows us to further build and exploit our own sales force. The ongoing growth of our sales force will be accompanied by a concurrent expansion of our portfolio of products in our three core therapeutic categories, cardiovascular, CNS and pain management, as well as other select niche medications. This focused approach allows our sales force to develop expertise in therapeutic areas, maximize resource allocations and improve sales call targeting and frequency.

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        The following table summarizes the therapeutic indication and current partner status of our portfolio of marketed products and the current development status of certain products in our developmental pipeline.

BIOVAIL PRODUCTS

Product
   Indication
   Current Status
1. Marketed Product Portfolio        

BRANDED (NDA)
 
 
 
 

Biovail Pharmaceuticals Inc.
 
 
 
 
Cardizem®   Hypertension/Angina   Commercialized
Cardizem® LA   Hypertension   Commercialized
Zovirax Ointment   Herpes   Commercialized
Wellbutrin SR®(4)   Depression   Commercialized
Teveten®(3)   Hypertension   Commercialized
Teveten® HCT(3)   Hypertension   Commercialized
Cedax®   Respiratory Infections   Commercialized
Rondec®   Respiratory/Allergy   Commercialized
Vasotec®/Vaseretic®   Hypertension, Congestive Heart Failure   Commercialized

Biovail Pharmaceuticals Canada
 
 
 
 
Cardizem®   Hypertension, Angina   Commercialized
Tiazac®(1)   Hypertension, Angina   Commercialized
Retavase™   Acute Myocardial Infarction   Commercialized
Celexa®   Depression   Commercialized
Monocor®   Hypertension, Congestive Heart Failure   Commercialized
Wellbutrin® SR   Depression   Commercialized
Zyban®   Smoking Cessation   Commercialized

BIOEQUIVALENT (ANDA)
 
 
 
 
Trental   Peripheral Vascular Disease   Commercialized
Cardizem® CD   Hypertension/Angina   Commercialized
Voltaren XR   Arthritis   Commercialized
Adalat CC   Hypertension/Angina   Commercialized
Procardia XL   Hypertension/Angina   Commercialized

2. Pipeline Products*
 
 
 
 

BRANDED (NDA)
 
 
 
 
Zovirax Cream   Herpes   Approved
Wellbutrin XL   Depression, Smoking Cessation   Regulatory Review
Vasotec XL   Hypertension   Under Development
metformin OD   Type II Diabetes   Under Development
tramadol XL   Chronic Pain   Under Development
acyclovir CR   Herpes    
simvastatin EA   High Cholesterol    
d-methylphenidate   AttentionDeficit-Hyperactivity Disorder   Regulatory Review
mismatched double-stranded RNA®   Chronic Fatigue Syndrome   Under Development
putriscine®   Surgical Scars and Burns   Under Development
fenofibrate   Hypercholesterolemia    
venlafaxine   Depression    
5 FU   Cancer   Under Development
FlashDose fluoxetine   Depression   Regulatory Review
FlashDose zolpidem   Sleeping Disorders   Regulatory Review
FlashDose paroxetine   Depression, other   Regulatory Review
FlashDose sumatriptan   Migraine   Under Development

BIOEQUIVALENT (ANDA)
 
 
 
 
Dilacor XR   Hypertension/Angina   Regulatory Review
Verelan   Hypertension/Angina   Regulatory Review
Tegretol   Epilepsy   Regulatory Review
Procardia XL — 90mg   Hypertension, Angina   Regulatory Review

* Biovail also has numerous undisclosed pipeline products under development.

1.
Tiazac® is also promoted and distributed in the U.S. by licensee Forest.

2.
Co-promoted with H. Lundbeck A/S.

3.
Acquired from Solvay in February 2002.

4.
Co-promoted with GSK in the U.S. until March 31, 2003.

N.B. We have also developed 11 additional products that have been successfully commercialized by various licensees in numerous world markets.

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Chronology of Strategic Events

        In September 1995, we licensed the right to market Tiazac in the United States to Forest and the formal product launch took place in February 1996. The license agreement with Forest provides for a royalty payment of 8% of its net sales of Tiazac® for a period of 16 years, commencing December 1995. In addition, under a 16-year supply agreement which also commenced December 1995, we act as the exclusive manufacturer of Tiazac® for Forest and receive contractually determined manufacturing fees.

        In December 1997, we entered into an agreement with Teva for the development and marketing in the United States of specific generic oral controlled-release products. These include products that have already been approved by the FDA as well as products under development. The terms of the agreement call for us to manufacture the products and share the profits after deduction of manufacturing costs and an allowance for selling and distribution expenses incurred by Teva. Products currently commercialized and marketed under this agreement include bioequivalent controlled-release versions of Trental (pentoxifylline), Cardizem CD (diltiazem), Voltaren XR (diclofenac), Adalat CC (nifedipine), Procardia XL (nifedipine) and Verelan. In addition, ANDAs have been filed for bioequivalent versions of Dilacor XR, Tegretol and Procardia XL 90mg.

        In July 1997, Intelligent Polymers Limited ("IPL") was formed primarily to develop once-daily controlled-release branded versions of selected drugs whose chemical patents and/or exclusivity periods had or were about to expire and which were marketed only in immediate-release form, or in controlled-release form requiring multiple daily dosing. We expect that such products will be marketed under distinct brand names. We had the right to acquire directly or indirectly all of the equity of IPL. On December 29, 2000, we exercised our option to purchase all of the equity of IPL. Subsequently we discontinued its incorporation in Bermuda, filed Articles of Dissolution and merged IPL with its sole shareholder, Biovail Laboratories Incorporated.

        In December 1998, we entered into a multi-faceted ten-year agreement with H. Lundbeck A/S of Copenhagen ("Lundbeck") for the development of a novel controlled-release formulation of the anti-depressant citalopram, marketed under the trademark Celexa in the United States. Under the agreement, we will develop, manufacture and supply a controlled-release version of citalopram for commercial sale by Lundbeck or its licensees worldwide. In exchange, Lundbeck paid us product development fees and will pay an agreed upon supply price upon commercialization of the controlled-release citalopram product. We have completed all development of the product and Lundbeck is currently completing Phase III clinical studies.

        Our November 1999 acquisition of Fuisz Technologies Ltd. ("Fuisz") renamed Biovail Technologies Limited ("BTL") has given us several proprietary drug delivery technologies, including taste masking, rapid dissolve and enhanced absorption, which we are applying in the development of FlashDose versions of several oral dosage, controlled-release branded products. During 2000, we consolidated our research and development activities at BTL's Chantilly, Virginia location.

        In October 2000, we acquired DJ Pharma, renamed BPI, a U.S. pharmaceutical sales and marketing company with approximately 300 sales representatives and several drug brands marketed and sold to physicians for the treatment of respiratory and allergy conditions and skin and soft tissue infections. We have consolidated BPI's operations at its Raleigh, North Carolina, facility. During 2002, we expanded our U.S. sales force from approximately 300 to approximately 550 in preparation for the launch of new products, such as Cardizem® LA and Teveten HCT in 2003.

        At the end of fiscal 2000 we acquired the rights to and benefits from, the Cardizem® family of products for the Canadian, U.S. and Puerto Rican markets from Aventis. Cardizem® branded products, used in the treatment of hypertension and angina, have been a leading line in the calcium channel blocker category of cardiovascular drugs for over twenty years. Under transitional arrangements with Aventis, Cardizem CD is being manufactured on our behalf by Aventis.

        In April of 2003, we launched, through our U.S. sales force, Cardizem LA, a once daily controlled- and graded-release formulation of this drug. Cardizem LA is manufactured in our facilities in Puerto Rico and Manitoba.

        We entered into agreements with GSK on October 26, 2001 in accordance with our stated business strategy. The agreements encompass final development and promotion of our novel controlled-release, once-daily Wellbutrin XL, the co-promotion of Wellbutrin SR in the U.S., GSK's existing sustained-release, twice-daily

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formulation of bupropion HCl, and the acquisition of the exclusive promotion and distribution rights to GSK's topical Zovirax products in the United States and Puerto Rico.

        We licensed to GSK a novel controlled-release, once-daily formulation of bupropion HCl (Wellbutrin XL) for sales and distribution on a worldwide basis excluding Canada. Bupropion HCl, which is marketed by GSK for the treatment of depression as Wellbutrin and for smoking cessation as Zyban, is currently sold in sustained-release ("SR"), twice-daily, and immediate-release, four-times daily, dosage formats. Under the terms of the Wellbutrin XL agreement, we will collaborate with GSK to direct regulatory and scientific development to seek regulatory approval of Wellbutrin XL. In August 2002 GSK filed an NDA for our Wellbutrin XL with the FDA. When and if FDA approval is received, we will manufacture and supply Wellbutrin XL to GSK for a share of the revenue generated by future sales of Wellbutrin XL. Together with GSK, we co-promoted Wellbutrin SR in the U.S. until March 31, 2003 and we will have the option to co-promote Wellbutrin XL when and if FDA approval is received in the United States.

        Effective January 1, 2002, we acquired from GSK the exclusive distribution rights for prescription strength Zovirax Ointment and Zovirax Cream for the United States and Puerto Rico. We received approval from the FDA for the marketing of Zovirax Cream in January 2003. Zovirax Ointment is indicated for the treatment of herpes and Zovirax Cream is indicated for the treatment of cold sores. We paid GSK $133 million on January 2, 2002 for the distribution rights to the Zovirax products until December 31, 2011. In the event of the termination of the Wellbutrin XL development agreement by either party, we would be required to pay GSK additional payments of $22 million per year for calendar years 2002 through 2006, with an aggregative cumulative total of all additional rights payments not to exceed $99 million, and for calendar years 2007 through 2011 we would be required to pay GSK additional payments based upon a percentage of our gross sales of the Zovirax products during the immediately preceding calendar year. In December 2002, we extended our agreement with GSK for the marketing rights for Zovirax Ointment and Zovirax Cream to 20 years from the original ten years for approximately $40 million.

        Under the terms of our agreement, GSK is to manufacture and supply Zovirax Ointment and Zovirax Cream, to us. We began promotional efforts related to Zovirax Ointment in January 2002 and we intend to launch Zovirax Cream in the third quarter of 2003. GSK has also committed to conduct a pediatric Phase IV marketing study for Zovirax Cream.

        On March 18, 2002, we acquired United States marketing rights for Teveten® (eprosartan mesylate) and Teveten HCT (eprosartan mesylate and hydrochlorothiazide combination) from Solvay for approximately $94 million. Solvay will retain marketing rights to the product in the rest of the world. In February 2003, Teveten HCT received FDA approval for the treatment of hypertension and the product was launched in early March 2003.

        Teveten® is an angiotensin-II receptor blocker ("ARB") for the treatment of hypertension and is indicated for use either alone or in conjunction with other antihypertensive medications. Teveten®HCT is a combination product which includes both an ARB and a diuretic. Under the terms of the agreement, Solvay will manufacture and supply these products with an option to transfer U.S. manufacturing to one of our manufacturing facilities, in a phased in approach, upon receipt of the necessary regulatory approvals. Solvay will continue to manufacture and market the products in areas outside of the U.S. We will form a joint business development committee with Solvay to discuss future clinical and product development options that can enhance the performance or expand the utilization of these products. Solvay has the option to acquire all potential future modifications and innovations developed by us for the products for worldwide markets excluding the United States.

        On May 10, 2002, we acquired Vasotec® (enalapril) and Vaseretic® (enalapril with hydrochlorothiazide) from Merck for an initial payment of $155 million and semi-annual minimum payments over the five year period following the acquisition. We also acquired the fixed dose combination NDA of enalapril in combination with diltiazem malate. The agreement calls for Merck to manufacture and supply Vasotec® and Vaseretic® and to temporarily provide distribution services. Merck will receive royalties on the future sales of any life cycle products developed and marketed in the U.S. We also entered into a separate agreement with Merck to develop, license and supply a new dosage format of a Merck product under development. Utilizing CEFORM™ technology, we will manufacture and supply this new dosage format technology to Merck for commercialization, subject to FDA approval.

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        In April 2002, we entered into an agreement with Ethypharm whereby we acquired the license to six ongoing product development programs for marketing in North America. Under the terms of this agreement, Ethypharm will continue development on these six licensed products through to the completion of Phase III clinical trials. This agreement also allows the cross licensing of Biovail's CEFORM™ technology and Ethypharm's Flashtab technology in the development of rapid dissolve pharmaceutical products. We also acquired a 15% equity interest in Ethypharm and certain options to acquire additional equity interests.

        In May 2002, we acquired from DepoMed Inc. ("DepoMed") the rights to manufacture and market a once daily metformin HCl product. This product, metformin GR used in the treatment of diabetes, is currently undergoing Phase III clinical trials. At the same time, Biovail also acquired a 15% equity interest in DepoMed.

        In the third quarter of 2002, we entered into an agreement with Reliant to co-promote a number of existing Biovail products in the United States. Approximately 650 of Reliant's sales representatives joined Biovail's sales representatives to promote Teveten® and other cardiovascular products through to the end of 2002. This agreement was expanded in the fourth quarter of 2002 whereby Reliant will provide 250 sales representatives for three years to co-promote a range of Biovail's cardiovascular products including Cardizem® LA.

        In December 2002, we acquired two of a group of PharmaPASS companies for approximately $178 million. PharmaPASS is a developer of advanced oral controlled-release formulations and technologies. Through this agreement, we acquired a number of pipeline products under development and two enhanced absorption formulations, finofibrate (Tricor) for the treatment of high cholesterol, and venlafaxine (Effexor) used in treating depression. In addition, we acquired an economic interest in two currently marketed products, omeprazole (Prilosec) for the treatment for depression, and Tricor as mentioned above. This agreement also added two new drug delivery technologies to our portfolio, Zero Order Release System (ZORS) for increased drug delivery control and absorption, and an oral colonic delivery technology, which increases drug absorption in the upper colon and lower intestine.

        In December 2002, we acquired the Canadian rights to Wellbutrin® SR and Zyban® from GSK. Through this agreement and upon marketing approval from Canadian authorities, we have the right to market our once-daily formulation of bupropion HCl as Wellbutrin XL in Canada. In support of the commercialization of Wellbutrin XL and under the terms of our agreement, we gain access to information and data from past and future clinical studies conducted by GSK.

        In April 2003, we acquired from Flamel Technologies exclusive North American rights to Flamel's oral controlled-release formuation of acyclovir (Genvir) used in the treatment of genital herpes. We intend to manufacture this product, upon FDA approval, using Flamel's proprietary controlled-release "Micropump" technology. We anticipate the start of Phase III clinical trials in the second half of 2003.

        In April 2003, we entered into an agreement with Athpharma Limited ("Athpharma") to acquire four cardiovascular products under development. The four products under development are a beta-1 selective beta-blocker formulation, Bisochron (bisoprolol) for the treatment of hypertension, a long-acting nitrate formulation, Isochron (isosorbide-5-mononitrate) for the treatment of angina, and two liver-selective statin formulations, Hepacol I (pravastatin) and Hepacol II (simvastatin), which are both for the treatment of high cholesterol. Athpharma will complete the development costs and we will make payments to Athpharma subject to the attainment of certain milestones. We will also pay Athpharma royalties on the approval and commercialization of each product.

        As part of our business strategy we enter into research and development contracts with third party formulators and developers to expand our development pipeline opportunities. These third party developers are typically paid with a combination of development milestone payments and royalty payments. In some cases, we have an ownership interest or an option to take an ownership position in the developer. In no case are we responsible for any of the developers' third party liabilities, nor have we guaranteed any debts, nor are we required under any circumstances to exercise any of our options.

Other Biovail Divisions

        Biovail Pharmaceuticals Canada ("BPC") performs sales and marketing activities in Canada for our products as well as for products licensed from third parties. BPC markets products developed by Biovail as well

14


as products in-licensed from third parties. Currently, BPC is comprised of a sales force of approximately 75 individuals supported by a divisional sales and marketing infrastructure located in Mississauga, Canada.

        We also have a full-service independent Contract Research Division ("CRD") that provides clinical research and laboratory testing services for our product development projects and for third-party international and domestic pharmaceutical companies including several developmental partners. The CRD includes a full-service bioanalytical laboratory that performs specialized bioanalytical and quality control testing and method development as well as other laboratory services. The CRD can also provide support services to its clients in the area of quality control. The CRD operates in a facility that includes a fully equipped bioanalytical laboratory, a department of biopharmaceutics and statistical analysis and a live-in 230-bed study clinic.

        In addition, we develop and manufacture nutraceutical and food ingredient products incorporating our proprietary technologies in our Nutravail division. Large-scale manufacture of nutraceutical products is currently handled through third party contractors but a variety of higher value flavour encapsulations, gums and gum bases are developed and manufactured at our Sterling, Virginia facility.

        We intend to selectively pursue strategic investments and alliances with small to medium-sized pharmaceutical companies that require additional capital to sustain specific NCEs projects in various stages of development as well as to fund the completion of development of novel products utilizing advanced drug delivery systems. In exchange for our investments, we expect to acquire various rights, options and licenses with respect to the marketing and distribution of drugs and technologies derived from these projects.

Industry Overview

        The pharmaceutical industry has experienced significant growth over the past several years. This has been impacted by factors such as: increasing enrollment in Health Maintence Organizations (HMOs) and growth in managed care, an ageing and more health-aware population, several major new drugs bringing significant therapeutic benefits, and increasing use of novel marketing approaches such as direct-to-consumer advertising.

        IMS Healthcare ("IMS") reports that the total U.S. prescription drug market was approximately $191 billion in 2002, an increase of 19.9% over the $175 billion for 2001. For the ten years to 2000 the compounded annual growth rate in sales was 13.8%. Prescription growth for 2002 versus 2001 in the U.S. was in excess of 4.5%. For the ten years to 2000 the compounded annual growth rate in prescriptions was 5.5%.

        The industry is undergoing a period of consolidation. It is estimated that during the years 2001-2005 branded products with estimated 2001 sales of in excess of $35 billion will lose patent protection and that in 2002 alone the figure was in the range of $6-7 billion. To replace these revenues and lessen their dependence on internal development programs, the large pharmaceutical companies are increasingly entering into strategic licensing arrangements with specialty pharmaceutical companies and augmenting their product pipelines by the acquisition of smaller specialty companies with valuable research and development programs and technologies. They are also developing strategies to defend themselves against generic competition through innovative approaches to extension of brand life-cycles, exclusivity periods and product differentiation.

        The larger companies are increasingly focusing their marketing resources on large revenue drugs (generally in excess of $500 million) and accordingly are increasingly willing to divest themselves of smaller, non-strategic products in niche therapeutic areas. According to IMS, in 2000 approximately 28% of U.S. market sales revenues were derived from 970 branded drugs with revenues less than $100 million. This affords a significant opportunity for smaller companies to acquire or in-license valuable brand name drugs and to revitalize these franchises through application of novel delivery forms and technologies.

        Prescription growth for 2002 in the U.S. pharmaceutical market for all forms of controlled-release drugs was in excess of 10.5%. The oral dosage controlled-release segment of the market generated approximately $16.3 billion of revenues in 2002, an increase of 21% over the prior year. The impetus for growth in this segment comes from the proliferation of branded drugs at or near patent expiration and new product launches.

        Controlled-release products are formulated to release the drug's active ingredient gradually and predictably over a 12 to 24 hour period. These formulations provide for (1) greater effectiveness in the treatment of chronic conditions through more consistent delivery of the medication; (2) reduced side effects; (3) greater convenience

15


and (4) higher levels of patient compliance due to a simplified dosage schedule as compared to that of immediate-release drugs.

        There are significant technical barriers to entry into the development of controlled-release drugs, with only a limited number of companies possessing the required expertise and technologies. Despite the therapeutic advantages of controlled-release drugs versus their immediate-release counterparts, many pharmaceutical companies have not made the additional investment to develop a controlled-release version of a product while their immediate-release version is under patent protection.

        The pharmaceutical industry is subject to ongoing political pressure to contain the growth in spending on drugs and to expedite and facilitate bioequivalent competition to branded products. In the U.S., Medicare prescription drug coverage changes may be developed in the next 2-3 years. Companies oriented towards improved drug delivery and bioequivalents should stand to benefit from the market focus on cost-containment and therapeutic value.

        For most of the 1990s the FDA evidenced an accommodative stance to NDAs and ANDAs. Relatively fast drug approvals reflected innovative ways of corporate funding of NDA reviews and the political imperative of bringing bioequivalent competition to the market place. As a result of several high profile drug withdrawals over the past several years, there is now evidence of a more cautious stance from the FDA and approval times appear to be slowing. This stance may operate to the benefit of drug delivery and bioequivalent drug companies whose products are viewed as rapid and lower cost methods of bringing safe new products to the market.

Marketed Products

        We currently benefit from direct sales and the sales by various licensees of over 20 pharmaceutical products. We have developed 25 controlled-release and FlashDose® drugs which, when commercialized, are marketed through licensees and, in the case of Tiazac®, directly through our BPC marketing division in Canada. We manufacture eight pharmaceutical products including: Cardizem LA®, Wellbutrin XL, Tiazac, and bioequivalent formulations of Trental®, Cardizem® CD, Voltaren® XR, Adalat®CC and Procardia® XL for sale by our licensees in the U.S. and Europe. In the case of Adalat CC, we manufacture and market our own 60mg version of this product and market the 30mg version under license from Elan Corporation plc ("Elan"). The remaining drugs are manufactured and distributed by licensees in numerous world markets.

Tiazac® (diltiazem)

        Tiazac belongs to a class of drugs used in the treatment of hypertension and angina called calcium channel blockers ("CCB"), which generated U.S. sales of $4.4 billion for the 12 months ended December 31, 2002. Within the CCB market, once-daily diltiazem products accounted for approximately $884 million of U.S. sales for the 12 months ended December 31, 2002 the largest portion of which is represented by Cardizem CD ($551 million including generics). Tiazac is another once-daily branded diltiazem product. Since Tiazac was introduced in the United States in February 1996, its market share has increased as a percentage of total prescriptions in the once-daily diltiazem market to approximately 21% by the end of 2002.

        We licensed the right to market Tiazac in the U.S. to Forest Laboratories, Inc. ("Forest") in September 1995 and the formal product launch took place in February 1996. Our license agreement with Forest provides us with a royalty payment of eight percent of net sales for 16 years, commencing December 1995. In addition, under our 16-year supply agreement with Forest, we act as the exclusive manufacturer of Tiazac and receive contractually determined manufacturing fees. Tiazac is marketed in Canada by BPC.

        Generic competition for Tiazac has occurred and we have launched a competing generic version of Tiazac through Forest under a profit sharing arrangement.

Brand Products Marketed by Biovail Pharmaceuticals Inc. ("BPI")

        BPI, our U.S. marketing and sales division, performs sales and marketing activities for our products as well as for products licensed from third parties worldwide. BPI is located in Morrisville, NC, adjacent to Research Triangle Park. BPI is responsible for significantly enhancing our presence in the U.S. marketplace through an expansion of its sales, marketing and support staff.

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        We believe BPI is well positioned to become a significant marketing presence in the largest pharmaceutical market in the world due to our rich pipeline of products which is complemented by the acquisition or in-licensing of well established pharmaceutical brands. BPI's competitors are other specialty pharmaceutical companies as well as divisions of large multinational pharmaceutical companies.

        BPI's product portfolio strategy is to focus on drugs for the primary care market, with an emphasis on the commercialization of products in the cardiovascular, anti-infective, CNS, and pain therapy areas. These therapeutic areas represent large and rapidly growing market segments.

        In the U.S., BPI markets Cardizem® LA, Teveten®, Teveten® HCT, Zovirax® Ointment, Rondec® and Cedax® through its field sales force, which consists of approximately 550 professional sales representatives. The BPI sales force size is in the top 25 largest proprietary pharmaceutical sales forces.

        In addition to the products promoted by the BPI field force, BPI also sells Cardizem® CD, Vasotec® and Vaseretic® to wholesalers and retailers. As these products were genericized prior to our acquisition of them, there is no field force promotion supporting these products.

        The following table reflects products currently in BPI's marketed portfolio:

Product
   Indication
   Status
Cardizem LA (diltiazem)   hypertension   Commercialized
Cardizem Tablets, SR, and CD (diltiazem)   hypertension, angina   Commercialized
Teveten (eprosartan)   hypertension   Commercialized
Teveten HCT (eprosartan/hydrochlorothiazide)   hypertension   Commercialized
Zovirax Ointment (acyclovir)   Herpes   Commercialized
Vasotec (enalapril)   hypertension, CHF   Commercialized
Vaseretic (enalapril/hydrochlorothiazide)   hypertension, CHF   Commercialized
Cedax (ceftibuten)   treatment of susceptible mild-to-moderate acute bacterial exacerbations of chronic bronchitis, acute bacterial otitis media, and pharyngitis/tonsillitis   Commercialized
Rondec Family   cough, cold, allergy   Commercialized

Cardizem Branded Products (diltiazem)

        Cardizem branded products have been leading medications in the calcium channel blocker category of cardiovascular drugs for approximately 20 years. Cardizem is used to treat hypertension and angina. In 2002, Cardizem CD (branded and generic) was the leading once-daily diltiazem product in this category with approximately 12.6 million prescriptions dispensed in the U.S., with a value of $551 million for the year ended December 31, 2002. Branded Cardizem CD accounted for approximately 1.7 million of these prescriptions while the balance was filled by generic versions, one of which is our own generic product sold through Teva.

        In April, BPI launched Cardizem LA ("CLA"). CLA is a novel, graded extended-release formulation of diltiazem HCL that provides 24-hour blood pressure control with a single daily dose and offers physicians a flexible dosing range from 120mg to 540mg. CLA is the only product labeled to allow administration in either the morning or evening. With evening administration, clinical trials have shown CLA improved reduction in blood pressure in the early morning hours, which is when patients may be at the greatest risk of significant cardiovascular events, such as heart attack, stroke, and death due to cardiovascular events.

Teveten (eprosartan)

        Teveten is indicated for the treatment of hypertension (high blood pressure). Teveten belongs to a class of antihypertensive drugs known as angiotensin receptor blockers. Teveten blocks the vasoconstrictor and aldosterone-secreting effects of angiotensin II by selectively blocking the binding of angiotensin II to the AT1 receptor found in many tissues (e.g., vascular smooth muscle, adrenal gland). Solvay Pharmaceuticals first

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launched Teveten in November 1999. We acquired the U.S. marketing rights to Teveten and Teveten HCT in March 2002. BPI relaunched Teveten in the U.S. market in June 2002. Total U.S. sales of all ARB products in 2002 were $2.7 billion.

        In March 2002, BPI launched Teveten/HCT, a combination of Teveten and the diuretic, hydrochlorothiazide. Teveten/HCT is available in strengths of 600mg/12.5mg and 600mg/25mg.

Zovirax Ointment (acyclovir)

        Zovirax Ointment 5% is a topical formulation of a synthetic nucleoside analogue active against herpes viruses. Each gram of Zovirax Ointment contains 50mg of acyclovir in a polyethylene glycol (PEG) base. This product is indicated in the management of initial genital herpes and in limited non-life threatening mucocutaneous herpes simplex infections in immunocompromised patients. Zovirax Ointment is available in 3g and 15g tubes. Zovirax Ointment was originally launched in 1982 by Burroughs Wellcome. It was last promoted by GlaxoWellcome in 1997. Zovirax Ointment remains the market leader with a 57% share of total prescriptions and an 78% share of total dollars in 2002.

        Zovirax Cream was approved by FDA in December 2002 and will be available to the market later in 2003. Zovirax Cream is also a topical antiviral medication used for the treatment of herpes labialis (cold sores). Zovirax Cream will be available in 2g and 5g tubes.

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

        Vasotec and Vaseretic have been gold standards in the treatment of hypertension, symptomatic congestive heart failure, and asymptomatic left ventricular dysfunction for nearly 20 years. Vasotec is the maleate salt of enalapril, the ethyl ester of a long-acting angiotensin converting enzyme inhibitor, enalaprilat. Enalapril is a pro-drug; following oral administration, it is bioactivated by hydrolysis of the ethyl ester to enalaprilat, which is the active angiotensin converting enzyme inhibitor. Vasotec is supplied as 2.5mg, 5mg, 10mg, and 20mg tablets for oral administration.

        Vaseretic combines Vasotec and a diuretic, hydrochlorothiazide. The product is indicated for the treatment of hypertension. Vaseretic is available in two tablet combinations of enalapril maleate with hydrochlorothiazide: Vaseretic 5-12.5, containing 5mg enalapril maleate and 12.5mg hydrochlorothiazide and Vaseretic 10-25, containing 10mg enalapril maleate and 25mg hydrochlorothiazide.

        For the 12-month period ending December 2002, the Angiotensin Converting Enzyme ("ACE") inhibitor market achieved total sales of approximately $4.9 billion with 132 million total prescriptions (TRxs) for the same time period. Total sales grew by 14% over the previous year and the TRx volume grew by 16% for the same period. Vasotec (branded and generic) is one of the most widely prescribed ACE inhibitors and is one of the top five most recognized cardiovascular brands. Vasotec lost its market exclusivity in August 2000 and its revenues have been eroded by generic competition. According to IMS, branded Vasotec® generated sales of $80 million for the 12 months ending December 2002. Branded Vaseretic® had sales of $16 million for the 12 months ending December 2002.

        We are currently developing Vasotec® XL, an extended-release formulation of Vasotec with an improved 24-hour kinetic profile and have recently begun development of several fixed dose combinations of enalapril and diltiazem.

Cedax (ceftibuten)

        Cedax is a patented, third generation, broad-spectrum oral cephalosporin antibiotic indicated for the treatment of chronic bronchitis, otitis media and pharyngitis/tonsilitis. Cedax was launched by Schering-Plough in 1996 and achieved peak sales in 1997 of $52 million. Schering-Plough manufactures the product for us. The third generation Cephalosporin market reached $302 million in 2002 and grew by 24% compared to 2001.

Rondec (carbinoxamine/pseudoephedrine)

        Rondec is a prescription decongestant indicated for relief of nasal congestion associated with allergy or the common cold. Rondec was developed by Abbott Laboratories and acquired from Dura Pharmaceuticals. Since

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Rondec is a cough, cold and allergy product (CCA). BPI promotes Rondec seasonally, predominantly during the cold months of the year.

        BPC performs sales and marketing activities for our products as well as for products licensed from third parties worldwide. BPC head office is located at our Corporate headquarters in Mississauga, Ontario, Canada. BPC is dedicated to providing high quality, cost effective branded pharmaceuticals to Canadian health care professionals and their patients.

        In addition to marketing products we have developed, BPC has adopted a business strategy of selling branded drug products through strategic joint ventures and partnerships. We believe that this strategy, combined with our portfolio of existing and new branded products utilizing our advanced drug delivery technologies, positions BPC to become a significant marketing presence in the Canadian market. BPC is the largest independent supplier of branded pharmaceutical products in Canada. Its competitors are other independent suppliers and divisions of large multinational pharmaceutical companies.

        BPC's product portfolio strategy is to focus on drugs and therapies for the primary care market including drugs for the treatment of cardiovascular disease, CNS and neurological disorders. All three therapeutic areas represent rapidly growing market segments, offering a multitude of opportunities for acquiring third party licenses.

        In Canada, BPC markets Tiazac® and other products through its field force consisting of 72 representatives. Tiazac® has been accepted on the provincial drug formularies in each of the provinces of Canada, thereby making it eligible for reimbursement by the provincial government health plan in all provinces.

        BPC co-promotes the immediate-release version of Celexa in collaboration with Lundbeck Canada Inc ("Lundbeck"). BPC promotes Celexa to primary care physicians and receives co-promotion fees from Lundbeck for contributing to the marketing of Celexa in Canada.

        The following table reflects products currently in BPC's portfolio and pipeline and the status of their respective new drug submission ("NDS") filings in Canada:

Product
   Indication
   Status
Tiazac® (diltiazem)   hypertension, angina   Commercialized
Celexa (citalopram)   depression   Commercialized
Retavase™ (reteplase recombinant)   acute myocardial infarction   Commercialized
Monocor (bisoprolol fumarate)   hypertension   Commercialized
Cardizem CD® (diltiazem)   hypertension, angina   Commercialized
Wellbutrin® SR   depression   Commercialized
Zyban (bupropion)   Smoking cessation   Commercialized
Tiazac® XC (diltiazem)   hypertension, angina   Regulatory Review
Attenade (d-methylphenidate)   Attention deficit-hyperactivity disorder (ADHD)   Under development
Fibrostat™   treatment of scars following surgery and burns   Under development
Ampligen®   chronic fatigue syndrome (CFS)   Under development

        Tiazac® belongs to a class of drugs used in the treatment of hypertension and angina called calcium channel blockers. Tiazac® is a once-daily formulation of diltiazem that delivers smooth blood pressure control over a 24 hour period. The Canadian market for CCBs for the year ending December 31, 2002, was valued at approximately $548 million, an increase of 11% verses the previous year.

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        BPC co-promotes Celexa in collaboration with Lundbeck Canada Inc. Citalopram has proven to be effective in the treatment of depression and belongs to a class of drugs known as Selective Seratonin Reuptake Inhibitors ("SSRIs"). SSRIs have been shown to have fewer side effects and a lower incidence of drug interactions when taken concurrently with other medications than earlier antidepressant products, which accounts for the significant growth in this market. The Canadian market for antidepressants for the year ended December 31, 2002 was approximately $690 million, an increase of 17% over the previous year.

        Retavase™, licensed from Centocor Inc., is a tissue plasmogen activator used in thrombolytic therapy. The medication is administered to patients immediately after the incidence of acute myocardial infarction (AMI or heart attack) and acts to clear arterial blockage. The thrombolytic market in Canada for the year ended December 31, 2002 was estimated to be approximately $50 million, an increase of 10% over the previous year.

        Monocor is a cardio-selective beta-blocker indicated for the treatment of mild to moderate hypertension and congestive heart failure. The beta-blocker market in Canada is valued at approximately $187 million and is growing annually at the rate of 12%.

Generic Products Marketed by Strategic Partners

        We have entered an agreement with Teva Pharmaceuticals Ltd. ("Teva") for the development and marketing of a number of our generic controlled-release products. Products currently marketed by Teva include generic versions of Cardizem CD (diltiazem), Trental (pentoxifylline), Voltaren XR (diclofenac), Adalat CC (nifedipine) and Procardia XL (nifedipine). Biovail manufactures these products and receives a share of profits after deduction of manufacturing, sales and distribution costs.

Pipeline Products

Branded Product Pipeline

        We are working to develop clinically enhanced branded versions of the following compounds. These pipeline products are in early/late stages of development except for bupropion (Wellbutrin XL), which has been filed (August 2002) with the FDA as an NDA. These pipeline products had aggregate U.S. sales in excess of $10 billion for the twelve months ended December 31, 2002:

Late Stage Development Programs

Compound(2)
   Currently Marketed Brand Name
   U.S. Marketer
   Indication
   Total U.S. Product Sales
(in millions)(1)
Bupropion   Wellbutrin SR/Zyban   GlaxoSmithKline   depression, smoking cessation   $ 1,613
Metformin   Glucophage   Bristol-Myers Squibb   diabetes     1,840
Tramadol XL   Ultram   Johnson & Johnson   moderate to moderately severe pain     515

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Earlier Stage Development Programs(4)

Compound(2)
   Currently Marketed Brand Name
   U.S. Marketer
   Indication
   Total U.S. Product Sales
(in millions)(1)
Enalapril XL   Vasotec   BPI   Hypertension   $ 400
Venlafaxine SB   Effexor/Effexor XR   Wyeth Pharmaceuticals   Depression   $ 1,654
Fenofibrate SB   Tricor   Abbott Laboratories   Hypercholesterolemia   $ 447
Simvastatin EA   Zocor   Merck & Co., Inc.   Hypercholesterolemia   $ 4,171
Acyclovir CR   Zovirax   GSK   Herpes Zoster Infections   $ 67(3)
(1)
Includes brand and bioequivalent versions.

(2)
We also have numerous undisclosed pipeline products in various stages of development.

(3)
Approximately 4.6 million prescriptions were written for oral acyclovir in 2002.

(4)
These products are in various stages of development including formulation, formulation-optimizing or scale-up.

        A four-times daily immediate-release formulation of bupropion, introduced in July 1989 by GSK is marketed in the United States under the brand name Wellbutrin. In addition, a twice-daily controlled-release formulation of bupropion, introduced in November 1996 by GSK, is marketed in the U.S. under the brand name Zyban for use as an aid in smoking cessation and as Wellbutrin SR for depression. U.S. sales of Wellbutrin SR/Zyban (including generics) were approximately $1,613 million for the twelve months ended December 31, 2002.

        Indication:    Bupropion is indicated for the symptomatic relief of depressive illness. Major depression is frequently encountered by patients of primary care physicians. Depression may occur in neurosis as well as in mood disorders and is a manifestation of major psychiatric illness. Bupropion is also indicated in the United States for use as an aid in smoking cessation.

        Clinical Efficacy:    Bupropion has been proved to be effective in the treatment of depression. An open, uncontrolled study of 3,167 patients at 105 sites showed that functional status improved in patients treated with Wellbutrin SR for up to 56 days. This improvement was highly correlated with improvement in clinical symptoms.

        Bupropion can also be used in conjunction with other anti-depressant drugs. When combined with another class of anti-depressants, specified neurotransmitter modulators ("SNMs"), in 27 patients, greater symptomatic improvement was found in 19 (70%) of those 27 subjects during a combined daily use of bupropion with an SNM (Prozac-equivalent) than with either drug alone.

        Our once-daily controlled-release formulation of bupropion seeks to significantly improve upon the existing sustained release formulation by providing sustained plasma levels with better control of symptoms and improved compliance with convenient once-a-day dosing. Clinically, it is important that symptoms in the depressed patient be adequately controlled as compliance is a major concern in these patients.

        In a study with children with ADDH, the results indicated that bupropion may also be a useful addition to available treatments for ADDH.

        In addition, bupropion has been demonstrated to be an effective aid in smoking cessation. In a placebo-controlled trial comparing transdermal nicotine, and sustained-release bupropion, and a combination of both transdermal nicotine and sustained-release bupropion in 893 patients for nine weeks, smoking cessation rates were 20% with placebo, 32% with nicotine alone, 46% with bupropion alone and 51% with both transdermal nicotine and bupropion.

        Status of Development:    Development programs for the once-daily controlled-release formulation of bupropion HCl have been completed. An NDA for our once-daily formulation was filed with the FDA by GSK in August 2002.

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        Market Size:    Sales of anti-depressant products totaled $12.3 billion for the twelve months ended December 31, 2002. Buproprion is classified as a new generation anti-depressant. The anti-depressant market consists of four major drug categories: new generation antidepressants, SSRIs/SNRIs (Selective Seratonin Reuptake Inhibitors/Selective Norepinephrine Reuptake Inhibitors), tricylic antidepressants, and monoamine oxidase inhibitors. Major marketed brands include Prozac (fluoxetine), Paxil (paroxetine), Zoloft (sertaline), Effexor XR (venlafaxine) and Wellbutrin (bupropion). The smoking cessation market was $229 million for the twelve months ended December 31, 2002. Major marketed brands of smoking cessation products include nicotine products such as Nicoderm, Habitrol, Nicorette, Nicotrol and Prostep.

        A three to four times daily immediate-release formulation of tramadol, introduced in March 1995 by Johnson & Johnson ("J&J"), is marketed in the United States under the brand name Ultram. U.S. sales of Ultram were approximately $515 million for the twelve months ended December 31, 2002. We are currently engaged in Phase III trials for this product.

        Indication:    Tramadol is indicated for the treatment of a variety of pain syndromes, including management of moderate to moderately severe chronic pain associated with cancer and other terminal illnesses. Pain is a common symptom of many diseases and is generally seen in everyday clinical practice.

        Clinical Efficacy:    Tramadol is one of a number of analgesics, which are among the most effective and valuable medications for the treatment of chronic pain. Tramadol's minimal propensity to induce adverse effects is an advantage over other morphine-like agents. For example, relative to morphine, tramadol causes less dependence and less respiratory depression. Tramadol also appears to be a promising drug for post-operative pain relief.

        In an article published in the American Journal of Medicine, the author concluded that, based on clinical experience, tramadol appears to have a low potential for abuse or addiction. Results from U.S. and European studies indicated that tramadol is an effective analgesic that may have a particularly important role in the management of chronic pain. Tramadol has been prescribed for almost two decades in Europe.

        Two long-term safety studies conducted on patients with chronic, nonmalignant pain demonstrated the efficacy of tramadol in a variety of pain conditions.

        Our once-daily controlled-release formulation of tramadol seeks to provide sustained pain control, as compared to the immediate-release form. This would be especially useful in the treatment of osteoarthritis for patients who need analgesics as a 24-hour treatment.

        Status of Development:    Biovail is pursuing an indication for the relief of the signs and symptoms of osteoarthritis for tramadol XL. Two extensive Phase III clinical trials of 1000 patients each were initiated in mid-2002. Enrollment in these trials has been completed. We have also completed an open label safety trial to generate the requisite ICH safety of at least 1500 patients exposed short term, 300 patients exposed for 6 months and 100 patients exposed for 12 months. We are targeting late 2003 for the submission of a 505(b)(1) NDA.

        Market Size:    The combined market for narcotic and non-narcotic analgesics generated U.S. sales of $5.3 billion for the twelve months ended December 31, 2002.

        A two to three times daily immediate-release formulation of metformin, introduced in April 1995 by BMS, is marketed in the United States under the brand name Glucophage. Recently BMS introduced a controlled-release metformin formulation marketed as Glucophage XR. U.S. sales of Glucophage and Glucophage XR were approximately $1.8 billion for the twelve months ended December 31, 2002.

        Indication:    Metformin is indicated for the treatment of diabetes mellitus which cannot be controlled by proper dietary management, exercise and weight reduction or when insulin therapy is not appropriate. Diabetes is a common disorder in which there are inappropriately elevated blood glucose levels and a variety of end organ complications leading to impaired kidney function and accelerated atherosclerosis.

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        Clinical Efficacy:    Clinical advantages of metformin include achieving control of elevated blood sugar levels without exacerbating weight gain, which is a common side effect of other anti-diabetic treatments. Metformin differs from the sulfonylureas in that it does not elevate insulin secretion and does not produce abnormally low blood sugar levels.

        In controlled trials, metformin has shown efficacy in lowering elevated blood sugar levels in the treatment of diabetes mellitus. In one such study of 289 obese patients with non-insulin dependent diabetes, poorly controlled with diet, the patients were given metformin or a placebo. Blood sugar levels were on average 29% lower in patients receiving metformin than in patients receiving a placebo. Furthermore, total cholesterol, LDL, and triglyceride concentrations decreased in patients receiving metformin, but did not change in patients receiving a placebo.

        Status of Development:    Our development of a once-daily metformin product is in collaboration with our partner, Depo-Med. One of two phase III clinical trials has been successfully completed for which positive results were reported for a non-inferiority trial that compared various dosing regimens of metformin XL to Glucophage. Enrollment for a second phase III clinical trial that evaluates combination therapy has been completed and top line results from this trial are expected in late 2003. Enrollment in an open label safety trial to generate additional safety data has also been compeleted. We anticipate an NDA filing with the FDA in collaboration with Depo-Med in the first half of 2004.

        Market Size:    The oral anti-diabetic market represented approximately $5.2 billion in U.S. sales for the twelve months ended December 31, 2002. Major anti-diabetic products other than Glucophage include Glucotrol XL (glipizide), Avandia (rosiglitazone) and Actos (pioglitazone).

        A once to twice daily formulation of enalapril maleate, launched in 1986 by Merck & Co., Inc under the name Vasotec®, is now sold by Biovail Pharmaceuticals, Inc. U.S. sales of Vasotec® and its generic equivalents were $400 million for the 12 months ended December 31, 2002.

        Indication:    Vasotec® is indicated for the treatment of hypertension, congestive heart failure and asymptomatic left ventricular dysfunction. Enalapril belongs to a class of antihypertensive medications known as ACE inhibitors.

        Clinical Efficacy:    Vasotec® is effective alone or in combination with other antihypertensive agents, especially thiazide-type diuretics. ACE activates a hormone called angiotensin. Once activated, angiotensin causes blood vessels to constrict resulting in high blood pressure and a strain on the heart.

        ACE inhibitors inhibit ACE and prevent the activation of angiotensin. This results in dilated blood vessels and a lower blood pressure. Even in people with normal blood pressure, blocking the activation of angiotensin and dilating blood vessels is effective for treatment of the other conditions listed above.

        In clinical studies, administration of Vasotec® to patients with hypertension of severity ranging from mild to severe results in a reduction of both supine and standing blood pressure.

        Status of Development:    We are in the process of developing a formulation of enalapril with an improved 24-hour kinetic profile. Currently, Vasotec® is being dosed more than once-per-day more than 30% of the time it is prescribed. We believe that an extended-release formulation of enalapril will offer an improved clinical benefit as compared to the current formulation. Additionally, we have recently begun development of several fixed dose combinations of enalapril and diltiazem. A substantial number of physicians are still prescribing Vasotec® and our XL formulation should enable us to leverage the brand equity resident in the Vasotec brand name while achieving true 24-hour delivery of enalapril when dosed once-per-day. We expect to initiate clinical trials for the enalapril XL program in late 2003/early 2004.

        Market Size:    For the 12-month period ending December 2002, the ACE inhibitor market achieved total sales of approximately $4.9 billion. We intend to commercialize enalapril XL under the well recognized Vasotec brand name (Vasotec XL).

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        A two times daily immediate-release formulation of venlafaxine, introduced by Wyeth in March of 1994, is marketed in the United States under the brand name Effexor. In 1997, Wyeth introduced a controlled-release formulation marketed as Effexor XR. U.S. sales of Effexor and Effexor XR were approximately $1.65 billion for the twelve months ended December 31, 2002.

        Indication:    Venlafaxine is indicated for the treatment of depression and general anxiety disorder.

        Clinical Efficacy:    The efficacy of Effexor XR in the treatment of depression was established in 8- and 12-week controlled trials of outpatients whose diagnoses corresponded most closely to the DSM-III-R or DSM-IV category of major depressive disorder.

        The efficacy of Effexor XR as a treatment for general anxiety disorder (GAD) was established in two 8-week, placebo-controlled, fixed-dose studies, one 6-month, placebo-controlled, fixed dose study, and one 6-month, placebo-controlled, flexible-dose study in outpatients meeting DSM-IV criteria for GAD.

        In two head-to-head comparison studies, people with major depression treated with Effexor (venlafaxine) were more likely to recover completely than those treated with either Prozac (fluoxetine) or Zoloft (sertraline).

        Status of Development:    We are in the process of developing a super-bioavailable version of venlafaxine CR. We believe this will result in reduced dosages, smaller capsule size and higher strengths. The reduced dosage may achieve a better safety profile than the currently marketed product. Formulation development is on-going and results of pilot bioavailability studies were favorable.

        Market Size:    Sales of anti-depressant products totaled $12.3 billion for the twelve months ended December 31, 2002. The anti-depressant market consists of four major drug categories: new generation antidepressants, SSRIs/SNRIs (Selective Seratonin Reuptake Inhibitors/Selective Norepinephrine Reuptake Inhibitors), tricylic antidepressants, and monoamine oxidase inhibitors. Major marketed brands include Prozac (fluoxetine), Paxil (paroxetine), Zoloft (sertaline), Effexor XR (venlafaxine) and Wellbutrin (bupropion). Sales of Effexor and Effexor XR totaled a combined $1.65 billion for the 12 months ended December 31, 2002.

        A once-daily immediate-release formulation of fenofibrate, introduced in April 1998 by Abbott, is marketed in the United States under the brand name Tricor. U.S. sales of Tricor and generic fenofibrate were approximately $447 million for the twelve months ended December 31, 2002.

        Indication:    Tricor (fenofibrate) is indicated as adjunctive therapy to diet to reduce LDL-C, Total-C, Triglycerides and Apo B, and to increase HDL-C in adult patients with primary hypercholesterolemia or mixed dyslipidemia. Tricor is also indicated as adjunctive therapy to diet for the treatment of adult patients with hypertriglyceridemia.

        Clinical Efficacy:    A variety of clinical studies have demonstrated that elevated levels of total cholesterol (total-C), low-density lipoprotein cholesterol (LDL-C), and apolipoprotein B (apo B) an LDL membrane complex, are associated with human atherosclerosis. Similarly, a decreased level of high-density lipoprotein (HDL-C) is associated with atherosclerosis.

        The effects of fenofibrate at a dose equivalent to 160 mg per day were assessed from four randomized, placebo-controlled, double-blind, parallel-group studies. Fenofibrate lowered LDL-C, Total-C, and the LDL-C/HDL-C ratio. Tricor also lowered triglycerides and raised HDL-C.

        Status of Development:    We are in the process of developing a fenofibrate formulation with improved bioavailability characteristics such that the product may be taken without regards to meals. Formulation development is on-going and the results of pilot bioavailability were favorable.

        Market Size:    Sales of hypocholesterolemic agents, which include bile acid sequestrants, fibric acid derivatives and statins totaled $13.3 billion for the 12 months ended Decebmer 31, 2002. Tricor, and bioequivalent versions of fenofibrate, generated $447 million for the same period.

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        A once daily formulation of simvastatin, introduced in January 1992 by Merck & Co. Inc., is marketed in the United States under the brand name Zocor. U.S. sales of Zocor were approximately $4.2 billion for the twelve months ended December 31, 2002.

        Indication:    Zocor (simvastatin) is indicated to reduce elevated total-C, LDL-C, Apo B, and triglycerides and to increase HDL-C in patients with primary hypercholesterolemia and mixed dyslipidemia. Zocor is also indicated for patients with hypertriglyceridemia and dysbetalipoproteinemia.

        In patients with coronary heart disease, and hypercholesterolemia, Zocor is indicated to reduce the risk of total mortality by reducing coronary death; reduce the risk of non-fatal MI; reduce the risk for undergoing myocardial revascularization procedures; reduce the risk of stroke or transient ischemic attack.

        Clinical Efficacy:    Zocor has been shown to be highly effective in reducing total-C and LDL-C. A marked response was seen within 2 weeks and the maximum therapeutic response occurred within 4-6 weeks. The response was maintained during chronic therapy. Furthermore, improving lipoprotein levels with Zocor improved survival in patients with CHD and hypercholesterolemia treated with 20-40mg/day for a median of 5.4 years.

        Status of Development:    Pilot bioavailability studies have demonstrated that the absorption characteristics of simvastatin can be improved through reformulation. This presents an opportunity to deliver more simvastatin to the body at the same dose with the potential of enhancing the efficacy of the product. Formulation development efforts continue and we anticipate initiation of clinical trials in late 2003 or early 2004.

        Market Size:    Sales of statins, which include Lipitor (atorvastatin), Pravachol (pravastatin), Mevacor (lovastatin), Lescol (fluvastatin) and Zocor (simvastatin), totaled $12.5 billion for the 12 months ended Decebmer 31, 2002. Zocor is the second most prescribed agent in the class and generated sales of $4.2 billion in 2002.

        A 5 times per day for 7 to 10 days formulation of acylovir sodium, introduced in February 1985 by what is now GSK, is marketed in the United States under the brand name Zovirax Capsules. In 1991 GSK introduced a tablet formulation marketed as Zovirax Tablets. Zovirax and generic oral acyclovir in both forms generated 4.6 million prescriptions for the twelve months ended December 31, 2002.

        Indication:    Zovirax (acyclovir) is indicated for the acute treatment of herpes zoster (shingles); initial episodes and the management of recurrent episodes of genital herpes; and chickenpox.

        Clinical Efficacy:    Double-blind, placebo controlled studies with patients with initial genital herpes have demonstrated that orally administered Zovirax significantly reduced the duration of acute infection and duration of lesion healing. The duration of pain and new lesion formation was decreased in some patient groups.

        Double-blind, placebo-controlled studies in patients with frequent recurrences (6 or more episodes per year) have shown that orally administered Zovirax given daily for 4 months to 10 years prevented or reduced the frequency and/or severity of recurrences in greater than 95% of patients.

        In a double-blind, placebo-controlled study of immunocompetent patients with localized cutaneous zoster infection, Zovirax shortened the times to lesion scabbing, healing, and complete cessation of pain, and reduced the duration of viral shedding and the duration of new lesion formation.

        Status of Development:    The development efforts for acyclovir CR are ongoing and we expect to initiate Phase III clinical trials for this product by the end of 2003.

        Market Size:    Sales of systemic anti-infective agents indicated for the treatment of herpes, including Zovirax capsules and tablets, and bioequivalent versions of acyclovir, Famvir and Valtrex, totaled $739 million for the 12 months ended December 31, 2002. Zovirax and its generics represented $67 million of that total.

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FlashDose® Product Pipeline

        The acquisition of BTL in November 1999 gave us access to FlashDose® drug technology, including certain innovative drug delivery features such as rapid dissolve, enhanced absorption and taste masking. We have been applying these technologies in the development of FlashDose® versions of several oral dosage, and in some cases, controlled-release branded products. We believe that FlashDose® technology provides access to significant unmet market needs in such areas as pain relief, migraine, pediatric and geriatric care. Additionally, FlashDose® provides superior product differentiation which can significantly enhance the marketability of pharmaceutical products. Marketing strategies will be developed on the basis of individual brand dynamics but provide us with the option of partnering with the brand originator to achieve extended brand exclusivity or competing with the originator upon patent expiry.

        We are currently developing numerous FlashDose products including FlashDose versions of fluoxetine, zolpidem, paroxetine, sumatriptan, tramadol and other undisclosed products. These FlashDose pipeline products had aggregate U.S. sales in excess of $4.5 billion for the twelve months ended December 31, 2002.

        The following chart presents information for the twelve months ended December 31, 2002 with respect to FlashDose® versions of products that are under development or have been filed with the FDA:

Compound
   Currently Marketed Brand Name
   Indication
   Total U.S. Product Sales
(in millions)
fluoxetine   Prozac, Sarafam   depression/OCD/bulimia   $ 1,376
zolpidem   Ambien   insomnia   $ 1,251
paroxetine   Paxil   depression/OCD SAD/panic disorder   $ 535
sumatriptan   Imitrex   migraine headaches   $ 1,088
tramadol   Ultram   moderate to moderately severe pain   $ 515
(1)
Branded products

(2)
Branded products and bioequivalent products

        In the U.S. fluoxetine is marketed by Eli Lilly and Company ("Lilly") under the brand names Prozac, Prozac Weekly and Sarafem which is marketed by a subsidiary of Galen Holdings PLC.

        Indication:    Fluoxetine is indicated for the treatment of depression, Obsessive Compulsive Disorder ("OCD") and bulimia.

        Clinical Efficacy:    The prevalence of depressive disorders in the general population is approximately 6%. Fluoxetine was the first Selective Serotonin Reuptake inhibitor antidepressant to be introduced (January 1988). SSRI's are considered first line treatment for major depressive disorders, panic disorders, social anxiety disorder and general anxiety disorders. SSRI's have mainly replaced tricyclic anti-depressants and Monoamine Oxidase Inhibitors ("MAO's") in the treatment of depression because of their established efficacy, more favorable side-effect profile and wider therapeutic index, for instance lower potential for fatal overdose and drug interactions.

        Our FlashDose fluoxetine formulation is designed to provide patient flexibility, a reduction in adverse side-effects and to provide greater patient compliance.

        Status of Development:    Development of this product was completed and an NDA was filed with the FDA in September 2001. We received an Approvable Letter for this product from the FDA in July 2002.

        Market Size:    Due to its efficacy in treating depressive symptoms, fluoxetine competes with other SSRIs (such as venlafaxine, paroxetine and citalopram) and newer generation anti-depressants (such as bupropion and mirtazapine) MAO's, tricyclics and tetracyclics. The total anti-depressant market in the U.S. was estimated to be in excess of $12.3 billion in the twelve-month period ended December 31, 2002. U.S. sales of Prozac, Prozac Weekly and bioequivalent versions of fluoxetine were $1.4 billion for the twelve-month period ended December 31, 2002.

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        Zolpidem was launched in 1993 and is now marketed in the U.S. by Searle/Pharmacia under the brand name Ambien.

        Indication:    Zolpidem is indicated for the short-term treatment of insomnia.

        Clinical Efficacy:    Until the early 1990s pharmacological intervention for insomnia usually resorted to short-term treatment with benzodiazepines. These drugs were less than ideal due to their propensity to induce tolerance and subsequent rebound insomnia at higher dosages, coupled with a long half-life leading to lingering effects on next-day motor functioning. Zolpidem can substantially reduce these adverse effects. Our product is designed to provide a more rapid onset of action as compared with the existing zolpidem formulation and will employ FlashDose technology for greater patient convenience.

        Status of Development:    We filed an NDA with the FDA in December 2001 and received tentative approval for this product in November 2002. There are patents in place inhibiting our independent commercialization of this product until 2006.

        Market Size:    The sleep disorder market in the U.S was in excess of $1.4 billion for the twelve-month period ended December 31, 2002. Pharmacia Corporation's Ambien was the market leader with sales of $1.2 billion during the same period.

        Paroxetine is marketed in the U.S. by GSK under the brand name Paxil. In 1999 GSK formulated a controlled-release version of paroxetine.

        Indication:    Paroxetine is indicated for the treatment of depression, obsessive compulsive disorder (OCD), social anxiety disorder (SAD), and panic disorder.

        Clinical Efficacy:    Paroxetine was the first product approved for the treatment of SAD and for the treatment of panic disorder. GSK has also filed for approval of paroxetine in treatment of post-traumatic stress disorder. Our product is designed to enable patients to take orally disintegrating controlled-release paroxetine FlashDose without the use of water.

        Status of Development:    Positive pilot bioavailability results have been obtained and scale-up is planned for the second half of 2003 leading to an NDA filing with the FDA in 2004.

        Market size:    Due to its efficacy in treating depressive symptoms, paroxetine competes with other SSRI/SNRIs (such as venlafaxine, fluoxetine and setraline) and newer generation anti-depressants (such as bupropion and mirtazapine), MAOs, tricyclics and tetracyclics. The total anti-depressant market in the U.S. was estimated to be in excess of $12.3 billion in the twelve-month period ended December 31, 2002. U.S sales of Paxil were in excess of $2.5 billion for the twelve-month period ended December 31, 2002.

        Sumatriptan is marketed in the U.S. by GSK under the brand name Imitrex.

        Indication:    Sumatriptan is indicated for the acute treatment of migraine attacks with or without aura in adults.

        Clinical Efficacy:    The efficacy of Imitrex tablets in the acute treatment of migraine headaches was demonstrated in 3, randomized, double-blind, placebo-controlled studies. In all 3 trials, the percentage of patients achieving headache response 2 and 4 hours after treatment was significantly greater among patients taking Imitrex at all doses compared to those who received placebo.

        Based upon results of pilot bioavailability studies, the developmental challenge associated with taste masking has been overcome without compromising the absorption rate. We expect to begin scale-up in the second half of 2003 and are targeting an NDA filing in the first half of 2004. A planned Phase IIIb/IV program

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will focus on our ability to improve the absorption rate and produce a faster onset of action than the conventional tablet dosage form.

        Status of Development:    The development of taste-masking, without causing a delay in the absorption rate, has been accomplished as evidenced by positive pilot bioavailability results. Scale-up is scheduled for mid-2003 leading to an NDA filing with the FDA in the first half of 2004.

        Market size:    GSK's Imitrex (sumatriptan) is one of a number of seratonin (5-HT) receptor agonists used to treat migraines. Other products in this class include Amerge, Axert, Frova, Maxalt and Zomig. Total sales for these products were $1.7 billion for the 12-month period ended December 31, 2002. Imitrex sales were $1.1 billion for the same period.

        An immediate-release formulation (4-6 times per day up to 400 mg) of tramadol is marketed by J&J in the United States under the brand name Ultram.

        Indication:    Tramadol is indicated for the management of moderate to moderately severe pain in adults.

        Clinical Efficacy:    Ultram has demonstrated its analgesic effects in three long-term controlled trials involving a total of 820 patients with a variety of chronic pain conditions. Analgesia begins approximately one hour after administration and reaches peak in approximately two to three hours.

        Two long term safety studies conducted on patients with chronic, nonmalignant pain demonstrated the efficacy of tramadol in a variety of pain conditions.

        Status of Development:    Our tramadol FlashDose product is now in the Process Development Stage. Scale-up activities are expected to be completed shortly leading to an NDA filing with the FDA for this product in late 2003 or early 2004.

        Market Size:    The combined market for narcotic and non-narcotic analgesics generated U.S. sales of $5.3 billion for the twelve months ended December 31, 2002. Tramadol sales, including brand and generic, totaled $515 million for the same period.

Research and Development

        Our staff of scientists has expertise in all aspects of the drug development process, from pre-formulation studies and formulation development to scale-up and manufacturing. We have successfully developed appropriate delivery systems for pharmaceutical compounds exhibiting a wide range of solubility and hydrophobicity characteristics.

        Subsequent to the acquisition in November 1999 of BTL, we concluded that it was appropriate to integrate much of the research and development being conducted at our head office in Mississauga, Ontario, Canada facility with that being conducted at the BTL Chantilly, Virginia facility. This integration was carried out during 2000 such that only formulation development work is now carried out in Mississauga. The Chantilly facility comprises 91,000 square feet of administrative, laboratory and manufacturing space. In addition we own a 27,000 square foot facility in Dublin, Ireland.

Technology

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

        Oral controlled-release technology permits the development of specialized oral drug delivery systems that improve the absorption and utilization by the human body of a variety of pharmaceutical compounds. Release

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patterns are characterized as zero order, which indicates constant release over time, or first order, which indicates decreasing release over time. These systems offer a number of advantages, in particular, allowing the patient to take only one or two doses a day. This, combined with enhanced therapeutic effectiveness, reduced side effects, improved compliance and potential cost effectiveness, makes controlled-release drugs ideally suited for the treatment of chronic conditions.

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

        Our rapid dissolve (FlashDose) formulations contain the same basic chemical compound found in the original branded products. The dry chemical compounds are encapsulated in microspheres utilizing our CEFORM™ technology. Our Shearform® technology is used to produce matrices that are subsequently processed into amorphous fibers which, when blended with the CEFORM™ microspheres, can be compressed into rapid dissolve formulations including FlashDose tablets. The benefits of rapid dissolve formulations include the ease of administration for the elderly, young children or people with disease states who may have difficulty swallowing tablets or capsules.

        Our enhanced technology platform is unique in a sense that we use various formulation, physico-chemical tools and apply a combination of these tools to a drug in order to increase the solubility, increase the amount absorbed, control the pre-systemic metabolism and/or increase the rate of absorption with or without modification of the total amount of drug into the blood flow.

        We use at least seven proprietary drug delivery platforms, described below, involving matrix tablets or multiparticulate beads in capsules. These platforms are capable of delivering a wide variety of drug compounds in controlled-release and rapid dissolve oral dosage formulations.

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

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

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

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

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        CEFORM™ is a microsphere technology used to produce uniformly sized and shaped microspheres of a wide range of pharmaceutical compounds. The microspheres are nearly perfectly spherical in shape, typically have a diameter of 150–180 microns, and allow for high drug content. CEFORM™ microspheres are produced using a continuous, single-step and solvent-free manufacturing process that can be used to formulate drugs that are generally thermally unstable because of the very brief application of heat and the wide range of temperatures which can be used in the manufacturing process. Depending on the desired release characteristics and oral dosage format, CEFORM™ microspheres can be formulated for controlled-release, enhanced absorption, and taste masking.

        Shearform® is used to produce matrices of saccharides, polysaccharides, or other carrier materials that are subsequently processed into amorphous fibers or flakes and recrystallized to a predetermined level. This process is used to produce rapid dissolve formulations, including FlashDose. Shearform® can also be applied to food product ingredients to provide enhanced flavoring.

        Smartcoat® is a technology Biovail acquired from and developed with Pharmapass. This technology allows the manufacturing of very high potency controlled-release tablets, allowing small size tablets while controlling the release over a 24-hour period. A thin, very strong molecular diffusion membrane controls the release and the rate can be adapted to a Zero order or Weibull function.

        Chronotabs are made of Multipart or Smartcoat tablets particularly adapted to chronotherapy, using a second layer of smart polymers made of dry- or film-coating in order to optimize the active drug absorption profile for a bed time administration.

Contract Research Division (CRD)

        The CRD provides us and other pharmaceutical companies with a broad range of confidential, clinical research services, including pharmacokinetic studies and bioanalytical laboratory testing, Quality Assurance and statistical analysis.

        Operating as an independent business unit in Toronto, Ontario, the CRD is located in a 41,000 square foot stand-alone facility owned by us and a leased 10,500 square foot facility. These facilities include an independent review ethics board, a fully equipped bioanalytical laboratory, a department of biopharmaceutics and a newly constructed 12-bed Phase I Unit as part of 230-bed capacity for live-in clinics.

        To date, the CRD has designed and conducted in excess of 2,500 bioavailability, bioequivalence and drug interaction studies. The therapeutic areas in which studies have been completed include cardiovascular, cardiopulmonary, bone and joint disease, pain management, infectious diseases, central nervous system, gastroenterology and endocrinology. In addition, the CRD is active and experienced in the design and implementation of Phase III and Phase IV clinical trials from protocol design and monitoring to completion of statistical reports.

        The CRD has a database in excess of 30,000 healthy male and female volunteers for potential study enrollment and the bioanalytical laboratory continues to add to the inventory of over 100 developed and validated assays. The operations of the CRD are subject to full compliance with the applicable regulations and standards required by U.S., Canadian and other comparable foreign regulatory bodies.

Regulatory Affairs and Quality Assurance

        Our Corporate Regulatory Affairs Department performs a key role in every aspect of the development and registration of each product and has prepared product submissions for regulatory agencies in the United States,

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Canada, the United Kingdom and the European Union. This department also coordinates all data and document management, including amendments, supplements and adverse events reporting. Our Quality Assurance Department seeks to ensure that all stages of product development and production fully comply with good clinical, laboratory and manufacturing practices.

Patents and Proprietary Rights

        We have not routinely sought patents on our controlled-release technology because the filing of certain patents may provide potential competitors with information relating to proprietary technology, which may enable such competitors to exploit information related to such technology which is not within the confines of the protection of the patent. Historically, we have relied on trade secrets, know-how and other proprietary information. While certain of our licensors have sought patents on controlled-release technology licensed to it, there can be no assurance that any patents will be issued or, if issued, that the manufacture, use, sale, importation or offer for sale of such patented matter will not infringe upon other patents or technology. Our ability to compete effectively with other companies will depend, in part, upon our ability to maintain the proprietary nature of our technology and to avoid infringing patents of others. To protect our rights in these areas, we require all licensors, licensees and significant employees to enter into confidentiality agreements. There can be no assurance, however, that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information.

Manufacturing Facilities

        We currently operate four modern, fully-integrated pharmaceutical manufacturing facilities located in Steinbach, Manitoba, Chantilly, Virginia, and Dorado and Carolina, Puerto Rico, respectively. All of these facilities meet FDA-mandated good manufacturing practices. These facilities are inspected on a regular basis by regulatory authorities, and our own internal auditing team ensures compliance on an ongoing basis with such standards.

        Our Steinbach, Manitoba facility was expanded 40,000 feet during 2002 in preparation for manufacturing in 2003 of Wellbutrin XL for licensed to GSK. This new wing contains four main areas including a block of GMP rooms equipped with fluid bed granulation, bin blending, tableting, tablet coating equipment suitable for the Wellbutrin XL (and other similar) products. This addition doubles the manufacturing capacity of the Steinbach facility, and is on schedule to be operational (GMP ready) in May 2003. This project represents an investment in excess of U.S.$15 million.

        The Carolina, Puerto Rico facilities total 34,000 square feet, including 23,000 square feet of manufacturing capacity and 11,000 square feet of additional leased warehouse space. This plant is specially constructed for the high volume production of controlled-release beads.

        During 2002, additional facility improvements were made to our Dorado Puerto Rico facility including the completion of the lab expansion initiated in 2001. The warehouse and Tech Transfer expansion commenced in 2002 and continues through mid 2003. Additional equipment for the manufacturing of controlled-release and FlashDose® products was installed within the facility during 2002. This equipment expands the focus on equipment installation and validation for "site transfer" activities in 2001 to provide manufacturing capacity to support production requirements. Packaging of Tiazac commenced in the Dorado facility in 2002, after the "site transfer" was approved by FDA. Total investment in the Dorado facility is anticipated to be approximately U.S.$35 million.

        The Dorado facility will be the primary manufacturing site for FlashDose products. The focus of the FDA approved Chantilly, Virginia facility will be on R&D and "Tech Transfer" activities however this site remains an FDA approved facility and is available as an "alternate" or back-up site for the production of FlashDose® products.

        For additional discussion regarding our manufacturing facilities see Item 4.D. "Property, Plant and Equipment".

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Competition

        The pharmaceutical industry is highly competitive and subject to rapid and significant technological change. Our products face competition from both conventional forms of drug delivery and controlled-release drug delivery systems developed, or under development, by other pharmaceutical concerns. Many of these competitors have greater financial resources and marketing capabilities than we have. Our competitors in the United States and abroad are numerous and include, among others, major pharmaceutical and chemical companies, including, without limitation, some of the licensees (or potential licensees) of our products, specialized contract research and research and development firms, universities and other research institutions. We believe that our controlled-release technology combined with our strategy of funding and controlling all or most aspects of our controlled-release pharmaceutical business will provide the cost savings, efficiencies in product development and acceleration of regulatory filings necessary for it to compete effectively with such firms and institutions. Our competitors, however, may succeed in developing technologies and products that are as, or more, clinically or cost-effective than any that are being developed or licensed by us, or that would render our technologies and products obsolete or uncompetitive. In addition, certain of our competitors have greater experience than us in clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA and other regulatory approvals.

Regulation

        The research and development, manufacture and marketing of controlled-release pharmaceuticals are subject to regulation by U.S., Canadian and foreign governmental authorities and agencies. Such national agencies and other federal, state, provincial and local entities regulate the testing, manufacturing, safety and promotion of our products. The regulations applicable to our products may change as the currently limited number of approved controlled-release products increases and regulators acquire additional experience in this area.

United States Regulation

New Drug Application

        We will be required by the FDA to comply with NDA procedures for our branded products prior to commencement of marketing by us, or our licensees. New drug compounds and new formulations for existing drug compounds which cannot be filed as ANDAs are subject to NDA procedures. These procedures include (1) preclinical laboratory and animal toxicology tests; (2) scaling and testing of production batches; (3) submission of an Investigational New Drug Application ("IND"), and subsequent approval is required before any human clinical trials can commence; (4) adequate and well controlled replicate human clinical trials to establish the safety and efficacy of the drug for its intended indication; (5) the submission of an NDA to the FDA; and (6) FDA approval of an NDA prior to any commercial sale or shipment of the product, including pre-approval and post-approval inspections of its manufacturing and testing facilities. If all of this data in the product application is owned by the applicant, the FDA will issue its approval without regard to patent rights that might be infringed or exclusivity periods that would affect the FDA's ability to grant an approval if the application relied upon data which the applicant did not own. We intend to generate all data necessary to support FDA approval of the applications we file.

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

        Clinical trials involve the administration of a pharmaceutical product to individuals under the supervision of qualified medical investigators that are experienced in conducting studies under "Good Clinical Practise" guidelines. Clinical studies are conducted in accordance with protocols that detail the objectives of a study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA and to an Institutional Review Board prior to the commencement of each clinical trial. Clinical studies are typically conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the

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product into human subjects, the compound is tested for absorption, safety, dosage, tolerance, metabolic interaction, distribution, and excretion. Phase II involves studies in a limited patient population with the disease to be treated to (1) determine the efficacy of the product for specific targeted indications, (2) determine optimal dosage and (3) identify possible adverse effects and safety risks. In the event Phase II evaluations demonstrate that a pharmaceutical product is effective and has an acceptable safety profile, Phase III clinical trials are undertaken to further evaluate clinical efficacy of the product and to further test its safety within an expanded patient population at geographically dispersed clinical study sites. Periodic reports on the clinical investigations are required. We, or the FDA, may suspend clinical trials at any time if either party believes the clinical subjects are being exposed to unacceptable health risks. The results of the product development, analytical laboratory studies and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing and commercialization of a pharmaceutical product.

        The above-described NDA procedures are premised on the applicant being the owner of, or having obtained a right of reference to, all of the data required to prove safety and efficacy. These NDAs are governed by 21 U.S.C. § 355(b)(1), also known as Section 505(b)(1) of the FDC Act.

Abbreviated New Drug Application

        In certain cases, where the objective is to develop a generic version of an approved product already on the market in controlled-release dosages, an ANDA may be filed in lieu of filing an NDA. Under the ANDA procedure, the FDA waives the requirement to submit complete reports of preclinical and clinical studies of safety and efficacy and instead requires the submission of bioequivalency data, that is, demonstration that the generic drug produces the same effect in the body as its brand-name counterpart and has the same pharmacokinetic profile, or change in blood concentration over time. The ANDA procedure would be available to us for a generic version of a drug product approved by the FDA. In certain cases, an ANDA applicant may submit a suitability petition to the FDA requesting permission to submit an ANDA for a drug product that differs from a previously approved reference drug product (the "Listed Drug") when the change is one authorized by statute. Permitted variations from the Listed Drug include changes in: (1) route of administration, (2) dosage form, (3) strength and (4) one of the active ingredients of the Listed Drug when the Listed Drug is a combination product. The FDA must approve the petition before the ANDA may be submitted. An applicant is not permitted to petition for any other kinds of changes from listed drugs. The information in a suitability petition must demonstrate that the change from the Listed Drug requested for the proposed drug product may be adequately evaluated for approval without data from investigations to show the proposed drug product's safety or effectiveness. The advantages of an ANDA over an NDA include reduced research and development costs associated with bringing a product to market, and generally a shorter review and approval time at the FDA.

Patent Certification and Exclusivity Issues

        ANDAs are required to include certifications with respect to any patents that claim the Listed Drug or that claim a use for the Listed Drug for which the applicant is seeking approval. If applicable patents are in effect and this information has been submitted to the FDA, the FDA must delay approval of the ANDA until the patents expire. If the applicant believes it will not infringe the patents, it can make a patent certification to the holder of patents on the drug for which a generic drug approval is being sought, which may result in patent infringement litigation which could delay the FDA approval of the ANDA for up to 30 months. If the drug product covered by an ANDA were to be found by a court to infringe another company's patents, approval of the ANDA could be delayed until the patents expire. Under the FDC Act, the first filer of an ANDA with a "non-infringement" certification is entitled to receive 180 days of market exclusivity. Subsequent filers of generic products would be entitled to market their approved product six months after the earlier of the first commercial marketing of the first filer's generic product or a successful defense of a patent infringement suit.

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

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        The FDC Act contains non-patent market exclusivity provisions that offer additional protection to pioneer drug products and are independent of any patent coverage that might also apply. Exclusivity refers to the fact that the effective date of approval of a potential competitor's ANDA to copy the pioneer drug may be delayed or, in certain cases, an ANDA may not be submitted until the exclusivity period expires. Five years of exclusivity are granted to the first approval of a "new chemical entity." Three years of exclusivity may apply to products which are not new chemical entities, but for which new clinical investigations are essential to the approval. For example, a new indication for use, or a new dosage strength of a previously-approved product, may be entitled to exclusivity, but only with respect to that indication or dosage strength. Exclusivity only offers protection against a competitor entering the market via the ANDA route, and does not operate against a competitor that generates all of its own data and submits a full NDA under Section 505(b)(1) of the FDC Act.

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

Canadian Regulation

        The requirements for selling pharmaceutical drugs in Canada are substantially similar to those of the United States described above.

Investigational New Drug Application

        Before conducting clinical trials of a new drug in Canada, we must submit a Clinical Trial Application (CTA) to the Therapeutic Products Directorate (TP D). This application includes information about the proposed trial, the methods of manufacture of the drug and controls, preclinical laboratory and animal toxicology tests on the safety and potential efficacy of the drug, and information on any previously executed clinical trials with the ew drug. If, within 30 days of receiving the application, the TPD does not notify us that our application is unsatisfactory, we may proceed with clinical trials of the drug. The phases of clinical trials are the same as those described above under "United States Regulation — New Drug Application."

New Drug Submission

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

        Where the TPD has already approved a drug for sale in controlled-release dosages, we may seek approval from the TPD to sell an equivalent generic drug through an Abbreviated New Drug Submission (ANDS). In certain cases, the TPD does not require the manufacturer of a proposed drug that is claimed to be equivalent to a drug that has already been approved for sale and marketed, to conduct clinical trials; instead, the manufacturer must satisfy the TPD that the drug is bioequivalent to the drug that has already been approved and marketed.

        The TPD may deny approval or may require additional testing of a proposed New Drug if applicable regulatory criteria are not met. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Contravention of Canada's Food and

34


Drugs Act and Regulations can result in fines and other sanctions, including product seizures and criminal prosecutions.

        Proposals have recently been made that, if implemented, would significantly change Canada's drug approval system. In general, the recommendations emphasize the need for efficiency in Canadian drug review. Proposals include establishment of a separate agency for drug regulation and modeling the approval system on those found in European Union countries. There is no assurance, however, that such changes will be implemented or, if implemented, will expedite the approval of new drugs.

        The Canadian government has regulations which can prohibit the issuance of an NOC for a patented medicine to a generic competitor, provided that the patentee or an exclusive licensee has filed a list of its Canadian patents covering that medicine with the Minister of Health and Welfare. After submitting the list, the patentee or an exclusive licensee can commence a proceeding to obtain an order of prohibition directed to the Minister prohibiting him or her from issuing an NOC. The minister may be prohibited from issuing an NOC permitting the importation or sale of a patented medicine to a generic competitor until patents on the medicine expire or the waiver of infringement and/or validity of the patent(s) in question is resolved by litigation in the manner set out in such regulations. There may be additional patents relating to a company's proposed manufacture, use or sale of a product that could potentially prohibit such company's proposed commercialization of a drug compound.

        Certain provincial regulatory authorities in Canada have the ability to determine whether the consumers of a drug sold within such province will be reimbursed by a provincial government health plan for that drug by listing drugs on formularies. The listing or non-listing of a drug on provincial formularies may affect the prices of drugs sold within provinces and the volume of drugs sold within provinces.

Additional Regulatory Considerations

        Sales of our products by our licensees outside the United States and Canada are subject to regulatory requirements governing the testing, registration and marketing of pharmaceuticals, which vary widely from country to country.

        Our manufacturing facilities located at Steinbach, Manitoba and Carolina, Puerto Rico operate according to FDA and TPD mandated Good Manufacturing Practices. These manufacturing facilities are inspected on a regular basis by the FDA, the TPD, and other regulatory authorities. Our self-auditing team seeks to ensure compliance on an ongoing basis with FDA and TPD mandated good manufacturing practices. From time to time, the FDA, the TPD or other regulatory agencies may adopt regulations that may significantly affect the manufacture and marketing of our products.

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


C.    Organizational Structure

        The subsidiaries of the Company are detailed under "Subsidiary Information" in Item 10.I.


D.    Property, Plant and Equipment

        We own and lease space for manufacturing, warehousing, research, development, sales, marketing and administrative purposes. Our acquisition of the Dorado, Puerto Rico manufacturing facility was completed in January 2001. We are currently upgrading this facility to meet our manufacturing requirements and in January 2003 we have commenced packaging operations within the facility for certain product lines. We will continue to transfer additional production to the facility. In September 2002 we completed the construction of our new corporate headquarter facility in Mississauga, Ontario and relocated all corporate and administrative staff to the new facility. In 2002, we commenced work on a 47,000 square foot expansion of our Steinbach,

35


Manitoba manufacturing facility in order to increase production capacity. The construction was completed in early 2003 and the site is currently being equipped and qualified in order to be ready for production in the second quarter of 2003. In 2002, we purchased a 27,000 square foot facility in Dublin, Ireland for research and development activities to meet planned activity expansion requirements. The site has been customized and equipped and relocation to the new facility was completed in February 2003. In 2002, we acquired 1.8 acres of land in Christ Church, Barbados where we will construct a 14,000 square foot office facility for the operations located in Barbados.

        The following table lists the location, use, size and ownership interest of Biovail's principal properties:

Location
   Use
   Size
   Ownership
Mississauga, Ontario, Canada   Corporate office, sales, marketing and administration   55,000 Sq. Ft.   Owned
Mississauga, Ontario, Canada   Research and development   24,300 Sq. Ft   Leased
Toronto, Ontario, Canada   Research and development   40,000 Sq. Ft.   Owned
        11,000 Sq. Ft.   Leased
Steinbach, Manitoba, Canada   Manufacturing   145,000 Sq. Ft.   Owned
Chantilly, VA, USA   Research, development   92,000 Sq. Ft.   Leased
Sterling, VA, USA   Manufacturing, research, development, and warehousing   50,000 Sq. Ft.   Leased
Morrisville, NC, USA   Sales, marketing and administration   42,000 Sq. Ft.   Leased
Dorado, Puerto Rico   Manufacturing   120,000 Sq. Ft.   Owned
Carolina, Puerto Rico   Manufacturing   34,000 Sq. Ft.   Owned
Carolina, Puerto Rico   Warehousing   5,600 Sq. Ft.   Leased
St. Michael, Barbados   Licensing and administration   11,000 Sq. Ft.   Leased
Dublin, Ireland   Research and development   5,700 Sq. Ft.   Leased
Dublin, Ireland   Research and development   27,000 Sq. Ft.   Owned

        For additional discussion regarding our property, plant, and equipment see Item 4.B "Manufacturing Facilities".

36


Item 5.    Operating and Financial Review and Prospects


BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDEX

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") prepared in accordance with U.S. GAAP should be read in conjunction with the audited consolidated financial statements and related notes thereto prepared in accordance with U.S. GAAP included under Item 18 "Financial Statements". Likewise, the following MD&A prepared in accordance with Canadian GAAP should be read in conjunction with the audited consolidated financial statements and related notes thereto prepared in accordance with Canadian GAAP also included under Item 18.

        All share and option amounts have been adjusted to give effect to the 2 for 1 stock split completed in October 2000. All share and per share amounts in the MD&As, and in the audited consolidated financial statements, prepared in accordance with Canadian and U.S. GAAP have been retroactively adjusted to give effect to the stock splits.

 
   Page
Management's Discussion and Analysis of Financial Condition and Results of Operations    
  In accordance with U.S. generally accepted accounting principles   38
  In accordance with Canadian generally accepted accounting principles   59

37

BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In accordance with U.S. generally accepted accounting principles
(All dollar amounts expressed in U.S. dollars)

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

PROFILE

        We are a full-service pharmaceutical company, engaged in the formulation of pharmaceutical products utilizing advanced oral drug delivery technologies, clinical testing, registration, manufacturing, sale and promotion of pharmaceutical products targeting the cardiovascular (including Type II diabetes), central nervous system, pain management and niche therapeutic areas.

        Our primary business strategy is to support the commercialization of our product development pipeline by expanding our sales and marketing presence in the United States and Canada. We intend to complement our product pipeline by acquiring established pharmaceutical products, in-licensing products in early stages of development and entering into product development collaborations with third parties.

        We have research and development, clinical testing, manufacturing, sales and marketing operations in the United States, Canada, Barbados and Puerto Rico, and a research facility in Ireland.

OVERVIEW

        We continue to make significant progress in terms of product approvals. In February 2003, we received U.S. Food and Drug Administration ("FDA") approval for Cardizem® LA, a graded extended-release formulation of diltiazem hydrochloride ("HCl"), for the treatment of hypertension. We launched Cardizem® LA in April 2003 in collaboration with our co-promotion partner, Reliant Pharmaceuticals LLC ("Reliant"). Reliant brings additional experienced sales representatives to the marketing of Cardizem® LA, as well as our Zovirax, Teveten®, Cedax and Rondec® products. We also received FDA approval for Zovirax Cream in January 2003 and for Teveten® HCT in February 2003. During 2002, we received tentative FDA approval for a FlashDose® formulation of zolpidem for the treatment of insomnia. In the United States, zolpidem is sold under the brand name Ambien. In August 2002, GlaxoSmithKline plc ("GSK") filed a New Drug Application ("NDA") for our once-daily formulation of bupropion HCl for the treatment of depression. GSK has applied for the trade name Wellbutrin XL. In 2001, we licensed our once-daily formulation of bupropion HCl to GSK and have been collaborating with them to seek regulatory approval of Wellbutrin XL. When, and if, FDA approval is received, we will manufacture and supply Wellbutrin XL to GSK for a share of the revenue generated by future sales of the product.

        We also continue to pursue strategic business acquisitions and investments. During 2002, we extended our marketing agreement with GSK for Zovirax Ointment and Zovirax Cream from ten years to twenty years and we acquired the Canadian rights to GSK's Wellbutrin® SR and Zyban®, as well as the right to market our once-daily formulation of bupropion HCl under the Wellbutrin® XL trade name in Canada when, and if, regulatory approval is received. We also acquired the rights to Vasotec®, Vaseretic®, Teveten® and Teveten® HCT in the United States. We have begun development programs that will allow us to further exploit these brands. In December 2002, we acquired three private development companies — Pharma Pass LLC, Pharma Pass S.A. (collectively, "Pharma Pass") and Pharmaceutical Technologies Corporation ("Pharma Tech"). We believe that the products and technologies we acquired through these acquisitions will create substantial value for us in the future. During 2002, we made minority equity investments in Ethypharm S.A. ("Ethypharm") and DepoMed, Inc. ("DepoMed") and we obtained the rights to market a number of products under development by these companies.

38


CHANGES IN ACCOUNTING PRINCIPLES

        We have adopted the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 141, all business combinations occurring after June 30, 2001 are to be accounted for under the purchase method of accounting. Under SFAS No. 142, which we adopted effective January 1, 2002, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment tests. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

        Effective January 1, 2002, we identified those intangible assets that did not meet the criteria for recognition apart from goodwill, and assessed the useful lives of our remaining intangible assets. As a result, we reclassified the $5.7 million net carrying amount of workforce related intangible assets to goodwill, and determined that the useful lives of our remaining intangible assets were appropriate and consistent with those useful lives identified as at December 31, 2001. Our results for 2001 and 2000 included $6.7 million ($0.05 basic and diluted earnings per share) and $3.3 million ($0.02 basic and diluted earnings per share), respectively, of goodwill and workforce related amortization.

CRITICAL ACCOUNTING POLICIES

        We prepare our consolidated financial statements in accordance with U.S. GAAP, applied on a consistent basis. Our critical accounting policies relate to the use of estimates, the impact of product returns, recalls, rebates and chargebacks on revenue recognition, the recording of research and development expenses, the useful lives of intangible assets, the evaluation of goodwill, the hedge effectiveness of derivative financial instruments and the realizability of deferred tax assets.

        In preparing our consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We review our estimates to ensure that our estimates appropriately reflect changes in our business and new information as it becomes available. Actual results may materially differ from these estimates under different assumptions or conditions. Significant estimates we make include allowances for accounts receivable and inventories, reserves for product returns, recalls, rebates and chargebacks, the useful lives of long-lived assets, the expected cash flows used in evaluating long-lived assets and investments for impairment, the realizability of deferred tax assets and the allocation of the purchase price of acquired assets and businesses. A significant change in these estimates could have a material impact on our results of operations.

        We recognize product sales revenue when the product is shipped to the customer provided that we have not retained any significant risks of ownership or future obligations with respect to the product shipped. Revenue from product sales is recognized net of reserves for estimated product returns, recalls, rebates and chargebacks. These reserves are established in the same period in which the related product sales are recorded and are based on estimates of the proportion of product sales subject to return, recall, rebate or chargeback. A significant change in these estimates could have a material impact on our results of operations.

        We expense research and development costs in the period in which they are incurred. The costs of assets that are purchased from others for a particular research and development project, that have not reached technological feasibility and that have no alternative future use are expensed at the time of acquisition. We may

39


pursue product or business acquisitions that could result in a charge for acquired research and development costs, which could have a material non-cash impact on our results of operations.

        Intangible assets acquired through business combinations are initially recognized at fair value based on an allocation of the purchase price. Intangible assets acquired other than through business combinations are initially recognized at fair value based on the consideration paid. Our intangible assets are stated at cost, less accumulated amortization generally computed using the straight-line method based on their estimated useful lives ranging from eight years to twenty years. Useful life is the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We determine the useful lives of intangible assets based on a number of factors such as legal, regulatory or contractual limitations, known technological advances, anticipated demand and the existence or absence of competition. A significant change in these factors may warrant a revision of the expected remaining useful life of an intangible asset resulting in accelerated amortization or an impairment charge, which could have a material impact on our results of operations.

        Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the identifiable net assets acquired. We evaluate goodwill annually for impairment. An impairment of goodwill could have a material impact on our results of operations.

        We manage our exposure to interest rate risks through the use of derivative financial instruments. We do not utilize derivative financial instruments for trading or speculative purposes. On the dates we entered into the derivative contracts, we designated the derivative financial instruments as a hedge of the fair value of an identified portion of a recognized long-term obligation. For a derivative financial instrument that is designated and qualifies as a fair value hedge, the derivative financial instrument is marked-to-market with the gain or loss on the derivative financial instrument, and the respective offsetting loss or gain on the underlying hedged item, recognized in net income (loss). A discontinuance of fair value hedge accounting could have a material impact on our results of operations.

        We have recorded a valuation allowance on deferred tax assets primarily related to operating losses and tax credit carryforwards. We have assumed that these carryforwards are more likely than not to be unrealized based on estimated future taxable income and tax planning strategies in the related jurisdictions. The implementation of tax planning strategies or a change in the outlook for future taxable income in these jurisdictions could result in the recognition of some portion or all of these carryforwards, which could result in a material increase in our results of operations through the recovery of deferred income taxes.

ACQUISITIONS

        In December 2002, we acquired Pharma Pass for $178.7 million. Pharma Pass is a developer of advanced oral controlled-release technologies and formulations for pharmaceutical companies, including us, in the United States and Europe. On the completion of the development of our products, we had the right to manufacture and sell the products and Pharma Pass was entitled to royalties from the net sales of each product for a period of fifteen years from the date of launch of each product. Through this acquisition we extinguished any future milestone or royalty obligations that we may have had to Pharma Pass resulting from the approval and successful commercialization of any of the products under development, pursuant to the research and development agreements previously entered into between Pharma Pass and us. The acquisition of Pharma Pass resulted in a charge for acquired research and development of $107.2 million related to approximately twenty product development projects that were in various stages of completion but that had not yet received regulatory approval. We obtained interests in certain licensed products including Tricor (fenofibrate) and a participating interest in the gross profit on sales by a third party of a bioequivalent version of Prilosec (omeprazole). We also obtained Pharma Pass's Zero Order Release System, a drug delivery technology that controls the rate of release of a drug and/or significantly enhances the systemic absorption of a drug molecule, and its oral Colonic Delivery

40


System, a drug delivery technology designed for the targeted release of medication into the lower intestine and upper colon.

        In December 2002, we acquired Pharma Tech for $22.6 million. Pharma Tech is a development-stage company engaged in the application of drug delivery technologies to the formulation and development of a portfolio of products. Pharma Tech contracted directly with third parties, including us, to conduct the contract research and development services. We provided contract research and advisory services consistent with the contractual relationships we had with other third parties. On the completion of the development of our products, we had the right to manufacture and sell the products and Pharma Tech was entitled to royalties from the net sales of each product for a period of ten years from the date of launch of each product. Through this acquisition we extinguished any future milestone or royalty obligations that we may have had to Pharma Tech resulting from the approval and successful commercialization of any of the products under development, pursuant to the research and development agreements previously entered into between Pharma Tech and us. We had options to acquire Pharma Tech's interest in the products or to acquire Pharma Tech. The acquisition of Pharma Tech resulted in a charge for acquired research and development of $17.5 million related to a number of product development projects that were in various stages of completion but that had not yet received FDA approval.

        In December 2002, we acquired from GSK the rights to Wellbutrin® SR and Zyban® in Canada, as well as the rights to market our once-daily formulation of bupropion HCl in Canada under the trade name Wellbutrin® XL when, and if, regulatory approval is received, for $72.0 million. Wellbutrin® SR is prescribed for the treatment of depression and Zyban® is administered for the treatment of nicotine addiction as an aid to smoking cessation.

        In May 2002, we acquired from Merck & Co., Inc. ("Merck") the rights to Vasotec® and Vaseretic® in the United States for $245.3 million. Vasotec® is a leading angiotensin converting enzyme inhibitor indicated for hypertension and symptomatic congestive heart failure and Vaseretic® is a fixed-dose combination of Vasotec® and a diuretic. We are developing a once-daily formulation of Vasotec® and a fixed-dose combination of Vasotec® with diltiazem HCl to capitalize on the value of the acquired brand name.

        In March 2002, we acquired from Solvay Pharmaceuticals Marketing & Licensing AG ("Solvay") the rights to Teveten® and Teveten® HCT in the United States for $94.3 million. Teveten® is an angiotensin-II receptor blocker for the treatment of hypertension and is indicated for use either alone or in conjunction with other antihypertensive medications and Teveten® HCT is a combination of Teveten® and a diuretic. We relaunched Teveten® in June 2002 and launched Teveten® HCT in February 2003 following receipt of FDA approval.

        Effective January 1, 2002, we acquired from GSK the exclusive distribution rights to Zovirax Ointment and Zovirax Cream in the United States for $133.4 million. Zovirax is an anti-viral topical product. Zovirax Ointment is indicated for the treatment of herpes and Zovirax Cream is indicated for the treatment of cold sores. In December 2002, we agreed to pay GSK $40 million to extend the term of the Zovirax agreement from ten years to twenty years. We also agreed to pay GSK an aggregate amount of $45 million, over four years beginning in 2004, to amend several terms of the original Zovirax distribution agreement. We received FDA approval for Zovirax Cream in January 2003 and we intend to launch the product in mid-2003.

        In December 2000, we completed the acquisition of Intelligent Polymers Limited ("Intelligent Polymers") for total consideration of $204.9 million. Intelligent Polymers was formed to fund the development of once-daily, controlled-release branded products for chronic disease states, such as anxiety, depression, pain management and diabetes. Prior to September 29, 2000, we were developing the products on behalf of Intelligent Polymers pursuant to a development and license agreement. The acquisition of Intelligent Polymers resulted in a charge for acquired research and development of $208.4 million. An NDA has been filed by GSK for one of the

41


products under development (bupropion HCl), two other products (tramadol and metformin) are now in Phase III clinical trials, and the development of another product (buspirone) was discontinued in March 2003.

        In December 2000, we acquired the North American rights to Cardizem® from Aventis for total consideration of $409.5 million. Cardizem® is a leading calcium channel blocker prescribed for the treatment of hypertension and angina. We are capitalizing on the competitive advantage of the Cardizem® brand name by attaching it to our improved once-daily graded extended-release formulation — Cardizem® LA.

        In October 2000, we acquired DJ Pharma, Inc. ("DJ Pharma"), a pharmaceutical sales and marketing company located in the United States, for total consideration of $165.1 million plus the assumption of $34.2 million of debt. As a result of this acquisition, we obtained the rights to DJ Pharma's portfolio of products, as well as a trained workforce and infrastructure. The acquisition of DJ Pharma was significant to our strategy of becoming a fully integrated pharmaceutical company because, prior to the acquisition of DJ Pharma, we had no direct access to the United States market and were reliant on our marketing partners. The acquisition of DJ Pharma enhanced the value of our product pipeline through the ability to market directly to physicians, and provided an infrastructure on which we are building to meet the marketing needs of our increasing portfolio of products.

RESULTS OF OPERATIONS

        Total revenue was $788.0 million in 2002 compared to $583.3 million in 2001 and $309.2 million in 2000. Total revenue increased by 35% in 2002 compared to 2001 and by 89% in 2001 compared to 2000. Net income in 2002 was $87.8 million, or diluted earnings per share of $0.55, compared to net income in 2001 of $87.4 million, or diluted earnings per share of $0.58, and a net loss in 2000 of $148.0 million, or a diluted loss per share of $1.16.

        We utilize a measure of net income and diluted earnings per share that excludes certain items. This measure is a non-GAAP measure that does not have a standardized meaning and, as such, is not necessarily comparable to similarly titled measures presented by other companies. We have consistently applied this measure when discussing earnings or earnings guidance. This measure is provided to assist our investors in assessing our operating performance. We understand that many of our investors prefer to analyze our results based on this measure, as it is consistent with industry practice. The items were excluded because they were considered to be of a non-operational nature in the applicable year. The excluded items are also disclosed to give investors the ability to further analyze our results. Investors should consider this non-GAAP measure in the context of our U.S. GAAP results. The following table reconciles, for each year indicated, our net income (loss) in accordance

42


with U.S. GAAP with our net income excluding certain items, and displays our diluted earnings (loss) per share and diluted earnings per share excluding certain items.

 
   Years ended December 31
  
 
   2002
   2001
   2000
  
 
   In 000s, except per share data
 
Net income (loss)   $ 87,795   $ 87,448   $ (147,976 )
   
 
 
 

Add (deduct) certain items
 
 
 
 
 
 
 
 
 
 
Write-down of assets     31,944     80,482     —  
Acquired research and development     167,745     —     208,424  
Other income     (3,408 )   —     —  
Debt conversion premiums     —     34,923     —  
Extraordinary item     —     —     20,039  
Cumulative effect of change in accounting principle     —     —     43,500  
   
 
 
 
Net income excluding certain items   $ 284,076   $ 202,853   $ 123,987  
   
 
 
 
Diluted earnings (loss) per share   $ 0.55   $ 0.58   $ (1.16 )
   
 
 
 
Diluted earnings per share excluding certain items   $ 1.77   $ 1.35   $ 0.86  
   
 
 
 

        Net income excluding certain items was $284.1 million, $202.9 million and $124.0 million in 2002, 2001 and 2000, respectively. Diluted earnings per share excluding certain items were $1.77, $1.35 and $0.86 in 2002, 2001 and 2000, respectively. Net income excluding certain items and diluted earnings per share excluding certain items increased by 40% and 31%, respectively, for 2002 compared to 2001, and by 64% and 57%, respectively, for 2001 compared to 2000. For 2002, the items excluded consist of a write-down of assets of $31.9 million primarily related to the write off of the Adalat product rights and corresponding long-term obligation as a result of a settlement reached between the U.S. Federal Trade Commission ("FTC"), Elan Corporation plc ("Elan") and us regarding the introduction of bioequivalent versions of Adalat CC, acquired research and development of $167.7 million arising from the acquisitions of Pharma Pass and Pharma Tech as well as from the termination of Pharma Tech's development of one of its products under development and any royalty obligation we may have had based on future sales of the product when, and if, approved by the FDA, and other income of $3.4 million related to the ineffective portion of the fair value hedge of a portion of our 77/8% Senior Subordinated Notes due April 1, 2010 ("Notes"). For 2001, the items excluded consist of a write-down of assets of $80.5 million primarily related to the Keftab and Dura-Vent product rights and debt conversion premiums of $34.9 million related to the surrender and redemption of our 6.75% Convertible Subordinated Preferred Equivalent Debentures due March 31, 2025 ("Debentures"). For 2000, the items excluded consist of acquired research and development of $208.4 million arising from the acquisition of Intelligent Polymers, a premium of $20.0 million paid to extinguish our 107/8% U.S. Dollar Senior Notes due November 15, 2005 ("Senior Notes") and a charge of $43.5 million for the cumulative effect of the adoption of the U.S. Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101").

REVENUE

        Our revenue is derived from sales of pharmaceutical products, providing research and development services, and the co-promotion of pharmaceutical products, as well as from royalties and license fees. Product sales include sales of products developed and manufactured by us for distribution by our licensees and direct marketing to physicians in the United States and Canada of proprietary and in-licensed products. Research and

43


development revenue relates to product development activity in collaboration with third parties and pharmaceutical contract research services. Fees for co-promotion services are earned on sales of co-promoted products developed by other companies. Royalties primarily arise on sales of the products we developed or acquired and from our interests in certain licensed products of Pharma Pass. License fees are derived from the license of our technologies or product rights.

        The following table displays, for each year indicated, the percentage of each source of revenue to total revenue, and the percentage change in the dollar amount of each source and the total as compared to the prior year. Revenue for 2001 and 2000 reflects the reclassification of co-promotion revenue from product sales to co-promotion, royalty and licensing to conform to the presentation adopted in 2002.

 
    
    
    
    
    
    
   Percentage Change
  
 
   Years Ended December 31
  
 
   2001 to 2002
   2000 to 2001
  
 
   2002
   2001
   2000
  
 
   000s
   
   000s
   
   000s
   
    
    
  
Product sales   $ 645,986   82 % $ 521,154   89 % $ 217,004   70 % 24 % 140  %
Research and development     28,425   4     14,596   3     66,834   22   95   (78)  
Co-promotion,                                        
royalty and licensing     113,614   14     47,513   8     25,332   8   139   88   
   
 
 
 
 
 
         
    $ 788,025   100 % $ 583,263   100 % $ 309,170   100 % 35   89   
   
 
 
 
 
 
         

Product sales

        Product sales were $646.0 million in 2002 compared to $521.2 million in 2001 and $217.0 million in 2000. Product sales comprised 82% of total revenue in 2002 compared to 89% in 2001 and 70% in 2000. The following table displays the approximate percentage of each product category to total product sales.

Product Category
   2002
   2001
   2000
  
Tiazac®   15 % 20 % 40 %
Cardizem®   25   35   —  
Bioequivalent   30   30   40  
All other   30   15   20  
   
 
 
 
    100 % 100 % 100 %
   
 
 
 

        In August 2002, we received final approval by the FDA for our 90mg bioequivalent version of Adalat CC (once-daily nifedipine). Our marketing partner, Teva Pharmaceuticals USA, Inc., immediately launched this product in the United States.

        Product sales increased by 24% in 2002 compared to 2001 mainly due to the continuing strong performance of Tiazac® and Cardizem®, combined with the contribution from Zovirax Ointment, Teveten®, Vasotec®, Vaseretic® and our 90mg bioequivalent version of Adalat CC.

        Product sales increased by 140% in 2001 compared to 2000 mainly due to the additions of Cardizem® and DJ Pharma's product portfolio. Product sales growth also came from a higher contribution from bioequivalent products, reflecting the 2001 launch of our 30mg bioequivalent version of Procardia XL and the late 2000 launches of our 60mg bioequivalent versions of Procardia XL and Adalat CC.

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        Our product sales and gross margins for 2002 and 2001 were adversely impacted by lost sales and costs associated with the voluntary recall of Keftab tablets, which was initiated by Eli Lilly & Company ("Lilly") in March 2001 because of undefined problems Lilly had with the product's stability. Lilly manufactured and supplied the product to us for marketing in the United States. In March 2003, we successfully settled our legal action against Lilly regarding the recall of Keftab.

        We expect our product sales to increase in 2003 compared to 2002 due to the contribution from the products we acquired in 2002, the launches of Cardizem® LA, Teveten® HCT and Zovirax Cream during 2003 and the anticipated launch of Wellbutrin XL in the second half of 2003 when, and if, approved by the FDA.

Research and development

        Research and development activities generated revenue of $28.4 million in 2002 compared to $14.6 million in 2001 and $66.8 million in 2000. Research and development activities comprised 4% of total revenue in 2002 compared to 3% in 2001 and 22% in 2000.

        In the ordinary course of business we enter into research and development collaborations with third parties whereby we provide contract research, formulation development and other services to those third parties. We are typically compensated through a combination of fees for service, milestone payments, royalties from future sales of the products and/or co-promotion revenue.

        Research and development revenue increased by 95% in 2002 compared to 2001 mainly due to the inclusion of revenue associated with the development of Wellbutrin XL in collaboration with GSK. During 2002, we completed the development of Wellbutrin XL, resulting in GSK's filing of an NDA for the product in August 2002.

        Research and development revenue declined by 78% in 2001 compared to 2000, as we did not earn any revenue from Intelligent Polymers after September 29, 2000. We earned revenue of $52.9 million from Intelligent Polymers for the period ended September 29, 2000.

        In the years presented, our remaining research and development revenue was primarily generated from clinical research and laboratory testing services provided to external customers by our contract research operation.

        In 2003, we expect research and development revenue to decline compared to 2002 mainly due to the completion of the development of Wellbutrin XL.

Co-promotion, royalty and licensing

        Co-promotion, royalty and licensing activities generated revenue of $113.6 million, $47.5 million and $25.3 million in 2002, 2001 and 2000, respectively. Co-promotion, royalty and licensing revenue comprised 14% of total revenue in 2002 and 8% in both 2001 and 2000.

        Co-promotion, royalty and licensing revenue increased by 139% in 2002 compared to 2001 and by 88% in 2001 compared to 2000. In 2002, co-promotion revenue was related to the co-promotion of GSK's Wellbutrin SR in the United States and the co-promotion of H. Lundbeck A/S's Celexa in Canada. During 2002, we received four quarterly increments of $10 million each under the Wellbutrin SR co-promotion agreement with GSK. We earned the last quarterly increment of $10 million in the first quarter of 2003. The receipt of each of the quarterly increments was dependent on our performing prescribed detailing activity during each quarter and the amount was determined based on a percentage of net sales of Wellbutrin SR in the United States during each quarter. In 2001 and 2000, co-promotion revenue was related entirely to the co-promotion of Celexa.

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        Royalty revenue increased in 2002 compared to 2001 due to the contribution from our interest in the gross profit on sales of a bioequivalent version of Prilosec. Royalty revenue increased in 2001 compared to 2000 due to higher Tiazac® sales by our marketing partner, Forest Laboratories Inc., and the inclusion of a royalty associated with sales of bioequivalent versions of Cardizem® by third parties.

        We expect the level of co-promotion, royalty and licensing revenue in 2003 to be higher than in 2002 due to the contribution from our interest in the gross profit on sales of a bioequivalent version of Prilosec, partly offset by the loss of revenue following the conclusion of our co-promotion of Wellbutrin SR in the United States.

OPERATING EXPENSES

        The following table displays, for each year indicated, the percentage of each expense item to total revenue, and the percentage change in the dollar amount of each item and the total as compared to the prior year. Prior to 2001, we included amortization expense as a component of cost of goods sold, research and development expenses and selling, general and administrative expenses. In 2001, amortization increased substantially due to the additions made to intangible assets and acquisitions of businesses and consequently we decided to present amortization as an individual line item within operating expenses. Operating expenses for 2000 reflect the reclassification of amortization to conform to the presentation adopted in 2001.

 
    
    
    
    
    
    
   Percentage Change
  
 
   Years Ended December 31
  
 
   2001 to 2002
   2000 to 2001
  
 
   2002
   2001
   2000
  
 
   000s
   
   000s
   
   000s
   
    
    
  
Cost of goods sold   $ 164,706   21 % $ 125,995   21 % $ 67,980   22 % 31 % 85  %
Research and development     52,150   7     51,017   9     51,709   17   2   (1)  
Selling, general and administrative     165,697   21     110,100   19     51,857   17   50   112   
Amortization     71,499   9     44,513   8     7,232   2   61   516   
   
 
 
 
 
 
         
    $ 454,052   58 % $ 331,625   57 % $ 178,778   58 % 37   85   
   
 
 
 
 
 
         

Cost of goods sold and gross margins

        Cost of goods sold was $164.7 million in 2002 compared to $126.0 million in 2001 and $68.0 million in 2000. Cost of goods sold includes royalties on product sales payable to third party licensors that owned and/or developed the products. Costs of goods sold increased by 31% in 2002 compared to 2001 and by 85% in 2001 compared to 2000. The year over year increases in cost of goods sold were the result of increased sales volumes from new product launches and product acquisitions, and higher sales levels of certain existing products.

        Gross margins based on product sales were 75%, 76% and 69% in 2002, 2001 and 2000, respectively. Gross margins are impacted year to year by sales volumes, pricing, product mix, and manufacturing volumes. The gross margin in 2002 was affected by a lower proportion of higher margin Cardizem® sales in the overall product mix and the additions of Zovirax Ointment and Teveten® sales, which had lower margins relative to other of our products, offset by the inclusion of Vasotec® and Vaseretic® sales, which generated higher margins relative to other of our products. The increase in gross margin in 2001 compared to 2000 reflected the impact of the higher margin earned on Cardizem® relative to other of our products.

        We expect gross margins on product sales in 2003 to be comparable to 2002.

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Research and development

        Research and development expenses were $52.2 million in 2002 compared to $51.0 million in 2001 and $51.7 million in 2000. As a percentage of total revenue, research and development costs declined to 7% in 2002 compared to 9% in 2001 and 17% in 2000.

        In the ordinary course of business, we enter into research and development collaborations with third parties to provide formulation and other services for our products under development. These collaborations target our therapeutic areas of focus — cardiovascular (including Type II diabetes), central nervous system, pain management and niche opportunities. These third party developers are typically compensated through a combination of fees for service, milestone payments and/or royalty payments from future sales of the products under development. The developers may utilize their own technology and, in other cases, we will allow access to our technology for the formulation and development of the products. In some cases, we have an ownership interest or an option to take an ownership position in the developer. In no case are we responsible for any of the developers' third party liabilities, nor have we guaranteed any debts, nor are we required under any circumstances to exercise any of our options.

        Research and development expenses reflect direct spending on the development of branded and bioequivalent products utilizing advanced oral drug delivery technologies. We completed a Phase III clinical trial to support the submission of a supplemental NDA for an angina indication for Cardizem® LA. The results of this clinical trial were favourable and we expect to file the supplemental NDA for Cardizem® LA in mid-2003. In addition, we have completed, or are in the process of completing, a number of comparative Phase IV studies involving Cardizem® LA. We are developing a once-daily formulation of Vasotec® and we are also working on a fixed-dose combination of Vasotec® with diltiazem HCl. Two ongoing Phase III trials are progressing to support an NDA submission for our once-daily formulation of tramadol, for the signs and symptoms of osteoarthritis. We expect to file an NDA for tramadol in the second half of 2003. One Phase III clinical trial has been successfully completed on our once-daily formulation of metformin, for the treatment of Type II diabetes, through a collaborative effort with DepoMed, and a second Phase III clinical trial is in progress. We expect to file an NDA for metformin in the first half of 2004. We have evaluated the results of a Phase III clinical trial involving buspirone, for the treatment of depression, and have decided to discontinue the development of this product in light of the unsatisfactory results from this trial.

        A number of other research and development activities are ongoing, including feasibility studies, formulation development and optimization, formulation scale-up and clinical studies. We are also working on the development of enhanced formulations of a number of disclosed compounds (fenofibrate, simvastatin, paroxetine, venlafaxine, sumatriptan and acyclovir), as well as a number of undisclosed compounds.

        We expect research and development expenses to increase significantly in 2003 compared to 2002 due to an expected increase in clinical activity.

Selling, general and administrative

        Selling, general and administrative expenses were $165.7 million, $110.1 million and $51.9 million in 2002, 2001 and 2000, respectively. Selling, general and administrative expenses were 21% of total revenue in 2002 compared to 19% in 2001 and 17% in 2000.

        During 2002, our sales capability in the United States was significantly increased. Our U.S. sales organization more than doubled in size as we added sales and marketing management and regional and district sales management and hired over 200 sales representatives across the country. We devoted considerable attention and resources to increasing our sales force capabilities by adhering to specific selection criteria during the hiring process and by locating new sales representatives in territories with high prescribing physicians. In

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addition, in November 2002 we entered into a co-promotion agreement with Reliant. Reliant's sales force has experience detailing cardiovascular products across the United States, has established relationships with high prescribing physicians and will be working in tandem with our existing sales force. We benefited from this approach to building our sales organization when we relaunched Teveten® in June 2002. After promoting Teveten® for six months, in collaboration with Reliant for the final three months of 2002, we saw December prescriptions increase substantially over June prescription levels.

        Selling, general and administrative expenses increased by 50% in 2002 compared to 2001 mainly due to the expansion of our sales organization in the United States and the incremental sales and marketing costs associated with Zovirax Ointment and Teveten®, as well as costs associated with the co-promotion of Wellbutrin SR in the United States. We recorded Teveten® sales and marketing costs net of a related marketing allowance of $10 million paid by Solvay in 2002. In addition, we have expensed a portion of the costs associated with the development of the Cardizem® LA promotional program. In 2002, selling, general and administrative expenses also include fees payable to Reliant related to the co-promotion of Teveten® and Cedax during the fourth quarter of 2002.

        Selling, general and administrative expenses increased by 112% in 2001 compared to 2000, mainly due to the inclusion of our U.S. sales organization in our results for a full year. In addition, with the acquisition of Cardizem® the level of sales and marketing activity increased in both the United States and Canada.

        We expect selling, general and administrative expenses to increase as a percentage of total revenue in 2003 compared to 2002 due to the costs associated with the launches of Cardizem® LA, Teveten® HCT and Zovirax Cream during 2003.

Amortization

        Amortization expense was $71.5 million, $44.5 million and $7.2 million in 2002, 2001 and 2000, respectively. Amortization expense was 9% of total revenue in 2002 compared to 8% in 2001 and 2% in 2000.

        The increase in amortization expense in 2002 compared to 2001 reflected the incremental amortization associated with the acquisitions of the rights to Zovirax, Teveten®, Vasotec® and Vaseretic®, and Wellbutrin® and Zyban® in Canada, as well as the amortization of our interest in the gross profit on sales of a bioequivalent version of Prilosec. In 2002, amortization expense was reduced by the elimination of goodwill and workforce related amortization as a result of the adoption of SFAS No. 142.

        The increase in amortization expense between 2001 and 2000 reflected the amortization of product rights and goodwill associated with the acquisition of DJ Pharma and the amortization of the Cardizem® brand name.

        We expect that amortization expense will increase in 2003 compared to 2002 due to a full year of amortization related to the intangible assets acquired during 2002.

Write-down of assets

        In 2002, we recorded a $31.9 million non-cash charge primarily related to the write-down of the following assets:

        As a result of a settlement reached with the FTC regarding the introduction of bioequivalent versions of Adalat CC, we agreed with Elan to terminate our agreements related to the licensing and supply of Elan's 30mg and 60mg bioequivalent versions of AdalatCC. The FTC consent order effectively nullifies our long-term obligation to make minimum license payments to Elan under the licensing and supply agreement for Elan's 30mg bioequivalent version of Adalat CC. We have been in negotiations to have Elan reacquire the rights to its bioequivalent versions of Adalat CC that had previously been sold to us. As there has been no meaningful

48


progress in these negotiations, and as we are unable to ascertain the eventual outcome of these negotiations, in December 2002 we determined that we should write off the net book value of the Adalat product rights, net of the corresponding long-term obligation to Elan. We recorded a related non-cash charge of $22.4 million. We are considering whether or not to pursue litigation against Elan to obtain fair compensation for the loss of these products. Elan is required to continue to supply us with its 30mg bioequivalent version of Adalat CC until May 31, 2003.

        In 2002, we also recorded other non-cash asset write-downs of $9.5 million, primarily related to an unrealized holding loss on our investment in DepoMed.

        In 2001, we recorded an $80.5 million non-cash charge related to the write-down of the following assets:

        At December 31, 2001, Lilly had not resolved the manufacturing problems associated with Keftab that arose in March 2001. The supply interruption had resulted in a deterioration of customer awareness of the product, which would have required substantial promotional efforts to restore if the product were to be re-launched. Due to these conditions that existed at December 31, 2001, we determined that the Keftab product right had been permanently impaired and should be written down to its estimated recoverable value of $10 million. We recorded a related non-cash charge of $54.6 million.

        We believed Lilly was responsible for manufacturing and supplying commercially acceptable products to us, as well as for the cost of the recall. In this regard, we commenced a legal action against Lilly in which we were seeking damages as a result of Lilly's voluntary recall of Keftab. In March 2003, we settled our legal action with, and received compensation from, Lilly for the recoverable value of the Keftab intangible asset, the cost of the Keftab inventory that was destroyed, the lost margin on sales of Keftab and the expenses incurred with respect to the Keftab recall. In the first quarter of 2003, we recorded an aggregate net recovery from the settlement of the Lilly action, together with the settlement of an unrelated action against Mylan Pharmaceuticals, Inc., of $24.8 million plus interest.

        In November 2000, the FDA requested a voluntary recall of products containing phenylpropanolamine ("PPA"). We immediately stopped shipments of our Dura-Vent products containing PPA and initiated a recall of these products from wholesalers and pharmacies. During 2001, we experienced supply interruptions resulting from manufacturing issues associated with our remaining Dura-Vent products that did not contain PPA. Dura-Vent is manufactured and supplied to us by a third party. These supply interruptions caused our revenues and gross margins for the remaining Dura-Vent products to significantly deteriorate. We evaluated the current and forecasted market share for the products and determined that the Dura-Vent product right had been permanently impaired and the remaining net book value should be written off. We recorded a related non-cash charge of $19.0 million.

        In 2001, we also recorded other non-cash asset write-downs of $6.9 million, primarily related to an intangible asset associated with the acquisition of Intelligent Polymers.

Acquired research and development

        In 2002, we incurred non-cash charges for acquired research and development of $107.2 million and $17.5 million arising from our acquisitions of Pharma Pass and Pharma Tech, respectively. Through each of these acquisitions, we acquired a portfolio of products that were in various stages of development, had not reached technological feasibility and had no alternative future use. The efforts required to develop the acquired research and development into commercially viable products include the completion of the development stages of the products, clinical-trial testing, regulatory approval and commercialization. The principal risks relating to the products in development are the outcomes of the formulation development, clinical studies and regulatory

49


filings. Since pharmaceutical products cannot be marketed without regulatory approvals, we will not receive any benefits unless regulatory approval is obtained.

        We also incurred a non-cash charge for acquired research and development of $43.1 million related to the termination of the development by Pharma Tech of one of its products under development and any royalty obligation we may have had to Pharma Tech based on future sales of the product when, and if, approved by the FDA. We are continuing the development program for this product.

        In 2000, we incurred a non-cash charge for acquired research and development of $208.4 million arising from our acquisition of Intelligent Polymers.

OPERATING INCOME OR LOSS

        Operating income was $134.3 million in 2002 compared to operating income of $171.2 million in 2001 and an operating loss of $78.0 million in 2000. Operating income excluding write-down of assets and acquired research and development was $334.0 million in 2002 compared to $251.6 million in 2001 and $130.4 million in 2000. Operating income excluding write-down of assets and acquired research and development increased by 33% in 2002 compared to 2001 and by 93% in 2001 compared to 2000. As a percentage of total revenue, operating income excluding write-down of assets and acquired research and development was 42% in 2002 compared to 43% in 2001 and 42% in 2000.

        The increase in operating income excluding write-down of assets and acquired research and development in 2002 compared to 2001 was mainly due to the additions of Zovirax, Teveten®, Vasotec®, Vaseretic® and our 90mg bioequivalent version of Adalat CC product sales. Also contributing to the increase was the inclusion of WellbutrinSR co-promotion revenue and our interest in the gross profit on sales of a bioequivalent version of Prilosec, combined with a reduction in research and development expenses as a percentage of total revenue. Operating income excluding write-down of assets and acquired research and development in 2002 was reduced by an offsetting increase in cost of goods sold and sales and marketing costs, as well as expenses related to the expansion of our U.S. sales organization and incremental amortization expense related to additions to intangible assets.

        The increase in operating income excluding write-down of assets and acquired research and development in 2001 compared to 2000 was mainly due to the additions of Cardizem® and DJ Pharma's product portfolio. Operating income excluding write-down of assets and acquired research and development in 2001 was reduced by an offsetting increase in cost of goods sold and sales and marketing costs, as well as expenses related to the inclusion of our U.S. sales organization and incremental amortization expense related to new products.

NON-OPERATING ITEMS

Interest income and expense

        Interest income of $3.6 million, $2.7 million and $23.7 million in 2002, 2001 and 2000, respectively, was earned on our investment portfolio, which is comprised primarily of high-grade government and corporate securities. Higher interest income in 2000 reflected a larger average investment portfolio following our concurrent offering of common shares and Debentures in March 2000, and prior to our acquisitions of Intelligent Polymers, Cardizem® and DJ Pharma.

        Interest expense was $32.0 million, $36.2 million and $20.7 million in 2002, 2001 and 2000, respectively. In 2002, interest expense was primarily related to our Notes issued in March 2002. During 2002, we entered into interest rate swap contracts of aggregate $200 million notional amount, which are designated as a fair value hedge of one-half of our Notes. The contracts involve the receipt of fixed rate amounts in exchange for floating

50


rate interest payments based on six-month London Interbank Offering Rate ("LIBOR") plus a spread. Net receipts or payments relating to the contracts are recorded as an adjustment to interest expense. Interest expense also included interest on advances under our credit facility and the amortization of the discounts on the Adalat and Vasotec® obligations. The non-cash amortization of these discounts amounted to $5.3 million.

        Prior to March 2000, interest expense was primarily related to our Senior Notes. In March 2000, we redeemed our Senior Notes using the proceeds from our concurrent offering of common shares and Debentures and, accordingly, interest expense from this time primarily related to our Debentures until their surrender and redemption during the second half of 2001. In addition, interest expense in 2001 reflected interest on advances under our credit facility and the amortization of the discounts on the Adalat and Cardizem® obligations. The non-cash amortization of these discounts amounted to $11.0 million.

Other income

        The change in the fair values of the interest rate swap contracts and the offsetting change in the fair value of the portion of our Notes being hedged are recognized in other income. The net gain recognized in 2002 related to the ineffective portion of the fair value hedge.

Debt conversion premiums

        In 2001, we recorded a debt conversion premium of $23.7 million on the surrender of $173.8 million aggregate principal amount of our outstanding Debentures. The premium represented the market value of the additional common shares issued in excess of the number of common shares that would have been issued under the terms of the conversion ratio provided for in the indenture governing our Debentures.

        We recorded an additional debt conversion premium of $11.2 million on the remaining $126.1 million aggregate principal amount of our outstanding Debentures that had been called for redemption in November 2001. The additional premium represented the aggregate amount of interest that would have been paid on our Debentures from the redemption date to March 31, 2003.

Provision for income taxes

        Our tax rate was affected by the relative profitability of our operations in various foreign tax jurisdictions. We recorded provisions for income taxes of $21.5 million, $15.3 million and $9.4 million in 2002, 2001 and 2000, respectively. The low effective tax rate was mainly due to a substantial portion of our income being derived from foreign subsidiaries with lower statutory tax rates than those that apply in Canada. In addition, our effective tax rate was affected by the low profitability of our operations in the United States due to the expansion of our sales organization in advance of the launch of Cardizem® LA and sales and marketing expenses related to products launched during 2002.

        Our future effective tax rate will depend on the relative profitability of our domestic and foreign operations, the statutory tax rates of the related tax jurisdictions, and the timing of the release, if any, of the valuation allowance. In 2003, we expect our effective tax rate to reflect the anticipated low profitability of our operations in the United States due to launch costs and sales and marketing activities related to products to be launched during 2003.

Extraordinary item

        In 2000, we paid total consideration of $141.0 million to repurchase our Senior Notes, of which $16.0 million was an inducement premium to the holders. We classified the premium paid and the unamortized deferred financing costs related to our Senior Notes as an extraordinary item.

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Cumulative effect of change in accounting principle

        Effective January 1, 2000, we adopted SAB 101 and, accordingly, we changed our revenue recognition accounting policy for up-front research and development, product license and certain other fees. Historically, we recognized these fees as revenue when all the conditions to payment had been met and there were no further performance contingencies or conditions to our receipt of payment. These fees were not creditable against future payments. We now defer and amortize these fees over the terms of the related agreements. At January 1, 2000, the cumulative effect of the change in accounting principle on prior years resulted in a charge of $43.5 million. A corresponding amount was recorded in deferred revenue, of which $4.8 million, $6.3 million and $9.3 million was amortized to revenue in 2002, 2001 and 2000, respectively.

EBITDA

        EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is a non-GAAP measure that does not have a standardized meaning and, as such, may not be comparable to similarly titled measures presented by other companies. We utilize a measure of EBITDA that excludes certain items. The items were excluded because they were considered to be of a non-operational nature in the applicable year. We disclose this measure of EBITDA because we understand that certain investors use it as an indicator of a company's ability to meet debt service and capital expenditure requirements. This measure should not be considered in isolation or as a substitute for operating income or loss, or as an indicator of our operating performance, or compared to cash flows from operating activities as a measure of liquidity. The following table displays the calculation of EBITDA and reconciles EBITDA with EBITDA excluding certain items.

 
   Years ended December 31
  
 
   2002
   2001
   2000
  
 
   in 000s
 
Net income (loss)   $ 87,795   $ 87,448   $ (147,976 )
Net interest expense (income)     28,397     33,500     (2,955 )
Provision for income taxes     21,500     15,285     9,360  
Depreciation and amortization     82,368     55,287     20,988  
   
 
 
 
EBITDA     220,060     191,520     (120,583 )
   
 
 
 
Write-down of assets     31,944     80,482     —  
Acquired research and development     167,745     —     208,424  
Other income     (3,408 )   —     —  
Debt conversion premiums     —     34,923     —  
Extraordinary item     —     —     20,039  
Cumulative effect of change in accounting principle     —     —     43,500  
   
 
 
 
EBITDA excluding certain items   $ 416,341   $ 306,925   $ 151,380  
   
 
 
 

        EBITDA excluding certain items was $416.3 million, $306.9 million and $151.4 million in 2002, 2001 and 2000, respectively. As a percentage of total revenue, EBITDA excluding certain items was 53% in both 2002 and 2001 and 49% in 2000.

        We disclose the ratio of EBITDA excluding certain items compared to interest expense because we understand that certain investors use it as an indicator of a company's ability to meet debt service requirements. This ratio is not necessarily comparable to similarly titled measures presented by other companies. The ratio of

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EBITDA excluding certain items to interest expense was 13.0 times, 8.5 times and 7.3 times for 2002, 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 2002, we had cash and cash equivalents of $56.1 million compared to $434.9 million at December 31, 2001. We also maintain a revolving term credit facility, which may be used for general corporate purposes, including acquisitions. In June 2001, our credit facility was successfully syndicated and was increased from $300 million to $400 million. In July 2002, our credit facility was further increased from $400 million to $600 million and in December 2002 we renewed our credit facility for an additional one-year period. All other material terms and conditions are unchanged. At December 31, 2002, we were in compliance with all financial and non-financial covenants associated with our credit facility.

        Borrowings under our credit facility may be by way of U.S. dollar, LIBOR or U.S. base rate advances or Canadian dollar prime rate or bankers' acceptance ("BA") advances or letters of credit. Interest is charged at the quoted bank rate plus a borrowing margin of 1.375% to 2% in the case of LIBOR and BA advances, and 0.375% to 1% in the case of base rate and prime rate advances, depending on our credit rating at the time of such borrowing. At December 31, 2002, our corporate credit ratings were BB+ with Standard & Poor's Rating Services ("S&P") and Ba3 with Moody's Investors Service. The effective rate of interest at December 31, 2002 was 3.74%. At December 31, 2002, we had advances of $110 million borrowed under our credit facility and we had a letter of credit with a balance of $93.2 million issued under our credit facility. The letter of credit secures the remaining semi-annual payments we are required to make under the Vasotec® and Vaseretic® agreement. At December 31, 2002, we had a remaining balance of $396.8 million available to borrow under our credit facility. At March 31, 2003, we have repaid $100 million of the advances borrowed under our credit facility.

        Cash provided by operating activities was $334.1 million, $284.1 million and $102.5 million in 2002, 2001 and 2000, respectively. Net income, after adjustments for items not involving cash, was $376.0 million, $262.8 million and $149.7 million in 2002, 2001 and 2000, respectively. Net changes in non-cash operating items used cash of $41.9 million and $47.2 million in 2002 and 2000, respectively, mainly due to increases in accounts receivable offset by increases in accounts payable and accrued liabilities. Net changes in non-cash operating items provided cash of $21.3 million in 2001, mainly due to increases in accrued liabilities and income taxes payable offset by an increase in inventories.

        Net cash used in investing activities was $792.5 million, $57.7 million and $582.3 million in 2002, 2001 and 2000, respectively. In 2002, we acquired the rights to Zovirax and Teveten® for $133.4 million and $94.3 million, respectively, and we paid initial instalments of $145.7 million to acquire Vasotec® and Vaseretic®, and $2.0 million to acquire Wellbutrin® and Zyban® in Canada. In 2001, we acquired other product rights for $27.4 million, offset by $15 million recovered as a reduction to the minimum license payments otherwise payable to Elan under the licensing and supply agreement for Elan's 30mg bioequivalent version of Adalat CC. In 2000, we acquired the remaining rights to the Dura-Vent, Keftab and Rondec® products, and other product rights for $27.8 million. Business acquisitions, net of cash acquired, totaled $240.6 million in 2002, comprising $178.7 million paid to acquire Pharma Pass, $43.1 million paid to terminate Pharma Tech's development of one of its products under development and any royalty obligation we may have had based on future sales of the product when, and if, approved by the FDA, and $18.8 million paid to acquire Pharma Tech. Business acquisitions, net of cash acquired, totaled $622.1 million in 2000, comprising $239.7 million for Cardizem®, $202.4 million for Intelligent Polymers, $162.8 million for DJ Pharma and $17.2 million of additional consideration paid for Fuisz Technologies Ltd. ("Fuisz"). In 2002, we acquired long-term investments of $85.1 million including equity investments in Ethypharm, DepoMed and Procyon Biopharma Inc. of $67.8 million, $13.7 million and $2.5 million, respectively. We acquired long-term investments of $0.9 million and

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$2.5 million in 2001 and 2000, respectively. Additions to property, plant and equipment were $61.4 million, $44.4 million and $15.8 million in 2002, 2001 and 2000, respectively, and were primarily related to the expansion of our manufacturing facilities. In 2002, we advanced $30 million to Reliant under a secured credit facility established by us and certain of Reliant's existing lenders. The net activity in short-term investments provided cash of $65.9 million in 2000. During 2000, as our short-term investments matured we converted them into cash equivalents with original maturities of 90 days or less. In 2000, we received proceeds of $20 million on the disposal of Clonmel Healthcare Limited, a subsidiary of Fuisz.

        Net cash provided by financing activities was $79.5 million, $83.6 million and $427.1 million in 2002, 2001 and 2000, respectively. Proceeds from the issue of common shares on the exercise of stock options and through our Employee Stock Purchase Plan were $19.6 million, $29.2 million and $14.3 million in 2002, 2001 and 2000, respectively. Net proceeds from our equity offerings in November 2001 and March 2000 were $560.0 million and $95.3 million, respectively. We repurchased common shares on the open market, under our stock repurchase programs, for $503.1 million and $120.0 million in 2002 and 2001, respectively. We received proceeds of $112.8 million, $29.1 million and $6.0 million on the exercise of warrants in 2002, 2001 and 2000, respectively, and we collected the remaining $2.3 million of the warrant subscription receivable in 2000. In 2001, we made loans in an aggregate amount of $10.0 million to certain executive officers under our Executive Stock Purchase Plan. In 2002, we received net proceeds of $384.3 million on the issue of our Notes. In 2002, we borrowed $110 million under our credit facility and paid $2.1 million of additional financing costs related to the increase in our credit facility from $400 million to $600 million. In 2001, we made repayments of $210 million under our credit facility and paid $1.3 million of additional financing costs related to the increase in our credit facility from $300 million to $400 million. In 2000, we borrowed $210 million from our credit facility and paid $3 million of arrangement fees. In 2002, we repaid $34.5 million of the Vasotec® obligation and $7.5 million of the Adalat obligation. In 2001, we repaid $193.4 million of other long-term obligations, including the $170 million Cardizem® obligation and $22.9 million of the Adalat obligation. In 2000, we repaid the debt assumed on the acquisition of DJ Pharma and other long-term obligations of $45.6 million. In 2000, we received net proceeds of $288.8 million from the issue of our Debentures and we repurchased our Senior Notes for $141.0 million.

        Overall, our cash and cash equivalents decreased by $378.8 million and $52.9 million in 2002 and 2000, respectively, and increased by $309.7 million in 2001.

        In 2002, non-cash investing and financing activities included a $99.6 million discounted obligation related to the acquisition of Vasotec® and Vaseretic®, an $80.7 million discounted obligation related to the amendments to the terms of the Zovirax distribution agreement, and a $70.0 million discounted obligation related to the acquisition of Wellbutrin® and Zyban® in Canada. In 2001, non-cash investing and financing activities included the issuance of common shares valued at $314.3 million on the surrender and redemption of our Debentures. In 2000, non-cash investing and financing activities included a $161.8 million discounted obligation related to the acquisition of Cardizem® and a $58.1 million discounted obligation related to the acquisition of the Adalat product rights.

Obligations and other matters

        At December 31, 2002, we had total long-term obligations of $747.4 million, including the current portion thereof, consisting of the carrying value of our Notes of $412.6 million, borrowings under our credit facility of $110 million, the Zovirax obligation of $80.7 million, the Wellbutrin® obligation of $70.0 million, the Vasotec® obligation of $67.9 million and deferred compensation of $6.2 million. At March 31, 2003, we have paid $40 million of the Zovirax obligation to GSK.

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        The following table summarizes our contractual obligations at December 31, 2002.

 
   Maturities by period
 
   Total
   Less than 1 year
   1-3 years
   4-5 years
   After
5 years
 
   In 000s
Long-term obligations   $ 737,350   $ 122,590   $ 170,462   $ 25,507   $ 418,791
Operating lease obligations     22,475     6,667     10,655     4,046     1,107
   
 
 
 
 
Total contractual cash obligations   $ 759,825   $ 129,257   $ 181,117   $ 29,553   $ 419,898
   
 
 
 
 

        In addition, we agreed to make milestone payments under certain research and development collaborations. These milestone payments are generally contingent on receiving regulatory approval for the products under development. We also agreed to make certain contingent payments to GSK for Zovirax in the event of the termination of the Wellbutrin XL development agreement by either GSK or us.

        In November 2001, we filed a $1.5 billion base shelf prospectus with the Canadian provincial securities commissions covering the potential sale of any combination of common shares, debt securities or warrants. On the same date, we filed a registration statement on Form F-10 covering those securities with the SEC under the multijurisdictional disclosure system. We may offer one or more of these types of securities in one or more offerings during the succeeding 25 months. One or more shareholders may also sell common shares pursuant to the base shelf prospectus. We will not receive any of the proceeds from any sale of common shares by the selling shareholders.

        In November 2001, we issued 12,500,000 common shares for gross proceeds of $587.5 million under our base shelf prospectus. In addition, the underwriters exercised in full an over-allotment option, which was granted in connection with the offering, to purchase an additional 1,875,000 of our common shares from Eugene Melnyk, Chairman of the Board and Chief Executive Officer, for $88.1 million. We did not receive any of the proceeds from the sale of the additional common shares by Mr. Melnyk.

        In March 2002, we issued $400 million aggregate principal amount of unsecured Notes under our base shelf prospectus. Interest on our Notes is payable semi-annually in arrears on April 1 and October1 of each year. Our Notes were issued at a price of 99.27% of their aggregate principal amount for an effective yield, if held to maturity, of 8%. At December 31, 2002, our Notes had a BB – credit rating with S&P.

        At any time on or after April 1, 2006, we may redeem all or any of our Notes at prescribed prices, plus accrued and unpaid interest to the date of redemption. Before April 1, 2005, we may redeem up to 35% of the original principal amount of our Notes, with the net cash proceeds of certain sales of our common shares, at 107.875% of the principal amount plus accrued and unpaid interest to the date of redemption.

        We have a balance of $424.4 million available under our base shelf prospectus to offer at our discretion. Our base shelf prospectus will expire in December 2003.

        In February 2002, by resolution of the Board of Directors we implemented a stock repurchase program pursuant to which we were able to repurchase up to 5% of our issued and outstanding common shares. In May 2002, the Board of Directors increased the amount to 10% of our issued and outstanding common shares. We repurchased an aggregate of 12,872,300 common shares under this program, through open market transactions on the New York Stock Exchange and Toronto Stock Exchange, at an average purchase price of $39.08 per share for total consideration of $503.1 million. The excess of the cost of the common shares acquired over the stated capital thereof, totaling $388.2 million, was charged to deficit. The program was terminated in July 2002.

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        In April 2002, we acquired a 15% equity interest in Ethypharm and we have an option to purchase up to an additional 5% interest in Ethypharm. At April 30, 2003, we had not exercised our option. We also licensed the marketing rights to six products from Ethypharm for commercialization in the United States, Canada and Mexico. We are obligated to pay Ethypharm up to $61 million in milestone payments on the first regulatory approval of the products within the United States, Canada or Mexico, as well as royalties on the net sales of the products. We have also entered into a cross-license agreement with Ethypharm whereby we grant to each other non-exclusive licenses to use our CEFORM™ technology and Ethypharm's Flashtab technology, respectively, relating to the development of new rapid dissolve pharmaceutical products. At April 30, 2003, we had not made any milestone payments to Ethypharm.

        In July 2002, we acquired newly issued common shares (15% of the issued and outstanding common shares) of DepoMed and we have options to purchase up to an additional 5% interest in DepoMed. At April 30, 2003, we had not exercised any of our options. We also licensed from DepoMed the rights to manufacture and market a once-daily metformin product that is currently undergoing Phase III clinical trials.

        In November 2002, together with certain of Reliant's existing lenders, we established an $85 million secured credit facility in favour of Reliant. At December 31, 2002 and March 31, 2003, we had advanced $30 million to Reliant out of our total commitment to fund up to $40 million of the credit facility. The credit facility is available to Reliant for general corporate purposes. Interest is calculated daily on outstanding advances at U.S. prime rate plus a margin of 2%. Commencing March 31, 2005, the outstanding advances are repayable in instalments with the final instalment due on December 31, 2006.

        We believe we have adequate capital resources and sources of financing to support our ongoing operational and interest requirements and investment objectives, and to meet our obligations as they become due. We believe we will be able to raise additional capital, if necessary, to support our objectives; however, there can be no assurance that, if required, we would be able to raise such capital on favourable terms.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

        Inflation has not had a significant impact on our results of operations.

Foreign currency risk

        We operate internationally but a majority of our revenue and expense activities and capital expenditures are transacted in U.S. dollars. Our only other significant transactions are in Canadian dollars, and we do not believe we have a material exposure to foreign currency risk because of the relative stability of the Canadian dollar in relation to the U.S. dollar. A 10% change in foreign currency exchange rates would not have a material effect on our consolidated results of operations, financial position or cash flows.

Interest rate risk

        The primary objective of our investment policy is the protection of principal and, accordingly, we invest in high-grade government and corporate securities with varying maturities, but typically less than 90 days. External independent fund administrators manage our investments. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk.

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        We are exposed to interest rate risk on borrowings under our credit facility. Our credit facility bears interest based on LIBOR, U.S. dollar base rate, Canadian dollar prime rate or Canadian dollar BA. At our option we may lock in a rate of interest for a period of up to one year.

        The imputed rates of interest used to discount our Zovirax, Vasotec® and Wellbutrin® long-term obligations are fixed and therefore not subject to interest rate risk.

        The fair value of our fixed rate Notes is affected by changes in interest rates. We manage this exposure to interest rate changes through the use of interest rate swap contracts, which are recorded at fair value in our consolidated balance sheets. In June 2002, we entered into three contracts of aggregate $200 million notional amount, which effectively modifies our exposure to interest rate fluctuations by converting one-half of our fixed rate Notes to floating rate. At December 31, 2002, the carrying value and marked-to-market value of the contracts was $18.6 million in our favour, which has been recorded in other assets, and the respective offsetting fair value adjustment to the carrying value of our Notes was $15.2 million, which has been recorded in long-term obligations.

        Based on our overall interest rate exposure at December 31, 2002, a 10% change in interest rates would not have a material effect on our consolidated results of operations, financial position or cash flows.

Investment risk

        We are exposed to investment risks on our cost method and available-for-sale investments in other companies. The fair values of our investments are subject to significant fluctuations due to stock market volatility and changes in general economic conditions. We regularly review the carrying values of our investments and record losses when events and circumstances indicate that there have been declines in their fair values. At December 31, 2002, we had cost method investments of $72.4 million and available-for-sale investments at fair value of $6.9 million. Based on the carrying values of our available-for-sale investments at December 31, 2002, adverse changes of 25% and 50% in equity market prices would result in a corresponding decline in the total fair value of these investments of approximately $2 million and $3.5 million, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 requires any gain or loss on extinguishments of debt to be classified as income or loss from continuing operations, rather than as an extraordinary item. We adopted SFAS No. 145 effective January 1, 2003 and, accordingly, we will reclassify the extraordinary item resulting from the extinguishment of our Senior Notes in 2000 to other expense for all comparative figures presented. The adoption of SFAS No. 145 will have no impact on our net results of operations.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should be measured initially at fair value. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Effective January 1, 2003, we will account for any exit costs or disposal activities in accordance with SFAS No. 146.

        In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies and expands on existing disclosure requirements for a guarantor regarding its obligations under certain guarantees it has issued. FIN No. 45 also requires that the guarantor must recognize a liability for

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the fair value of its obligations under certain guarantees. The disclosure requirements are effective for fiscal years ending after December 15, 2002. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued after December 31, 2002. We have adopted the disclosure requirements of FIN No. 45 effective December31, 2002, and will adopt the recognition and measurement provisions for guarantees issued after December 31, 2002.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion ("APB") No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. We have elected to continue to use the intrinsic value based method under the provisions of APB No. 25, "Accounting for Stock Issued to Employees", and have adopted the required disclosures of SFAS No. 148 effective December 31, 2002.

FORWARD-LOOKING STATEMENTS

        To the extent any statements made or incorporated by reference in this MD&A contain information that is not historical, these statements are essentially forward-looking. As such, these statements are subject to risks and uncertainties, including the difficulty of predicting FDA and Canadian Therapeutic Products Programme approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, new product development and launch, reliance on key strategic alliances, availability of raw materials, production interruptions or supply delays at third party suppliers or at our own manufacturing facilities, the outcome of litigation, the regulatory environment, fluctuations in operating results and other risks detailed from time to time in our filings with the SEC, including the risks set forth in Item 3 of our Annual Report on Form 20-F for the fiscal year ended December 31, 2002, and securities commissions or other securities regulatory authorities in Canada.

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

PROFILE

        We are a full-service pharmaceutical company, engaged in the formulation of pharmaceutical products utilizing advanced oral drug delivery technologies, clinical testing, registration, manufacturing, sale and promotion of pharmaceutical products targeting the cardiovascular (including Type II diabetes), central nervous system, pain management and niche therapeutic areas.

        Our primary business strategy is to support the commercialization of our product development pipeline by expanding our sales and marketing presence in the United States and Canada. We intend to complement our product pipeline by acquiring established pharmaceutical products, in-licensing products in early stages of development and entering into product development collaborations with third parties.

        We have research and development, clinical testing, manufacturing, sales and marketing operations in the United States, Canada, Barbados and Puerto Rico, and a research facility in Ireland.

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BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In accordance with Canadian generally accepted accounting principles
(All dollar amounts expressed in U.S. dollars)

OVERVIEW

        We continue to make significant progress in terms of product approvals. In February 2003, we received U.S. Food and Drug Administration ("FDA") approval for Cardizem® LA, a graded extended-release formulation of diltiazem hydrochloride ("HCl"), for the treatment of hypertension. We launched Cardizem® LA in April 2003 in collaboration with our co-promotion partner, Reliant Pharmaceuticals LLC ("Reliant"). Reliant brings additional experienced sales representatives to the marketing of Cardizem® LA, as well as our Zovirax, Teveten®, Cedax and Rondec products. We also received FDA approval for Zovirax Cream in January 2003 and for Teveten® HCT in February 2003. During 2002, we received tentative FDA approval for a FlashDose® formulation of zolpidem for the treatment of insomnia. In the United States, zolpidem is sold under the brand name Ambien. In August 2002, GlaxoSmithKline plc ("GSK") filed a New Drug Application ("NDA") for our once-daily formulation of bupropion HCl, for the treatment of depression. GSK has applied for the trade name Wellbutrin XL. In 2001, we licensed our once-daily formulation of bupropion HCl to GSK and have been collaborating with them to seek regulatory approval of Wellbutrin XL. When, and if, FDA approval is received, we will manufacture and supply Wellbutrin XL to GSK for a share of the revenue generated by future sales of the product.

        We also continue to pursue strategic business acquisitions and investments. During 2002, we extended our marketing agreement with GSK for Zovirax Ointment and Zovirax Cream from ten years to twenty years and we acquired the Canadian rights to GSK's Wellbutrin® SR and Zyban®, as well as the right to market our once-daily formulation of bupropion HCl under the Wellbutrin® XL trade name in Canada when, and if, regulatory approval is received. We also acquired the rights to Vasotec®, Vaseretic®, Teveten® and Teveten® HCT in the United States. We have begun development programs that will allow us to further exploit these brands. In December 2002, we acquired three private development companies — Pharma Pass LLC, Pharma Pass S.A. (collectively, "Pharma Pass") and Pharmaceutical Technologies Corporation ("Pharma Tech"). We believe that the products and technologies we acquired through these acquisitions will create substantial value for us in the future. During 2002, we made minority equity investments in Ethypharm S.A. ("Ethypharm") and DepoMed, Inc. ("DepoMed") and we obtained the rights to market a number of products under development by these companies.

CHANGES IN ACCOUNTING POLICIES

        We have adopted The Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 1581, "Business Combinations", and CICA Handbook Section 3062, "Goodwill and Other Intangible Assets". Under CICA Handbook Section 1581, all business combinations occurring after June 30, 2001 are to be accounted for under the purchase method of accounting. Under CICA Handbook Section 3062, which we adopted effective January 1, 2002, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment tests. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

        Effective January 1, 2002, we identified those intangible assets that did not meet the criteria for recognition apart from goodwill, and assessed the useful lives of our remaining intangible assets. As a result, we reclassified the $5.7 million net carrying amount of workforce related intangible assets, together with the related future tax liability of $2.4 million, to goodwill and determined that the useful lives of our remaining intangible assets were appropriate and consistent with those useful lives identified as at December 31, 2001. Our results for 2001 and 2000 included $6.4 million ($0.04 basic and diluted earnings per share) and $2.3 million ($0.02 basic earnings per share and $0.01 diluted earnings per share), respectively, of goodwill and workforce related amortization, net of tax.

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        Effective January 1, 2002, we adopted CICA Handbook Section 3870, "Stock-Based Compensation and Other Stock-Based Payments". CICA Handbook Section 3870 establishes standards for the recognition, measurement and disclosure of stock-based compensation, and other stock-based payments, and generally applies to awards granted on or after January 1, 2002. Under the provisions of CICA Handbook Section 3870, companies can either measure the compensation cost of equity instruments issued under employee compensation plans using a fair value-based method or can recognize compensation cost using another method, such as the intrinsic value-based method. However, if another method is applied, pro forma disclosure of net income and earnings per share must be presented in the financial statements as if the fair value-based method had been applied. All stock-based awards granted to non-employees must be accounted for at fair value. We recognize employee stock-based compensation costs under the intrinsic value-based method and we have provided pro forma disclosure of net income attributable to common shareholders and earnings per share as if the fair value-based method had been applied. The adoption of CICA Handbook Section 3870 as of January 1, 2002 did not have any impact on our results of operations, financial position or cash flows.

CRITICAL ACCOUNTING POLICIES

        We prepare our consolidated financial statements in accordance with Canadian GAAP, applied on a consistent basis. Our critical accounting policies relate to the use of estimates, the impact of product returns, recalls, rebates and chargebacks on revenue recognition, the recording of research and development expenses, the useful lives of intangible assets, the evaluation of goodwill, the hedge effectiveness of derivative financial instruments and the realizability of future tax assets.

        In preparing our consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We review our estimates to ensure that our estimates appropriately reflect changes in our business and new information as it becomes available. Actual results may materially differ from these estimates under different assumptions or conditions. Significant estimates we make include allowances for accounts receivable and inventories, reserves for product returns, recalls, rebates and chargebacks, the useful lives of long-lived assets, the expected cash flows used in evaluating long-lived assets and investments for impairment, the realizability of future tax assets and the allocation of the purchase price of acquired assets and businesses. A significant change in these estimates could have a material impact on our results of operations.

        We recognize product sales revenue when the product is shipped to the customer provided that we have not retained any significant risks of ownership or future obligations with respect to the product shipped. Revenue from product sales is recognized net of reserves for estimated product returns, recalls, rebates and chargebacks. These reserves are established in the same period in which the related product sales are recorded and are based on estimates of the proportion of product sales subject to return, recall, rebate or chargeback. A significant change in these estimates could have a material impact on our results of operations.

        We expense research costs in the period in which they are incurred and we expense development costs in the period in which they are incurred unless they meet the criteria for deferral. At December 31, 2002, we had not deferred any development costs. The costs of assets that are purchased from others for a particular research and development project, that have not reached technological feasibility and that have no alternative future use are deferred and amortized over their estimated useful lives ranging from five years to fifteen years. We may pursue product or business acquisitions that could result in the amortization of acquired research and development costs, which could have a material non-cash impact on our results of operations.

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        Intangible assets acquired through business combinations are initially recognized at fair value based on an allocation of the purchase price. Intangible assets acquired other than through business combinations are initially recognized at fair value based on the consideration paid. Our intangible assets are stated at cost, less accumulated amortization generally computed using the straight-line method based on their estimated useful lives ranging from eight years to twenty years. Useful life is the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We determine the useful lives of intangible assets based on a number of factors such as legal, regulatory or contractual limitations, known technological advances, anticipated demand and the existence or absence of competition. A significant change in these factors may warrant a revision of the expected remaining useful life of an intangible asset resulting in accelerated amortization or an impairment charge, which could have a material impact on our results of operations.

        Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the identifiable net assets acquired. We evaluate goodwill annually for impairment. An impairment of goodwill could have a material impact on our results of operations.

        We manage our exposure to interest rate risks through the use of derivative financial instruments. We do not utilize derivative financial instruments for trading or speculative purposes. On the dates we entered into the derivative contracts, we designated the derivative financial instruments as a hedge of an identified portion of a recognized long-term obligation. A discontinuance of hedge accounting could have a material impact on our results of operations.

        We have recorded a valuation allowance on future tax assets primarily related to operating losses and tax credit carryforwards. We have assumed that these carryforwards are more likely than not to be unrealized based on estimated future taxable income and tax planning strategies in the related jurisdictions. The implementation of tax planning strategies or a change in the outlook for future taxable income in these jurisdictions could result in the recognition of some portion or all of these carryforwards, which could result in a material increase in our results of operations through the recovery of future income taxes.

ACQUISITIONS

        In December 2002, we acquired Pharma Pass for $178.7 million. Pharma Pass is a developer of advanced oral controlled-release technologies and formulations for pharmaceutical companies, including us, in the United States and Europe. On the completion of the development of our products, we had the right to manufacture and sell the products and Pharma Pass was entitled to royalties from the net sales of each product for a period of fifteen years from the date of launch of each product. Through this acquisition we extinguished any future milestone or royalty obligations that we may have had to Pharma Pass resulting from the approval and successful commercialization of any of the products under development, pursuant to the research and development agreements previously entered into between Pharma Pass and us. The acquisition of Pharma Pass resulted in a deferral of acquired research and development costs of $107.2 million related to approximately twenty product development projects that were in various stages of completion but that had not yet received regulatory approval. We obtained interests in certain licensed products including Tricor (fenofibrate) and a participating interest in the gross profit on sales by a third party of a bioequivalent version of Prilosec (omeprazole). We also obtained Pharma Pass's Zero Order Release System, a drug delivery technology that controls the rate of release of a drug and/or significantly enhances the systemic absorption of a drug molecule, and its oral Colonic Delivery System, a drug delivery technology designed for the targeted release of medication into the lower intestine and upper colon.

        In December 2002, we acquired Pharma Tech for $22.6 million. Pharma Tech is a development-stage company engaged in the application of drug delivery technologies to the formulation and development of a portfolio of products. Pharma Tech contracted directly with third parties, including us, to conduct the contract

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research and development services. We provided contract research and advisory services consistent with the contractual relationships we had with other third parties. On the completion of the development of our products, we had the right to manufacture and sell the products and Pharma Tech was entitled to royalties from the net sales of each product for a period of ten years from the date of launch of each product. Through this acquisition we extinguished any future milestone or royalty obligations that we may have had to Pharma Tech resulting from the approval and successful commercialization of any of the products under development, pursuant to the research and development agreements previously entered into between Pharma Tech and us. We had options to acquire Pharma Tech's interest in the products or to acquire Pharma Tech. The acquisition of Pharma Tech resulted in a deferral of acquired research and development costs of $17.5 million related to a number of product development projects that were in various stages of completion but that had not yet received FDA approval. We also deferred acquired research and development costs of $43.1 million related to the termination of the development by Pharma Tech of one of its products under development and any royalty obligation we may have had to Pharma Tech based on future sales of the product when, and if, approved by the FDA. We are continuing the development program for this product.

        In December 2002, we acquired from GSK the rights to Wellbutrin® SR and Zyban® in Canada, as well as the rights to market our once-daily formulation of bupropion HCl in Canada under the trade name Wellbutrin® XL when, and if, regulatory approval is received, for $72.0 million. Wellbutrin® SR is prescribed for the treatment of depression and Zyban® is administered for the treatment of nicotine addiction as an aid to smoking cessation.

        In May 2002, we acquired from Merck & Co., Inc. ("Merck") the rights to Vasotec® and Vaseretic® in the United States for $245.3 million. Vasotec® is a leading angiotensin converting enzyme inhibitor indicated for hypertension and symptomatic congestive heart failure and Vaseretic® is a fixed-dose combination of Vasotec® and a diuretic. We are developing a once-daily formulation of Vasotec® and a fixed-dose combination of Vasotec® with diltiazem HCl to capitalize on the value of the acquired brand name.

        In March 2002, we acquired from Solvay Pharmaceuticals Marketing & Licensing AG ("Solvay") the rights to Teveten® and Teveten® HCT in the United States for $94.3 million. Teveten® is an angiotensin-II receptor blocker for the treatment of hypertension and is indicated for use either alone or in conjunction with other antihypertensive medications and Teveten® HCT is a combination of Teveten® and a diuretic. We relaunched Teveten® in June 2002 and launched Teveten® HCT in February 2003 following receipt of FDA approval.

        Effective January 1, 2002, we acquired from GSK the exclusive distribution rights to Zovirax Ointment and Zovirax Cream in the United States for $133.4 million. Zovirax is an anti-viral topical product. Zovirax Ointment is indicated for the treatment of herpes and Zovirax Cream is indicated for the treatment of cold sores. In December 2002, we agreed to pay GSK $40 million to extend the term of the Zovirax agreement from ten years to twenty years. We also agreed to pay GSK an aggregate amount of $45 million, over four years beginning in 2004, to amend several terms of the original Zovirax distribution agreement. We received FDA approval for Zovirax Cream in January 2003 and we intend to launch the product in mid-2003.

        In December 2000, we completed the acquisition of Intelligent Polymers Limited ("Intelligent Polymers") for total consideration of $204.9 million. Intelligent Polymers was formed to fund the development of once-daily, controlled-release branded products for chronic disease states, such as anxiety, depression, pain management and diabetes. Prior to September 29, 2000, we were developing the products on behalf of Intelligent Polymers pursuant to a development and license agreement. The acquisition of Intelligent Polymers resulted in a deferral of acquired research and development costs of $208.4 million. An NDA has been filed by GSK for one of the products under development (bupropion HCl), two other products (tramadol and metformin) are now in Phase III clinical trials, and the development of another product (buspirone) was discontinued in March 2003.

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        In December 2000, we acquired the North American rights to Cardizem® from Aventis for total consideration of $409.5 million. Cardizem® is a leading calcium channel blocker prescribed for the treatment of hypertension and angina. We are capitalizing on the competitive advantage of the Cardizem® brand name by attaching it to our improved once-daily graded extended-release formulation — Cardizem® LA.

        In October 2000, we acquired DJ Pharma, Inc. ("DJ Pharma"), a pharmaceutical sales and marketing company located in the United States, for total consideration of $165.1 million plus the assumption of $34.2 million of debt. As a result of this acquisition, we obtained the rights to DJ Pharma's portfolio of products, as well as a trained workforce and infrastructure. The acquisition of DJ Pharma was significant to our strategy of becoming a fully integrated pharmaceutical company because, prior to the acquisition of DJ Pharma, we had no direct access to the United States market and were reliant on our marketing partners. The acquisition of DJ Pharma enhanced the value of our product pipeline through the ability to market directly to physicians, and provided an infrastructure on which we are building to meet the marketing needs of our increasing portfolio of products.

RESULTS OF OPERATIONS

        Total revenue was $788.0 million in 2002 compared to $583.3 million in 2001 and $311.5 million in 2000. Total revenue increased by 35% in 2002 compared to 2001 and by 87% in 2001 compared to 2000. Net income attributable to common shareholders was $207.6 million, $85.6 million and $81.2 million in 2002, 2001 and 2000, respectively. Diluted earnings per share were $1.29 in 2002 and $0.57 in both 2001 and 2000.

        We utilize a measure of net income attributable to common shareholders and diluted earnings per share that excludes certain items. This measure is a non-GAAP measure that does not have a standardized meaning and, as such, is not necessarily comparable to similarly titled measures presented by other companies. This measure is provided to assist our investors in assessing our operating performance. We understand that many of our investors prefer to analyze our results based on this measure, as it is consistent with industry practice. The items were excluded because they were considered to be of a non-operational nature in the applicable year. The excluded items are also disclosed to give investors the ability to further analyze our results. Investors should consider this non-GAAP measure in the context of our Canadian GAAP results. The following table reconciles, for each year indicated, our net income attributable to common shareholders in accordance with Canadian GAAP with our net income attributable to common shareholders excluding certain items, and displays our diluted earnings per share and diluted earnings per share excluding certain items.

 
   Years ended December 31
(In 000s, except per share data)
  2002
   2001
   2000
Net income attributable to common shareholders   $ 207,553   $ 85,553   $ 81,163
   
 
 
Add certain items                  
Write-down of assets, net of tax     31,944     48,246     —
Debt conversion premiums     —     10,001     —
Premium paid on early extinguishment of U.S. Dollar Senior Notes     —     —     20,039
   
 
 
Net income attributable to common shareholders excluding certain items   $ 239,497   $ 143,800   $ 101,202
   
 
 
Diluted earnings per share   $ 1.29   $ 0.57   $ 0.57
   
 
 
Diluted earnings per share excluding certain items   $ 1.49   $ 0.95   $ 0.71
   
 
 

        Net income attributable to common shareholders excluding certain items was $239.5 million, $143.8 million and $101.2 million in 2002, 2001 and 2000, respectively. Diluted earnings per share excluding certain items were

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$1.49, $0.95 and $0.71 in 2002, 2001 and 2000, respectively. Net income attributable to common shareholders excluding certain items and diluted earnings per share excluding certain items increased by 67% and 57%, respectively, for 2002 compared to 2001, and by 42% and 34%, respectively, for 2001 compared to 2000. For 2002, the item excluded was a write-down of assets of $31.9 million primarily related to the write off of the Adalat product rights and corresponding long-term obligation as a result of a settlement reached between the U.S. Federal Trade Commission ("FTC"), Elan Corporation, plc ("Elan") and us regarding the introduction of bioequivalent versions of Adalat CC. For 2001, the items excluded consist of a write-down of assets of $48.2 million, net of tax of $32.2 million, primarily related to the Keftab and Dura-Vent product rights and debt conversion premiums of $10.0 million related to the surrender and redemption of our 6.75% Convertible Subordinated Preferred Equivalent Debentures due March 31, 2025 ("Debentures"). For 2000, the item excluded was a premium of $20.0 million paid to extinguish our 107/8% U.S. Dollar Senior Notes due November 15, 2005 ("Senior Notes").

REVENUE

        Our revenue is derived from sales of pharmaceutical products, providing research and development services, and the co-promotion of pharmaceutical products, as well as from royalties and license fees. Product sales include sales of products developed and manufactured by us for distribution by our licensees and direct marketing to physicians in the United States and Canada of proprietary and in-licensed products. Research and development revenue relates to product development activity in collaboration with third parties and pharmaceutical contract research services. Fees for co-promotion services are earned on sales of co-promoted products developed by other companies. Royalties primarily arise on sales of the products we developed or acquired and from our interests in certain licensed products of Pharma Pass. License fees are derived from the license of our technologies or product rights.

        The following table displays, for each year indicated, the percentage of each source of revenue to total revenue, and the percentage change in the dollar amount of each source and the total as compared to the prior year. Revenue for 2001 and 2000 reflects the reclassification of co-promotion revenue from product sales to co-promotion, royalty and licensing to conform to the presentation adopted in 2002.

 
    
    
    
    
    
    
   Percentage Change
  
 
   Years ended December 31
  
(In 000s)
   2001 to 2002
   2000 to 2001
  
  2002
   2001
   2000
  
Product sales   645,986   82 % 521,154   89 % 217,004   70 % 24 % 140 %
Research and development   28,425   4   14,596   3   69,121   22   95   (79)  
Co-promotion, royalty and licensing   113,614   14   47,513   8   25,332   8   139   88  
   
 
 
 
 
 
         
    788,025   100 % 583,263   100 % 311,457   100 % 35   87  
   
 
 
 
 
 
         

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Product sales

        Product sales were $646.0 million in 2002 compared to $521.2 million in 2001 and $217.0 million in 2000. Product sales comprised 82% of total revenue in 2002 compared to 89% in 2001 and 70% in 2000. The following table displays the approximate percentage of each product category to total product sales.

Product category
   2002
   2001
   2000
  
Tiazac®   15 % 20 % 40 %
Cardizem®   25   35   —  
Bioequivalent   30   30   40  
All other   30   15   20  
   
 
 
 
    100 % 100 % 100 %
   
 
 
 

        In August 2002, we received final approval by the FDA for our 90mg bioequivalent version of Adalat CC (once-daily nifedipine). Our marketing partner, Teva Pharmaceuticals USA, Inc., immediately launched this product in the United States.

        Product sales increased by 24% in 2002 compared to 2001 mainly due to the continuing strong performance of Tiazac® and Cardizem®, combined with the contribution from Zovirax Ointment, Teveten®, Vasotec®, Vaseretic® and our 90mg bioequivalent version of Adalat CC.

        Product sales increased by 140% in 2001 compared to 2000 mainly due to the additions of Cardizem® and DJ Pharma's product portfolio. Product sales growth also came from a higher contribution from bioequivalent products, reflecting the 2001 launch of our 30mg bioequivalent version of Procardia XL and the late 2000 launches of our 60mg bioequivalent versions of Procardia XL and Adalat CC.

        Our product sales and gross margins for 2002 and 2001 were adversely impacted by lost sales and costs associated with the voluntary recall of Keftab tablets, which was initiated by Eli Lilly & Company ("Lilly") in March 2001 because of undefined problems Lilly had with the product's stability. Lilly manufactured and supplied the product to us for marketing in the United States. In March 2003, we successfully settled our legal action against Lilly regarding the recall of Keftab.

        We expect our product sales to increase in 2003 compared to 2002 due to the contribution from the products we acquired in 2002, the launches of Cardizem® LA, Teveten® HCT and Zovirax Cream during 2003 and the anticipated launch of Wellbutrin XL in the second half of 2003 when, and if, approved by the FDA.

Research and development

        Research and development activities generated revenue of $28.4 million in 2002 compared to $14.6 million in 2001 and $69.1 million in 2000. Research and development activities comprised 4% of total revenue in 2002 compared to 3% in 2001 and 22% in 2000.

        In the ordinary course of business we enter into research and development collaborations with third parties whereby we provide contract research, formulation development and other services to those third parties. We are typically compensated through a combination of fees for service, milestone payments, royalties from future sales of the products and/or co-promotion revenue.

        Research and development revenue increased by 95% in 2002 compared to 2001 mainly due to the inclusion of revenue associated with the development of Wellbutrin XL in collaboration with GSK. During 2002, we

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completed the development of Wellbutrin XL, resulting in GSK's filing of an NDA for the product in August 2002.

        Research and development revenue declined by 78% in 2001 compared to 2000, as we did not earn any revenue from Intelligent Polymers after September 29, 2000. We earned revenue of $55.2 million from Intelligent Polymers for the period ended September 29, 2000.

        In the years presented, our remaining research and development revenue was primarily generated from clinical research and laboratory testing services provided to external customers by our contract research operation.

        In 2003, we expect research and development revenue to decline compared to 2002 mainly due to the completion of the development of Wellbutrin XL.

Co-promotion, royalty and licensing

        Co-promotion, royalty and licensing activities generated revenue of $113.6 million, $47.5 million and $25.3 million in 2002, 2001 and 2000, respectively. Co-promotion, royalty and licensing revenue comprised 14% of total revenue in 2002 and 8% in both 2001 and 2000.

        Co-promotion, royalty and licensing revenue increased by 139% in 2002 compared to 2001 and by 88% in 2001 compared to 2000. In 2002, co-promotion revenue was related to the co-promotion of GSK's Wellbutrin SR in the United States and the co-promotion of H. Lundbeck A/S' Celexa in Canada. During 2002, we received four quarterly increments of $10 million each under the Wellbutrin SR co-promotion agreement with GSK. We earned the last quarterly increment of $10 million in the first quarter of 2003. The receipt of each of the quarterly increments was dependent on our performing prescribed detailing activity during each quarter and the amount was determined based on a percentage of net sales of Wellbutrin SR in the United States during each quarter. In 2001 and 2000, co-promotion revenue was related entirely to the co-promotion of Celexa.

        Royalty revenue increased in 2002 compared to 2001 due to the contribution from our interest in the gross profit on sales of a bioequivalent version of Prilosec. Royalty revenue increased in 2001 compared to 2000 due to higher Tiazac® sales by our marketing partner, Forest Laboratories Inc., and the inclusion of a royalty associated with sales of bioequivalent versions of Cardizem® by third parties.

        We expect the level of co-promotion, royalty and licensing revenue in 2003 to be higher than in 2002 due to the contribution from our interest in the gross profit on sales of a bioequivalent version of Prilosec, partly offset by the loss of revenue following the conclusion of our co-promotion of Wellbutrin SR in the United States.

OPERATING EXPENSES

        The following table displays, for each year indicated, the percentage of each expense item to total revenue, and the percentage change in the dollar amount of each item and the total as compared to the prior year. Prior to 2001, we included amortization expense as a component of cost of goods sold, research and development expenses and selling, general and administrative expenses. In 2001, amortization increased substantially due to the additions made to intangible assets and acquisitions of businesses and consequently we decided to present

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amortization as an individual line item within operating expenses. Operating expenses for 2000 reflect the reclassification of amortization to conform to the presentation adopted in 2001.

 
    
    
    
    
    
    
   Percentage Change
  
 
   Years ended December 31
  
(In 000s)
   2001 to 2002
   2000 to 2001
  
  2002
   2001
   2000
  
Cost of goods sold   164,706   21 % 125,995   21 % 67,980   22 % 31 % 85 %
Research and development   52,150   7   51,017   9   51,709   17   2   (1)  
Selling, general and administrative   165,697   21   111,362   19   59,317   19   49   88  
Amortization   125,849   16   98,097   17   16,228   5   28   504  
   
 
 
 
 
 
         
    508,402   65 % 386,471   66 % 195,234   63 % 32   98  
   
 
 
 
 
 
         

Cost of goods sold and gross margins

        Cost of goods sold was $164.7 million in 2002 compared to $126.0 million in 2001 and $68.0 million in 2000. Cost of goods sold includes royalties on product sales payable to third party licensors that owned and/or developed the products. Costs of goods sold increased by 31% in 2002 compared to 2001 and by 85% in 2001 compared to 2000. The year over year increases in cost of goods sold were the result of increased sales volumes from new product launches and product acquisitions, and higher sales levels of certain existing products.

        Gross margins based on product sales were 75%, 76% and 69% in 2002, 2001 and 2000, respectively. Gross margins are impacted year to year by sales volumes, pricing, product mix, and manufacturing volumes. The gross margin in 2002 was affected by a lower proportion of higher margin Cardizem® sales in the overall product mix and the additions of Zovirax Ointment and Teveten® sales, which had lower margins relative to other of our products, offset by the inclusion of Vasotec® and Vaseretic® sales, which generated higher margins relative to other of our products. The increase in gross margin in 2001 compared to 2000 reflected the impact of the higher margin earned on Cardizem® relative to other of our products.

        We expect gross margins on product sales in 2003 to be comparable to 2002.

Research and development

        Research and development expenses were $52.2 million in 2002 compared to $51.0 million in 2001 and $51.7 million in 2000. As a percentage of total revenue, research and development costs declined to 7% in 2002 compared to 9% in 2001 and 17% in 2000.

        In the ordinary course of business, we enter into research and development collaborations with third parties to provide formulation and other services for our products under development. These collaborations target our therapeutic areas of focus — cardiovascular (including Type II diabetes), central nervous system, pain management and niche opportunities. These third party developers are typically compensated through a combination of fees for service, milestone payments and/or royalty payments from future sales of the products under development. The developers may utilize their own technology and, in other cases, we will allow access to our technology for the formulation and development of the products. In some cases, we have an ownership interest or an option to take an ownership position in the developer. In no case are we responsible for any of the developers' third party liabilities, nor have we guaranteed any debts, nor are we required under any circumstances to exercise any of our options.

        Research and development expenses reflect direct spending on the development of branded and bioequivalent products utilizing advanced oral drug delivery technologies. We completed a Phase III clinical trial

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to support the submission of a supplemental NDA for an angina indication for Cardizem® LA. The results of this clinical trial were favourable and we expect to file the supplemental NDA for Cardizem® LA in mid-2003. In addition, we have completed, or are in the process of completing, a number of comparative Phase IV studies involving Cardizem® LA. We are developing a once-daily formulation of Vasotec® and we are also working on a fixed-dose combination of Vasotec® with diltiazem HCl. Two ongoing Phase III trials are progressing to support an NDA submission for our once-daily formulation of tramadol, for the signs and symptoms of osteoarthritis. We expect to file an NDA for tramadol in the second half of 2003. One Phase III clinical trial has been successfully completed on our once-daily formulation of metformin, for the treatment of Type II diabetes, through a collaborative effort with DepoMed, and a second Phase III clinical trial is in progress. We expect to file an NDA for metformin in the first half of 2004. We have evaluated the results of a Phase III clinical trial involving buspirone, for the treatment of depression, and have decided to discontinue the development of this product in light of the unsatisfactory results from this trial.

        A number of other research and development activities are ongoing, including feasibility studies, formulation development and optimization, formulation scale-up and clinical studies. We are also working on the development of enhanced formulations of a number of disclosed compounds (fenofibrate, simvastatin, paroxetine, venlafaxine, sumatriptan and acyclovir), as well as a number of undisclosed compounds.

        We expect research and development expenses to increase significantly in 2003 compared to 2002 due to an expected increase in clinical activity.

Selling, general and administrative

        Selling, general and administrative expenses were $165.7 million, $111.4 million and $59.3 million in 2002, 2001 and 2000, respectively. Selling, general and administrative expenses were 21% of total revenue in 2002 compared to 19% in both 2001 and 2000.

        During 2002, our sales capability in the United States was significantly increased. Our U.S. sales organization more than doubled in size as we added sales and marketing management and regional and district sales management and hired over 200 sales representatives across the country. We devoted considerable attention and resources to increasing our sales force capabilities by adhering to specific selection criteria during the hiring process and by locating new sales representatives in territories with high prescribing physicians. In addition, in November 2002 we entered into a co-promotion agreement with Reliant. Reliant's sales force has experience detailing cardiovascular products across the United States, has established relationships with high prescribing physicians and will be working in tandem with our existing sales force. We benefited from this approach to building our sales organization when we relaunched Teveten® in June 2002. After promoting Teveten® for six months, in collaboration with Reliant for the final three months of 2002, we saw December prescriptions increase substantially over June prescription levels.

        Selling, general and administrative expenses increased by 49% in 2002 compared to 2001 mainly due to the expansion of our sales organization in the United States and the incremental sales and marketing costs associated with Zovirax Ointment and Teveten®, as well as costs associated with the co-promotion of Wellbutrin SR in the United States. We recorded Teveten® sales and marketing costs net of a related marketing allowance of $10 million paid by Solvay in 2002. In addition, we have expensed a portion of the costs associated with the development of the Cardizem® LA promotional program. In 2002, selling, general and administrative expenses also include fees payable to Reliant related to the co-promotion of Teveten® and Cedax during the fourth quarter of 2002.

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        Selling, general and administrative expenses increased by 88% in 2001 compared to 2000, mainly due to the inclusion of our U.S. sales organization in our results for a full year. In addition, with the acquisition of Cardizem® the level of sales and marketing activity increased in both the United States and Canada.

        We expect selling, general and administrative expenses to increase as a percentage of total revenue in 2003 compared to 2002 due to the costs associated with the launches of Cardizem® LA, Teveten® HCT and Zovirax Cream during 2003.

Amortization

        Amortization expense was $125.8 million, $98.1 million and $16.2 million in 2002, 2001 and 2000, respectively. Amortization expense was 16% of total revenue in 2002 compared to 17% in 2001 and 5% in 2000.

        The increase in amortization expense in 2002 compared to 2001 reflected the incremental amortization associated with the acquisitions of the rights to Zovirax, Teveten®, Vasotec® and Vaseretic®, and Wellbutrin® and Zyban® in Canada, as well as the amortization of our interest in the gross profit on sales of a bioequivalent version of Prilosec. In 2002, amortization expense was reduced by the elimination of goodwill and workforce related amortization as a result of the adoption of CICA Handbook Section 3062.

        The increase in amortization expense between 2001 and 2000 reflected the amortization of acquired research and development associated with the acquisition of Intelligent Polymers, the amortization of product rights and goodwill associated with the acquisition of DJ Pharma and the amortization of the Cardizem® brand name.

        We expect that amortization expense will increase in 2003 compared to 2002 due to a full year of amortization related to the intangible assets acquired during 2002.

Write-down of assets

        In 2002, we recorded a $31.9 million non-cash charge primarily related to the write-down of the following assets:

        As a result of a settlement reached with the FTC regarding the introduction of bioequivalent versions of Adalat CC, we agreed with Elan to terminate our agreements related to the licensing and supply of Elan's 30mg and 60mg bioequivalent versions of Adalat CC. The FTC consent order effectively nullifies our long-term obligation to make minimum license payments to Elan under the licensing and supply agreement for Elan's 30mg bioequivalent version of Adalat CC. We have been in negotiations to have Elan reacquire the rights to its bioequivalent versions of Adalat CC that had previously been sold to us. As there has been no meaningful progress in these negotiations, and as we are unable to ascertain the eventual outcome of these negotiations, in December 2002 we determined that we should write off the net book value of the Adalat product rights, net of the corresponding long-term obligation to Elan. We recorded a related non-cash charge of $22.4 million. We are considering whether or not to pursue litigation against Elan to obtain fair compensation for the loss of these products. Elan is required to continue to supply us with its 30mg bioequivalent version of Adalat CC until May 31, 2003.

        In 2002, we also recorded other non-cash asset write-downs of $9.5 million, primarily related to an unrealized holding loss on our investment in DepoMed.

        In 2001, we recorded an $80.5 million non-cash charge related to the write-down of the following assets:

        At December 31, 2001, Lilly had not resolved the manufacturing problems associated with Keftab that arose in March 2001. The supply interruption had resulted in a deterioration of customer awareness of the product,

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which would have required substantial promotional efforts to restore if the product were to be relaunched. Due to these conditions that existed at December 31, 2001, we determined that the Keftab product right had been permanently impaired and should be written down to its estimated recoverable value of $10 million. We recorded a related non-cash charge of $54.6 million.

        We believed Lilly was responsible for manufacturing and supplying commercially acceptable products to us, as well as for the cost of the recall. In this regard, we commenced a legal action against Lilly in which we were seeking damages as a result of Lilly's voluntary recall of Keftab. In March 2003, we settled our legal action with, and received compensation from, Lilly for the recoverable value of the Keftab intangible asset, the cost of the Keftab inventory that was destroyed, the lost margin on sales of Keftab and the expenses incurred with respect to the Keftab recall. In the first quarter of 2003, we recorded an aggregate net recovery from the settlement of the Lilly action, together with the settlement of an unrelated action against Mylan Pharmaceuticals, Inc., of $24.8 million plus interest.

        In November 2000, the FDA requested a voluntary recall of products containing phenylpropanolamine ("PPA"). We immediately stopped shipments of our Dura-Vent products containing PPA and initiated a recall of these products from wholesalers and pharmacies. During 2001, we experienced supply interruptions resulting from manufacturing issues associated with our remaining Dura-Vent products that did not contain PPA. Dura-Vent is manufactured and supplied to us by a third party. These supply interruptions caused our revenues and gross margins for the remaining Dura-Vent products to significantly deteriorate. We evaluated the current and forecasted market share for the products and determined that the Dura-Vent product right had been permanently impaired and the remaining net book value should be written off. We recorded a related non-cash charge of $19.0 million.

        In 2001, we also recorded other non-cash asset write-downs of $6.9 million, primarily related to an intangible asset associated with the acquisition of Intelligent Polymers.

OPERATING INCOME

        Operating income was $247.7 million, $116.3 million and $116.2 million in 2002, 2001 and 2000, respectively. Operating income excluding write-down of assets was $279.6 million in 2002 and $196.8 million in 2001. Operating income excluding write-down of assets increased by 42% in 2002 compared to 2001 and by 69% in 2001 compared to 2000. As a percentage of total revenue, operating income excluding write-down of assets was 35% in 2002 compared to 34% in 2001 and 37% in 2000.

        The increase in operating income excluding write-down of assets in 2002 compared to 2001 was mainly due to the additions of Zovirax, Teveten®, Vasotec®, Vaseretic® and our 90mg bioequivalent version of Adalat CC product sales. Also contributing to the increase was the inclusion of Wellbutrin SR co-promotion revenue and our interest in the gross profit on sales of a bioequivalent version of Prilosec, combined with a reduction in research and development expenses as a percentage of total revenue. Operating income excluding write-down of assets was reduced by an offsetting increase in cost of goods sold and sales and marketing costs, as well as expenses related to the expansion of our U.S. sales organization and incremental amortization expense related to additions to intangible assets.

        The increase in operating income excluding write-down of assets in 2001 compared to 2000 was mainly due to the additions of Cardizem® and DJ Pharma's product portfolio. Operating income excluding write-down of assets in 2001 was reduced by an offsetting increase in cost of goods sold and sales and marketing costs, as well as expenses related to the inclusion of our U.S. sales organization and incremental amortization expense related to new products and acquired research and development.

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NON-OPERATING ITEMS

Interest income and expense

        Interest income of $3.6 million, $2.7 million and $23.7 million in 2002, 2001 and 2000, respectively, was earned on our investment portfolio, which is comprised primarily of high-grade government and corporate securities. Higher interest income in 2000 reflected a larger average investment portfolio following our concurrent offering of common shares and Debentures in March 2000, and prior to our acquisitions of Intelligent Polymers, Cardizem® and DJ Pharma.

        Interest expense was $32.0 million, $21.1 million and $4.6 million in 2002, 2001 and 2000, respectively. In 2002, interest expense was primarily related to our 77/8% Senior Subordinated Notes due April 1, 2010 ("Notes") issued in March 2002. During 2002, we entered into interest rate swap contracts of aggregate $200 million notional amount, which are designated as a hedge of one-half of our Notes. The contracts involve the receipt of fixed rate amounts in exchange for floating rate interest payments based on six-month London Interbank Offering Rate ("LIBOR") plus a spread. Net receipts or payments relating to the contracts are recorded as an adjustment to interest expense. Interest expense also included interest on advances under our credit facility and the amortization of the discounts on the Adalat and Vasotec® obligations. The non-cash amortization of these discounts amounted to $5.3 million.

        Prior to March 2000, interest expense was primarily related to our Senior Notes. In March 2000, we redeemed our Senior Notes using the proceeds from our concurrent offering of common shares and Debentures and, accordingly, interest expense from this time primarily related to our Debentures until their surrender and redemption during the second half of 2001. In 2001 and 2000, interest on our Debentures was deducted from net income to determine net income attributable to common shareholders. In addition, interest expense in 2001 reflected interest on advances under our credit facility and the amortization of the discounts on the Adalat and Cardizem® obligations. The non-cash amortization of these discounts amounted to $11.0 million.

Premium paid on early extinguishment of Senior Notes

        In 2000, we paid total consideration of $141.0 million to repurchase our Senior Notes, of which $16.0 million was an inducement premium to the holders. In addition, we wrote of the unamortized deferred financing costs related to our Senior Notes.

Provision for or recovery of income taxes

        Our tax rate was affected by the relative profitability of our operations in various foreign tax jurisdictions. We recorded provisions for current income taxes of $21.5 million, $13.8 million and $5.6 million in 2002, 2001 and 2000, respectively. The low effective tax rate was mainly due to a substantial portion of our income being derived from foreign subsidiaries with lower statutory tax rates than those that apply in Canada. In addition, our effective tax rate was affected by the low profitability of our operations in the United States due to the expansion of our sales organization in advance of the launch of Cardizem® LA and sales and marketing expenses related to products launched during 2002. We recorded recoveries of future income taxes of $9.8 million and $39.8 million in 2002 and 2001, respectively, and a provision for future income taxes of $0.2 million in 2000. The recoveries of future income taxes recorded in 2002 and 2001 related to the reversal of temporary differences and the write-down of assets in the United States.

        Our future effective tax rate will depend on the relative profitability of our domestic and foreign operations, the statutory tax rates of the related tax jurisdictions, and the timing of the release, if any, of the valuation allowance. In 2003, we expect our effective tax rate to reflect the anticipated low profitability of our operations

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in the United States due to launch costs and sales and marketing activities related to products to be launched during 2003.

Interest on Debentures

        The value of our Debentures comprised a holder conversion option and interest and principal components. The interest and principal components were discounted at a rate of interest that would have approximated the rate applicable to non-convertible debt at the time our Debentures were issued, with the residual amount ascribed to the holder conversion option. The present value of the interest and principal components was being accreted to the face value of the payments over the three-year period preceding the first redemption date of March 31, 2003.

        Interest on our Debentures was comprised of interest expense of $14.9 million and $15.8 million in 2001 and 2000, respectively, and the accretion of the principal and interest components of $13.5 million and $12.5 million in 2001 and 2000, respectively.

Debt conversion premiums

        In 2001, we recorded a debt conversion premium of $23.7 million on the surrender of $173.8 million aggregate principal amount of our outstanding Debentures. The premium represented the market value of the additional common shares issued in excess of the number of common shares that would have been issued under the terms of the conversion ratio provided for in the indenture governing our Debentures. The premium was recorded as follows: the portion related to the interest and principal components of our Debentures as a $6.2 million deduction from net income for the determination of net income attributable to common shareholders and the portion related to the holder conversion option as a $17.5 million charge to retained earnings.

        We recorded an additional debt conversion premium of $11.2 million on the remaining $126.1 million aggregate face value of our outstanding Debentures that had been called for redemption in November 2001. The premium represented the aggregate amount of interest that would have been paid on our Debentures from the redemption date to March 31, 2003. The premium was recorded as follows: the portion related to the interest and principal components of our Debentures as a $3.8 million deduction from net income for the determination of net income attributable to common shareholders and the portion related to the holder conversion option as a $7.4 million charge to retained earnings.

EBITDA

        EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is a non-GAAP measure that does not have a standardized meaning and, as such, may not be comparable to similarly titled measures presented by other companies. We utilize a measure of EBITDA that excludes certain items. The items were excluded because they were considered to be of a non-operational nature in the applicable year. We disclose this measure of EBITDA because we understand that certain investors use it as an indicator of a company's ability to meet debt service and capital expenditure requirements. This measure should not be considered in isolation or as a substitute for operating income, or as an indicator of our operating performance,

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or compared to cash flows from operating activities as a measure of liquidity. The following table displays the calculation of EBITDA and reconciles EBITDA with EBITDA excluding certain items.

 
   Years ended December 31
  
(In 000s)
  
  2002
   2001
   2000
  
Net income   $ 207,553   $ 123,990   $ 109,453  
Net interest expense (income)     28,397     18,318     (19,064 )
Provision for (recovery of) income taxes     11,729     (25,998 )   5,795  
Depreciation and amortization     136,718     108,871     29,984  
   
 
 
 
EBITDA     384,397     225,181     126,168  
   
 
 
 
Write-down of assets     31,944     80,482     —  
Premium paid on early extinguishment of U.S. Dollar Senior Notes     —     —     20,039  
   
 
 
 
EBITDA excluding certain items   $ 416,341   $ 305,663   $ 146,207  
   
 
 
 

        EBITDA excluding certain items was $416.3 million, $305.7 million and $146.2 million in 2002, 2001 and 2000, respectively. As a percentage of total revenue, EBITDA excluding certain items was 53% in 2002, 52% in 2001 and 47% in 2000.

        We disclose the ratio of EBITDA excluding certain items compared to interest expense because we understand that certain investors use it as an indicator of a company's ability to meet debt service requirements. This ratio is not necessarily comparable to similarly titled measures presented by other companies. The ratio of EBITDA excluding certain items to interest expense was 13.0 times, 8.5 times and 7.2 times for 2002, 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 2002, we had cash and cash equivalents of $56.1 million compared to $434.9 million at December 31, 2001. We also maintain a revolving term credit facility, which may be used for general corporate purposes, including acquisitions. In June 2001, our credit facility was successfully syndicated and was increased from $300 million to $400 million. In July 2002, our credit facility was further increased from $400 million to $600 million and in December 2002 we renewed our credit facility for an additional one-year period. All other material terms and conditions are unchanged. At December 31, 2002, we were in compliance with all financial and non-financial covenants associated with our credit facility.

        Borrowings under our credit facility may be by way of U.S. dollar, LIBOR or U.S. base rate advances or Canadian dollar prime rate or bankers' acceptance ("BA") advances or letters of credit. Interest is charged at the quoted bank rate plus a borrowing margin of 1.375% to 2% in the case of LIBOR and BA advances, and 0.375% to 1% in the case of base rate and prime rate advances, depending on our credit rating at the time of such borrowing. At December 31, 2002, our corporate credit ratings were BB+ with Standard & Poor's Rating Services ("S&P") and Ba3 with Moody's Investors Service. The effective rate of interest at December 31, 2002 was 3.74%. At December 31, 2002, we had advances of $110 million borrowed under our credit facility and we had a letter of credit with a balance of $93.2 million issued under our credit facility. The letter of credit secures the remaining semi-annual payments we are required to make under the Vasotec® and Vaseretic® agreement. At December 31, 2002, we had a remaining balance of $396.8 million available to borrow under our credit facility. At March 31, 2003, we have repaid $100 million of the advances borrowed under our credit facility.

        Cash provided by operating activities was $334.1 million, $309.1 million and $113.1 million in 2002, 2001 and 2000, respectively. Net income, after adjustments for items not involving cash, was $376.0 million,

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$287.8 million and $160.3 million in 2002, 2001 and 2000, respectively. Net changes in non-cash operating items used cash of $41.9 million and $47.2 million in 2002 and 2000, respectively, mainly due to increases in accounts receivable offset by increases in accounts payable and accrued liabilities. Net changes in non-cash operating items provided cash of $21.3 million in 2001, mainly due to increases in accrued liabilities and income taxes payable offset by an increase in inventories.

        Net cash used in investing activities was $792.5 million, $57.7 million and $574.8 million in 2002, 2001 and 2000, respectively. In 2002, we acquired the rights to Zovirax and Teveten® for $133.4 million and $94.3 million, respectively, and we paid initial instalments of $145.7 million to acquire Vasotec® and Vaseretic®, and $2.0 million to acquire Wellbutrin® and Zyban® in Canada. In 2001, we acquired other product rights for $27.4 million, offset by $15 million recovered as a reduction to the minimum license payments otherwise payable to Elan under the licensing and supply agreement for Elan's 30mg bioequivalent version of Adalat CC. In 2000, we acquired the remaining rights to the Dura-Vent, Keftab and Rondec products, and other product rights for $27.8 million. Business acquisitions, net of cash acquired, totaled $240.6 million in 2002, comprising $178.7 million paid to acquire Pharma Pass, $43.1 million paid to terminate Pharma Tech's development of one of its products under development and any royalty obligation we may have had based on future sales of the product when, and if, approved by the FDA, and $18.8 million paid to acquire Pharma Tech. Business acquisitions, net of cash acquired, totaled $614.7 million in 2000, comprising $239.7 million for Cardizem®, $202.4 million for Intelligent Polymers, $162.8 million for DJ Pharma and $9.8 million of additional consideration paid for Fuisz Technologies Ltd. ("Fuisz"). In 2002, we acquired long-term investments of $85.1 million including equity investments in Ethypharm, DepoMed and Procyon Biopharma Inc. of $67.8 million, $13.7 million and $2.5 million, respectively. We acquired long-term investments of $0.9 million and $2.5 million in 2001 and 2000, respectively. Additions to property, plant and equipment were $61.4 million, $44.4 million and $15.8 million in 2002, 2001 and 2000, respectively, and were primarily related to the expansion of our manufacturing facilities. In 2002, we advanced $30 million to Reliant under a secured credit facility established by us and certain of Reliant's existing lenders. The net activity in short-term investments provided cash of $65.9 million in 2000. During 2000, as our short-term investments matured we converted them into cash equivalents with original maturities of 90 days or less. In 2000, we received proceeds of $20 million on the disposal of Clonmel Healthcare Limited, a subsidiary of Fuisz.

        Net cash provided by financing activities was $79.5 million, $58.6 million and $409.0 million in 2002, 2001 and 2000, respectively. Proceeds from the issue of common shares on the exercise of stock options and through our Employee Stock Purchase Plan were $19.6 million, $29.2 million and $14.3 million in 2002, 2001 and 2000, respectively. Net proceeds from our equity offerings in November 2001 and March 2000 were $560.0 million and $95.3 million, respectively. We repurchased common shares on the open market, under our stock repurchase programs, for $503.1 million and $120.0 million in 2002 and 2001, respectively. We received proceeds of $112.8 million, $29.1 million and $6.0 million on the exercise of warrants in 2002, 2001 and 2000, respectively. In 2001, we made loans in an aggregate amount of $10.0 million to certain executive officers under our Executive Stock Purchase Plan. In 2002, we received net proceeds of $384.3 million on the issue of our Notes. In 2002, we borrowed $110 million under our credit facility and paid $2.1 million of additional financing costs related to the increase in our credit facility from $400 million to $600 million. In 2001, we made repayments of $210 million under our credit facility and paid $1.3 million of additional financing costs related to the increase in our credit facility from $300 million to $400 million. In 2000, we borrowed $210 million from our credit facility and paid $3 million of arrangement fees. In 2002, we repaid $34.5 million of the Vasotec® obligation and $7.5 million of the Adalat obligation. In 2001, we repaid $193.4 million of other long-term obligations, including the $170 million Cardizem® obligation and $22.9 million of the Adalat obligation. In 2000, we repaid the debt assumed on the acquisition of DJ Pharma and other long-term obligations of $45.6 million. In 2001 and 2000, we paid interest on our Debentures of $13.6 million and $15.8 million, respectively, and in 2001 we paid

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$11.3 million to redeem our Debentures. In 2000, we received net proceeds of $288.8 million from the issue of our Debentures and we repurchased our Senior Notes for $141.0 million.

        Overall, our cash and cash equivalents decreased by $378.8 million and $52.9 million in 2002 and 2000, respectively, and increased by $309.7 million in 2001.

        In 2002, non-cash investing and financing activities included a $99.6 million discounted obligation related to the acquisition of Vasotec® and Vaseretic®, an $80.7 million discounted obligation related to the amendments to the terms of the Zovirax distribution agreement, and a $70.0 million discounted obligation related to the acquisition of Wellbutrin® and Zyban® in Canada. In 2001, non-cash investing and financing activities included the issuance of common shares valued at $316.0 million on the surrender and redemption of our Debentures. In 2000, non-cash investing and financing activities included a $161.8 million discounted obligation related to the acquisition of Cardizem® and a $58.1 million discounted obligation related to the acquisition of the Adalat product rights.

Obligations and other matters

        At December 31, 2002, we had total long-term obligations of $747.4 million, including the current portion thereof, consisting of the carrying value of our Notes of $412.6 million, borrowings under our credit facility of $110 million, the Zovirax obligation of $80.7 million, the Wellbutrin® obligation of $70.0 million, the Vasotec® obligation of $67.9 million and deferred compensation of $6.2 million. At March 31, 2003, we have paid $40 million of the Zovirax obligation to GSK.

        The following table summarizes our contractual obligations at December 31, 2002.

 
   Maturities by Period
(In 000s)
   Total
   Less Than 1 Year
   1-3 Years
   4-5 Years
   After 5 Years
Long-term obligations   $ 737,350   $ 122,590   $ 170,462   $ 25,507   $ 418,791
Operating lease obligations     22,475     6,667     10,655     4,046     1,107
   
 
 
 
 
Total contractual cash obligations   $ 759,825   $ 129,257   $ 181,117   $ 29,553   $ 419,898
   
 
 
 
 

        In addition, we agreed to make milestone payments under certain research and development collaborations. These milestone payments are generally contingent on receiving regulatory approval for the products under development. We also agreed to make certain contingent payments to GSK for Zovirax in the event of the termination of the Wellbutrin XL development agreement by either GSK or us.

        In November 2001, we filed a $1.5 billion base shelf prospectus with the Canadian provincial securities commissions covering the potential sale of any combination of common shares, debt securities or warrants. On the same date, we filed a registration statement on Form F-10 covering those securities with the SEC under the multijurisdictional disclosure system. We may offer one or more of these types of securities in one or more offerings during the succeeding 25 months. One or more shareholders may also sell common shares pursuant to the base shelf prospectus. We will not receive any of the proceeds from any sale of common shares by the selling shareholders.

        In November 2001, we issued 12,500,000 common shares for gross proceeds of $587.5 million under our base shelf prospectus. In addition, the underwriters exercised in full an over-allotment option, which was granted in connection with the offering, to purchase an additional 1,875,000 of our common shares from Eugene Melnyk, Chairman of the Board and Chief Executive Officer, for $88.1 million. We did not receive any of the proceeds from the sale of the additional common shares by Mr. Melnyk.

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        In March 2002, we issued $400 million aggregate principal amount of unsecured Notes under our base shelf prospectus. Interest on our Notes is payable semi-annually in arrears on April 1 and October 1 of each year. Our Notes were issued at a price of 99.27% of their aggregate principal amount for an effective yield, if held to maturity, of 8%. At December 31, 2002, our Notes had a BB- credit rating with S&P.

        At any time on or after April 1, 2006, we may redeem all or any of our Notes at prescribed prices, plus accrued and unpaid interest to the date of redemption. Before April 1, 2005, we may redeem up to 35% of the original principal amount of our Notes, with the net cash proceeds of certain sales of our common shares, at 107.875% of the principal amount plus accrued and unpaid interest to the date of redemption.

        We have a balance of $424.4 million available under our base shelf prospectus to offer at our discretion. Our base shelf prospectus will expire in December 2003.

        In February 2002, by resolution of the Board of Directors we implemented a stock repurchase program pursuant to which we were able to repurchase up to 5% of our issued and outstanding common shares. In May 2002, the Board of Directors increased the amount to 10% of our issued and outstanding common shares. We repurchased an aggregate of 12,872,300 common shares under this program, through open market transactions on the New York Stock Exchange and Toronto Stock Exchange, at an average purchase price of $39.08 per share for total consideration of $503.1 million. The excess of the cost of the common shares acquired over the stated capital thereof, totaling $388.2 million, was charged to deficit. The program was terminated in July 2002.

        In April 2002, we acquired a 15% equity interest in Ethypharm and we have an option to purchase up to an additional 5% interest in Ethypharm. At April 30, 2003, we had not exercised our option. We also licensed the marketing rights to six products from Ethypharm for commercialization in the United States, Canada and Mexico. We are obligated to pay Ethypharm up to $61 million in milestone payments on the first regulatory approval of the products within the United States, Canada or Mexico, as well as royalties on the net sales of the products. We have also entered into a cross-license agreement with Ethypharm whereby we grant to each other non-exclusive licenses to use our CEFORM™ technology and Ethypharm's Flashtab technology, respectively, relating to the development of new rapid dissolve pharmaceutical products. At April 30, 2003, we had not made any milestone payments to Ethypharm.

        In July 2002, we acquired newly issued common shares (15% of the issued and outstanding common shares) of DepoMed and we have options to purchase up to an additional 5% interest in DepoMed. At April 30, 2003, we had not exercised any of our options. We also licensed from DepoMed the rights to manufacture and market a once-daily metformin product that is currently undergoing Phase III clinical trials.

        In November 2002, together with certain of Reliant's existing lenders, we established an $85 million secured credit facility in favour of Reliant. At December 31, 2002 and March 31, 2003, we had advanced $30 million to Reliant out of our total commitment to fund up to $40 million of the credit facility. The credit facility is available to Reliant for general corporate purposes. Interest is calculated daily on outstanding advances at U.S. prime rate plus a margin of 2%. Commencing March 31, 2005, the outstanding advances are repayable in instalments with the final instalment due on December 31, 2006.

        We believe we have adequate capital resources and sources of financing to support our ongoing operational and interest requirements and investment objectives, and to meet our obligations as they become due. We believe we will be able to raise additional capital, if necessary, to support our objectives; however, there can be no assurance that, if required, we would be able to raise such capital on favourable terms.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

        Inflation has not had a significant impact on our results of operations.

Foreign currency risk

        We operate internationally but a majority of our revenue and expense activities and capital expenditures are transacted in U.S. dollars. Our only other significant transactions are in Canadian dollars, and we do not believe we have a material exposure to foreign currency risk because of the relative stability of the Canadian dollar in relation to the U.S. dollar. A 10% change in foreign currency exchange rates would not have a material effect on our consolidated results of operations, financial position or cash flows.

Interest rate risk

        The primary objective of our investment policy is the protection of principal and, accordingly, we invest in high-grade government and corporate securities with varying maturities, but typically less than 90 days. External independent fund administrators manage our investments. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk.

        We are exposed to interest rate risk on borrowings under our credit facility. Our credit facility bears interest based on LIBOR, U.S. dollar base rate, Canadian dollar prime rate or Canadian dollar BA. At our option we may lock in a rate of interest for a period of up to one year.

        The imputed rates of interest used to discount our Zovirax, Vasotec® and Wellbutrin® long-term obligations are fixed and therefore not subject to interest rate risk.

        The fair value of our fixed rate Notes is affected by changes in interest rates. We manage this exposure to interest rate changes through the use of interest rate swap contracts. In June 2002, we entered into three contracts of aggregate $200 million notional amount, which effectively modifies our exposure to interest rate fluctuations by converting one-half of our fixed rate Notes to floating rate. At December 31, 2002, the marked-to-market value of the contracts was an unrecognized gain of $18.6 million in our favour.

        Based on our overall interest rate exposure at December 31, 2002, a 10% change in interest rates would not have a material effect on our consolidated results of operations, financial position or cash flows.

Investment risk

        We are exposed to investment risks on our investments in other companies. The fair values of our investments are subject to significant fluctuations due to stock market volatility and changes in general economic conditions. We regularly review the carrying values of our investments and record losses when events and circumstances indicate that there have been declines in their fair values. At December 31, 2002, we had investments without readily determinable market values of $72.4 million and investments with readily determinable market values at fair value of $6.9 million. Based on the carrying values of our investments with readily determinable market values at December 31, 2002, adverse changes of 25% and 50% in equity market prices would result in a corresponding decline in the total fair value of these investments of approximately $2 million and $3.5 million, respectively.

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RECENT ACCOUNTING PRONOUNCEMENTS

        In December 2001, the CICA issued Accounting Guideline ("AcG") 13, "Hedging Relationships". AcG-13 establishes the criteria for identification, designation, documentation and effectiveness of hedging relationships, for the purpose of applying hedge accounting. AcG-13 does not specify hedge-accounting methods. AcG-13 is to be applied to hedging relationships in effect in fiscal years beginning on or after July 1, 2003. In June 2002, the Emerging Issues Committee ("EIC") issued EIC-128, "Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments". EIC-128 establishes that a freestanding derivative financial instrument that gives rise to a financial asset or financial liability and is entered into for trading or speculative purposes, or that does not qualify for hedge accounting under AcG-13 should be recognized in the balance sheet and measured at fair value, with changes in fair value recognized in net income.

        In December 2002, the CICA issued Handbook Section 3063, "Impairment of Long-Lived Assets". CICA Handbook Section 3063 establishes standards for the recognition, measurement and disclosure of impairments of long-lived assets held for use. CICA Handbook Section 3063 is effective for fiscal years beginning on or after April 1, 2003. In December 2002, the CICA also issued Handbook Section 3475, "Disposal of Long-Lived Assets and Discontinued Operations". CICA Handbook Section 3475 establishes standards for the recognition, measurement, presentation and disclosure of the disposal of long-lived assets and also establishes the standards for the presentation and disclosure of discontinued operations. CICA Handbook Section 3475 is effective for disposal activities initiated on or after May 1, 2003.

        In February 2003, the CICA issued AcG-14, "Disclosures of Guarantees". AcG-14 establishes the disclosures to be made by a guarantor about its obligations under guarantees. AcG-14 is effective for fiscal years beginning on or after January 1, 2003.

FORWARD-LOOKING STATEMENTS

        To the extent any statements made or incorporated by reference in this MD&A contain information that is not historical, these statements are essentially forward-looking. As such, these statements are subject to risks and uncertainties, including the difficulty of predicting FDA and Canadian Therapeutic Products Programme approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, new product development and launch, reliance on key strategic alliances, availability of raw materials, production interruptions or supply delays at third party suppliers or at our own manufacturing facilities, the outcome of litigation, the regulatory environment, fluctuations in operating results and other risks detailed from time to time in our filings with the securities commissions or other securities regulatory authorities in Canada, including the risks set forth in Item 3 of our Annual Information Form for the fiscal year ended December 31, 2002, and the U.S. Securities and Exchange Commission.

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Item 6. Directors, Senior Management and Employees

A.    Directors and Senior Management

        The name, municipality of residence, their ages as of May 12, 2003 and position with the Company of each of the directors and executive officers are set forth below:

Name(1)
   Age
   Position
Eugene N. Melnyk
St. Philip, Barbados		   43   Chairman of the Board, Chief Executive Officer and Director
Rolf K. Reininghaus
Mississauga, Ontario, Canada		   57   Senior Vice President, Corporate and Strategic Development and Director
Paul W. Haddy(2)
Christ Church, Barbados		   50   Director
Wilfred G. Bristow(3)(4)
Campbellville, Ontario, Canada		   71   Director
Roger Rowan(2)
Toronto, Ontario Canada		   50   Director
Sheldon Plener(3)(4)
Toronto, Ontario		   51   Director
Laurence Paul, MD(2)(3)(4)
Santa Monica, California, USA		   38   Director
Kenneth C. Cancellara, Q.C.
Toronto, Ontario, Canada		   56   Senior Vice President, Chief Legal Officer and Corporate Secretary
Brian H. Crombie
Mississauga, Ontario, Canada		   43   Senior Vice President and Chief Financial Officer
Kristine Peterson
Newtown, Pennsylvania, USA		   43   Senior Vice President, Commercial Operations
Gregory Szpunar, Ph.D
Chester, New Jersey, USA		   45   Senior Vice President and Chief Scientific Officer
(1)
Directors serve one year terms.

(2)
Member of the Audit Committee.

(3)
Member of the Compensation Committee.

(4)
Member of the Nominating and Governance Committee.

        Mr. Melnyk has been the Chief Executive Officer since December 2001 and has been the Chairman of the Board and a Director since March 29, 1994, the effective date of the amalgamation of the Company's predecessor entities, BCI and Trimel Corporation ("Trimel"). Prior to that time, was the Chairman of the Board of BCI since October 1991 and was instrumental in acquiring, financing and organizing the companies or businesses that comprised BCI. Mr. Melnyk also founded Trimel and served as its President and Chief Executive Officer from 1983 through July 1991.

        Mr. Reininghaus has been a Senior Vice President, and a Director since the Amalgamation and has been the Senior Vice President Corporate and Strategic Development and the President of Biovail Ventures since December 1999. Prior to that time he was President of BPC since November 1997, President, Chief Operating Officer and a Director of BCI since October 1991 and Executive Vice President and a Director of Trimel Corp. or its affiliates since November 1987. Prior to his employment by Trimel, Mr. Reininghaus was the Marketing Manager of the Canadian operations of Miles Pharmaceuticals, a division of Bayer AG.

        Mr. Haddy was elected to the Board of Directors in June 2000. Mr. Haddy has been the Chairman and Chief Executive Officer of London Life Bank and Trust Corporation, a financial institution providing international banking and segregated fund management, asset and liability management and pooled fixed income funds since March 1997. Prior thereto, Mr. Haddy was Chairman of London Life & Casualty Reinsurance Corporation since 1994.

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        Mr. Bristow has been a Director since the Amalgamation. Prior to that time, he had been a Director of BCI since January 1993. Mr. Bristow had been a Vice President and senior investment advisor at Nesbitt Thomson Inc., a Canadian investment banking firm, since December 1991. From September 1975 to December 1991, he served as vice president and director of Richardson Greenshields of Canada, an investment banking firm.

        Mr. Rowan was elected to the Board of Directors in June 1997. Mr. Rowan has been President and Chief Operating Officer of Watt Carmichael Inc., a private investment firm, since May 1994. Prior thereto, Mr. Rowan was the Executive Vice President and Chief Operating Officer of Watt Carmichael Inc. since 1991.

        Mr. Plener was elected to the Board of Directors in June 2002. Mr. Plener is a senior partner in the Business Law practice group at Cassels Brock and Blackwell LLP, since 1978. He is a member of the firm's Executive and Operations Committee and Chairman of its Finance Committee. Throughout his career, Mr. Plener has been lead counsel to many public and private clients in a broad range of industries including pharmaceutical companies.

        Dr. Paul was elected to the Board of Directors in June 2002. Dr. Paul is founding principal of Laurel Crown Capital, LLC, leveraged-buyout and principal investment company based in Santa Monica, California. Prior to his work at Laurel Crown and its predecessor, Dr. Paul was a managing director at Donaldson, Lufkin, Jennette, Inc. (DLJ), a New York based securities and brokerage firm. At DLJ, Dr. Paul was responsible for building and overseeing much of the firm's life science effort. Dr. Paul received his A.B. and MD from Harvard University and then subsequently received his MBA from Stanford University.

        Mr. Cancellara has been a Senior Vice President and the Chief Legal Officer since August 2002. Previously he was the Senior Vice President and General Counsel since March 1996, was appointed Secretary in April 1996, and had been a Director from May 1995 to June 2000. Prior to that time, Mr. Cancellara was a partner with the law firm of Cassels, Brock and Blackwell since 1980 where he held many positions including Chairman of the Executive Committee and managing partner. Mr. Cancellara holds a Juries Doctor degree from the University of Toronto Faculty of Law and a Masters of Law in Business from Osgoode Hall law school.

        Mr. Crombie joined Biovail as Senior Vice President and Chief Financial Officer in May 2000. Mr. Crombie came to Biovail from The Jim Pattison Group, one of Canada's largest private holding companies where he served as Managing Director Corporate Finance from 1998 to 2000 and was responsible for corporate development and treasury. Prior to that time, he spent 7 years in finance and general management positions with The Molson Companies most recently as SVP Corporate Finance and Treasurer responsible for planning, accounting and control, corporate development, treasury and investor relations. Mr. Crombie is a graduate of The Harvard Graduate School of Business where he received his Masters in Business Administration.

        Ms. Peterson joined Biovail as Senior Vice President, Commercial Operations in May 2003. Ms. Peterson came to Biovail from Bristol-Myers Squibb (BMS) where she spent twenty years in increasingly senior roles culminating in her most recent role as Senior Vice President of Marketing, Drug Discovery and Exploratory Development. In that role, she was responsiible for designing the organization to better integrate science and marketing earlier into the R&D process, building launch plans for several pipeline brands, and evaluating external commercial opportunities. Prior to that role, she was Senior Vice President of Marketing for BMS's Cardiovascular and Metabolic business in the U.S. During her career, Ms. Peterson launched several key brands, led large sales organizations, and headed BMS's generic business. She also served on the internal Board for the BMS Foundation's Women Health Philanthropy since 2001. Ms. Peterson holds a Bachelor's Degree in marketing and a Masters in Business Administration from the University of Illinois.

        Dr. Szpunar joined Biovail as Senior Vice President and Chief Scientific Officer in April of 2003. Dr. Szpunar came to Biovail from Pharmacia Corporation, where he was Senior Vice President for Product Development. Dr. Szpunar has held various executive and scientific positions with Pharmacia, Pharmacia and Upjohn and The Upjohn Company over the prior 19 years. These have included participation in and responsibility for directing global R&D operations ranging from early pre-clinical development through Phase IV product support. He has served in direct leadership positions in clinical and pre-clinical pharmacokinetics and drug metabolism, biopharmaceutics research, project management, portfolio analysis, and

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quality assurance. Dr. Szpunar holds a Bachelors degree in Pharmacy from Wayne State University, and a Doctor of Philosophy Degree in Pharmaceutics from The University of Michigan.


B.    Compensation

        The following table sets forth the compensation information for each of the last three fiscal years for the Chief Executive Officer and the four other most highly compensated executive officers of the Company who served as executive officers at the end of 2002 ("Named Executive Officers"). This information includes the U.S. dollar value of base salaries, annual incentive compensation payments, long-term incentive compensation payments, and certain other compensation.


SUMMARY COMPENSATION TABLE

 
    
   Annual Compensation
   Long-Term Compensation
    
 
    
    
    
    
   Awards
   Payments
    
Name and Principal Position
   Year
   Salary (U.S.$)
   Bonus (U.S.$)
   Other Annual Compensation(1) (U.S.$)
   Securities Under Options Granted (2) (#)
   Restricted Shares or Restricted Share Units (U.S.$)
   LTIP Payouts (U.S.$)(3)
   All Other Compensation(1) (U.S.$)
Eugene N. Melnyk
Chairman of the Board and Chief Executive Officer		   2002
2001
2000		   607,908
552,644
502,404		   —

—

125,000		   —

—

—		   501,100
—

901,300		   —

—

—		   41,310,000
78,570,000
26,500,804		   —

—

—
William S. Poole(6) (7)
President, North American Pharmaceuticals		   2002
2001
2000		   413,243
377,353
—		   56,538
—

—		   —

—

—		   65,000
45,000
—		   —

—

—		   —

—

—		   52,443
—

—
Kenneth C. Cancellara(4)
Senior Vice President, Chief Legal Officer and Corporate Secretary		   2002
2001
2000		   277,398
237,122
200,079		   29,322
41,654
—		   —

—

—		   115,600
—

45,300		   —

—

—		   1,499,694
1,034,331
2,799,684		   —

—

—
Brian H. Crombie(4) (5)
Senior Vice President and Chief Financial Officer		   2002
2001
2000		   236,628
208,819
130,812		   53,882
35,495
33,345		   —

—

—		   115,100
15,000
120,000		   —

—

—		   —

—

—		   —

—

—
Rolf K. Reininghaus(4)
Senior Vice President, Corporate and Strategic Development		   2002
2001
2000		   189,135
143,604
152,548		   49,830
91,185
120,317		   —

—

—		   85,100
—

33,300		   —

—

—		   —

—

8,245,858		   —

—

—

Notes:

(1)
Perquisites and other personal benefits for Named Executive Officers did not exceed the lesser of Cdn $50,000 and/or 10% of the officer's salary and bonus for 2002. The "other" compensation paid to Mr. Poole related to relocation expenses.

(2)
All share and option amounts have been adjusted to give effect to the 2 for 1 stock split completed in October 2000. The options are all for the purchase of common shares of the Company and were granted under the Company's Stock Option Plan, as amended, established in 1993.

(3)
Relates to the value of options exercised pursuant to the Stock Option Plan.

(4)
Other than in respect of Mr. Melnyk, and Mr. Poole these amounts were paid in Canadian dollars and, for the purposes of this table, converted to U.S. dollars at the respective year end rates of exchange as follows: 2002 — .6339; 2001 — .6278; and 2000 — .6669.

(5)
Mr. Crombie joined the Company on May 1, 2000.

(6)
Mr. Poole joined the Company on January 15, 2001

(7)
Effective May 6, 2003, Mr. Poole ceased to be President, North American Pharmaceuticals

Employment Agreements

        The following is an outline of the key material terms of the employment agreements for the Named Executive Officers.

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        Eugene N. Melnyk, as Chairman of the Board of the Company, pursuant to a Management Agreement, effective February 1, 1992, receives annual compensation for services in the amount of U.S. $583,592, which amount is subject to 10% annual increases during the term of the Management Agreement, and is reimbursed for business related expenses. The Management Agreement will continue automatically for renewal periods of one year unless terminated by either the Company or Mr. Melnyk upon prior written notice. Mr. Melnyk is not entitled to any termination payments upon expiry or any other terminations of his employment agreement.

        Kenneth C. Cancellara, as Senior Vice President, Chief Legal Officer and Corporate Secretary, pursuant to an Employment Agreement made as of March 1, 2003, receives an annual salary of U.S. $400,000, subject to a cost of living adjustment, reimbursement of business expenses, an automobile allowance plus the right to receive up to 50% of annual salary as a performance based bonus. The Employment Agreement has an indefinite term. Mr. Cancellara must provide the Company with 60 days prior written notice upon his intention to terminate the contract. Where Mr. Cancellara's contract is terminated other than for cause, he is entitled to 12 months severance in lieu of notice. Where the Company enters into a transaction the result of which is that there is a change in control of the Company, Mr. Cancellara is entitled to 24 months severance in lieu of notice and any options granted to Mr. Cancellara prior to such change of control vest immediately.

        Brian H. Crombie, as Senior Vice President, Chief Financial Officer, pursuant to an Employment Agreement made as of March 1, 2003, receives an annual salary of U.S. $400,000, subject to a cost of living adjustment, reimbursement of business expenses, an automobile allowance plus the right to receive up to 50% of annual salary as a performance based bonus. The Employment Agreement has an indefinite term. Mr. Crombie must provide the Company with 60 days prior written notice upon his intention to terminate the contract. Where Mr. Crombie's contract is terminated other than for cause, he is entitled to 12 months severance in lieu of notice. Where the Company enters into a transaction the result of which is that there is a change in control of the Company, Mr. Crombie is entitled to 24 months severance in lieu of notice and any options granted to Mr. Crombie prior to such change of control vest immediately.

        William S. Poole, as President, North American Pharmaceuticals, pursuant to an Employment Agreement made as of January 12, 2001 receives an annual salary of U.S. $400,000, subject to a cost of living adjustment and reimbursement of business expenses. The Employment Agreement had a term of two years, expiring in January 15, 2003 and was automatically renewable for a one year term thereafter. The contract was terminable by the Company upon six months' written notice and was terminable by Mr. Poole upon six months' prior notice. Effective May 6, 2003, the Company advised Mr. Poole that his contract would not be renewed and as such Mr. Poole ceased to be President, North American Pharmaceuticals. Mr. Poole was not entitled to any termination payment upon the expiry or other termination of his employment contract.

        Rolf Reininghaus, as Senior Vice President, Corporate and Strategic Development and Director, pursuant to an Employment Agreement made as of March 1, 2003, receives an annual salary of U.S. $400,000, subject to a cost of living adjustment, reimbursement of business expenses, an automobile allowance plus the right to receive up to 50% of annual salary as a performance based bonus. The Employment Agreement has an indefinite term. Mr. Reininghaus must provide the Company with 60 days prior written notice upon his intention to terminate the contract. Where Mr. Reininghaus's contract is terminated other than for cause, he is entitled to 12 months severance in lieu of notice. Where the Company enters into a transaction the result of which is that there is a change in control of the Company, Mr. Reininghaus is entitled to 24 months severance in lieu of notice and any options granted to Mr. Reininghaus prior to such change of control vest immediately.

        Kristine Peterson, as Senior Vice President, Commercial Operations, pursuant to an Employment Agreement made as of March 1, 2003, receives an annual salary of U.S. $380,000 subject to a cost of living adjustment, reimbursement of business expenses, an automobile allowance plus the right to receive up to 50% of annual salary as a performance based bonus. The Employment Agreement has an indefinite term. Ms. Peterson must provide the Company with 60 days prior written notice upon her intention to terminate the contract. Where Ms. Peterson's contract is terminated other than for cause, she is entitled to 12 months severance in lieu of notice. Where the Company enters into a transaction the result of which is that there is a change in control of the Company, Ms. Peterson is entitled to 24 months severance in lieu of notice and any options granted to Ms. Peterson prior to such change of control vest immediately.

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        Gregory Szpunar, as Senior Vice President, Chief Scientific Officer, pursuant to an Employment Agreement made as of March 1, 2003, receives an annual salary of U.S. $300,000 subject to a cost of living adjustment, reimbursement of business expenses, an automobile allowance plus the right to receive up to 50% of annual salary as a performance based bonus. The Employment Agreement has an indefinite term. Mr. Szpunar must provide the Company with 60 days prior written notice upon his intention to terminate the contract. Where Mr. Szpunar's contract is terminated other than for cause, he is entitled to 12 months severance in lieu of notice. Where the Company enters into a transaction the result of which is that there is a change in control of the Company, Mr. Szpunar is entitled to 24 months severance in lieu of notice and any options granted to Mr. Szpunar prior to such change of control vest immediately.

Directors' and Officers' Liability Insurance

        The Company maintained insurance during 2002 for the benefit of its directors and officers against certain liabilities incurred by them in their capacity as directors and officers of the Company or its subsidiaries in the aggregate amount of $50,000,000 for the period January 1, 2002 to March 25, 2002 and $75,000,000 for the period from March 26, 2002 to December 31, 2002. The policy governing such insurance is subject to standard exclusions and limitations. During the 2002 fiscal year the amount of premiums paid in respect of such insurance was $1,255,000.

        It is anticipated that the amount of premium to be paid in respect of such insurance for the 2003 fiscal year will be approximately $3,750,000.

Remuneration and Term of Directors

        The Company remunerates Directors who are not officers of Biovail for services to the board, committee participation and special assignments. Remuneration for each Director during 2002 (paid in U.S. Dollars) was as follows:

•   Annual Retainer — Board of Directors   $10,000

•
 
Annual Retainer — Board Committee
 
$3,000

•
 
Meeting Attendance Fee
 
 

 
 
• $1,000 for attending in person each Board Meeting and or Committee Meeting
    • $500 for attending each Board Meeting and or Committee Meeting by telephone conference
    • $500 for attending a committee meeting held on the same day as a board meeting

        A meeting fee is paid to each non-management director for meetings that the board of directors or one or more committee of the board of directors is requested or required to attend (such as executive meetings) that are not official meetings of the board of directors.

        Directors are also reimbursed for travel and reasonable expenses incurred in connection with attending board meetings.

        In 2002, the total remuneration and fees paid to Directors was $110,735.

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        In 2002 options were granted to directors follows:

Name
   Options Granted (#) (1)
   Exercise Price (U.S. $/Security)
   Market Value of Securities Underlying Options
on the
Date of Grant
(U.S. $/Security)
   Expiration Date
Wilfred Bristow   10,000   31.00   27.55   June 26, 2007
Roger Rowan   10,000   31.00   27.55   June 26, 2007
Paul Haddy   10,000   31.00   27.55   June 26, 2007
Laurence Paul   10,000   31.00   27.55   June 26, 2007
Sheldon Plener   10,000   31.00   27.55   June 26, 2007
(1)
The options become exerciseable as of June 1, 2003


C.    Board Practices

        Information regarding the Company's Board of Directors is provided in Item 6.B. "Compensation of Directors and Officers" above and Item 10.B. "Memorandum and Articles of Association" below.

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85

86

87

Pension Plan

        The Company does not maintain a pension plan for its employees, officers or directors.

Stock Option Plan

        The Company may grant directors and officers options to purchase common shares of the Company under the Plan (described under "— Stock Option Plan" in Item 6.E below). The following tables provide information on those options granted and exercised during 2002 and held at the end of 2002 by the Named Executive Officers.

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Options Granted in Last Fiscal Year

Name
    
   Securities Under Option (#) (1)
   % of Total Options Granted to Employees in Period
   Exercise Price (U.S.$/ Security)
   Market Value of Securities Underlying Options on the Date of Grant (U.S. $/Security)
   Expiration Date
Eugene N. Melnyk   (2 ) 300,000   14.5%   42.00   40.80   February 8, 2007
    (3 ) 1,100   —   42.00   40.80   February 8, 2007
    (4 ) 50,000   2.4%   31.00   30.75   June 14, 2007
    (5 ) 150,000   7.3%   31.00   30.75   June 14, 2007

William S. Poole
 
(2
)
30,000
 
1.5%
 
42.00
 
40.80
 
February 8, 2007
    (4 ) 20,000   1.0%   31.00   30.75   June 14, 2007
    (5 ) 15,000   0.7%   31.00   30.75   June 14, 2007

Kenneth C. Cancellara
 
(2
)
50,000
 
2.4%
 
42.00
 
40.80
 
February 8, 2007
    (3 ) 600   —   42.00   40.80   February 8, 2007
    (4 ) 50,000   2.4%   31.00   30.75   June 14, 2007
    (5 ) 15,000   0.7%   31.00   30.75   June 14, 2007

Brian H. Crombie
 
(2
)
50,000
 
2.4%
 
42.00
 
40.80
 
February 8, 2007
    (3 ) 100   —   42.00   40.80   February 8, 2007
    (4 ) 50,000   2.4%   31.00   30.75   June 14, 2007
    (5 ) 15,000   0.7%   31.00   30.75   June 14, 2007

Rolf K. Reininghaus
 
(2
)
50,000
 
2.4%
 
42.00
 
40.80
 
February 8, 2007
    (3 ) 100   —   42.00   40.80   February 8, 2007
    (4 ) 20,000   1.0%   31.00   30.75   June 14, 2007
    (5 ) 15,000   0.7%   31.00   30.75   June 14, 2007
(1)
The options granted under the Company's Stock Option Plan, as amended, established in 1993. All options are for the purpose of common shares of the Company and are for a term of 5 years.

(2)
The options become exerciseable as to a maximum of 25% on March 1st of 2002, 2003, 2004 and 2005 respectively.

(3)
The options become exerciseable as of December 31, 2003.

(4)
The options become exerciseable as to a maximum of 25% on June 14th of 2002, 2003, 2004 and 2005 respectively.

(5)
The options become exerciseable as to a maximum of 25% on March 1st of 2003, 2004, 2005 and 2006 respectively.


AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND OPTION VALUES

Name
   Securities Acquired on Exercise
   Aggregate Value Realized (U.S. $)
   Unexercised Options at Fiscal Year-End Exerciseable / Unexerciseable
   Value of Unexercised in-the-money Options Fiscal Year-End Exerciseable / Unexerciseable (U.S. $)
Eugene N. Melnyk   1,620,000   41,310,000   1,084,000 / 563,600   4,804,732 / —
William S. Poole   —   —   23,750 / 86,250   — / —
Kenneth C. Cancellara   80,000   1,499,694   169,000 / 113,100   473,892 / —
Brian H. Crombie   —   —   100,000 / 150,100   58,650 / 58,650
Rolf K. Reininghaus   —   —   284,000 / 82,600   2,442,310 / —

Notes:

(1)
Value of unexercised in-the-money options calculated using the closing price of common shares of the Company, on the NYSE on December 31, 2002 (U.S.$26.41), less the exercise price of in-the-money options.

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(2)
All share and option amounts have been adjusted to give effect to the 2 for 1 stock split completed in October 2000. The options are all for the purchase of common shares of the Company and were granted under the Company's Stock Option Plan, as amended, established in 1993.

Employee Stock Purchase Plan

        The Company's Employee Stock Purchase Plan ("EPP") was approved by the shareholders at the Special Meeting held on January 1, 1996. The purpose of the EPP is to provide a convenient method for full-time employees of the Company to participate in the share ownership of the Company or to increase their share ownership in the Company via payroll or contractual deduction. Directors, senior officers or insiders of the Company are not eligible to participate in the EPP. The aggregate number of shares reserved for issuance under the EPP taking into consideration the 2 for 1 stock splits completed in December, 1999 and October, 2000 shall not exceed 1,200,000 common shares. At the discretion of a committee of the Board of Directors that will administer the EPP, the Company may issue shares directly from treasury or purchase shares in the market from time to time to satisfy the obligation under the EPP. A participant may authorize a payroll or contractual deduction up to a maximum of 10% of the base salary or remuneration to be received during any purchase period. The purchase price shall be 90% of the fair value per share of stock on the date on which the eligible period ends.

        As of April 30, 2002 the Company had issued 40,406 shares pursuant to the EPP, of which 6,972 were issued in 2001 and 5,148 in 2002.


D.    Employees

        At December 31, 2002 we had 1,857 employees including 176 part time positions, of whom 863 were were engaged in sales and marketing, 392 were engaged in research and development, 527 were engaged in manufacturing, and the remaining 75 worked in general and administrative areas. At December 31, 2001 and 2000, we had 1,322 and 1,200 employees, respectively, of whom 304 and 350, respectively, were in part-time positions. None of our employees are represented by a collective bargaining agreement.


E.    Share Ownership

        The following table shows the number and percent of Common Shares beneficially owned by Eugene Melnyk and the officers and directors as a group (10 persons). As of April 30, 2003. Other than Mr. Melnyk, no executive officer or director of the Company beneficially owns 1% or more of the Company's Common Shares.

Name of Beneficial Owner
   Common Shares Owned
   Percent(1)
Eugene N. Melnyk(2)   26,101,816   16.5%
Officers and directors as a group (11 persons)   27,080,167   17.1%
(1)
Does not include 6,825,433 common shares issuable upon exercise of stock options outstanding under our stock option plan

(2)
Mr. Melnyk also has options to purchase 1,797,700 common shares, of which 1,234,000 are exerciseable.

Stock Option Plan

        Under the Company's Stock Option Plan, as amended, (the "Plan") established in 1993 and approved by the Shareholders at a special meeting held on March 28, 1994, the Company may grant to directors, officers, employees, consultants and advisors, options to purchase common shares of the Company. The purpose of the Plan is to provide incentives to certain of the Company's directors, officers, employees, consultants and advisors. The aggregate number of shares reserved for issuance under the Plan, taking into consideration the 2 for 1 stock splits completed in December 1999 and October 2000, shall not exceed 28,000,000 common shares. The number of shares reserved for issuance to any one person under the Plan, together with shares which that person may acquire under any similar plan of the Company may not exceed 5% of the total issued and outstanding common shares. Under the Plan, the Company designates the maximum number of shares that are subject to an option. The exercise price per share of an option is the closing market price at which the shares are traded on the

90


New York Stock Exchange on the day prior to the date the option is granted, or if not so traded, the average between the closing bid and ask prices thereof as reported for that day.

        As at April 30, 2002, the Company had granted an aggregate of 6,825,433 options which are outstanding at exercise prices ranging from $0.81 to $45.00 per share. The options are exercisable on various dates up to October 6, 2010.

Item 7. Major Shareholders and Related Party Transactions

A.    Major Shareholders

        Biovail is not directly or indirectly owned or controlled by another corporation(s) or by any foreign government.

        Other than as provided in Item 6.E "Share Ownership" above, we are not aware of any shareholders owning more than 5% of our outstanding voting securities as of April 30, 2003.

        The following table indicates as of April 30, 2003 the approximate total number of holders of record of Common Shares, the total number of Common Shares outstanding, the number of holders of record of Common Shares with United States addresses, the portion of the outstanding Common Shares held in the United States, and the percentage of Common Shares held in the United States:

Total Number of Holders of Record(1)
   Total Number of Common Shares Outstanding
   Number of U.S. Holders of Record(2)
   Number of Common Shares Held by U.S. Holders of Record
   Percentage of Common Shares Held by U.S. Holders of Record
1,162   158,308,203   458   141,202,848   89.2%
(1)
A substantial number of the Common Shares are held by depositories, brokerage firms and financial institutions in "street name". Based upon the number of annual reports and proxy statements requested by such nominees, the Company estimates that the total number of beneficial holders of Common Shares exceeds 66,112 holders.

(2)
The computation of the number of Common Shares held in the United States is based upon the number of holders of record with United States' addresses. United States residents may beneficially own Common Shares owned of record by non-United States residents.


B.    Related Party Transactions

        In June 2001, we acquired a corporate aircraft from an entity controlled by the Chairman of the Board of Directors for cash consideration of $10,475,000. The purchase price was based on comparable market prices for the aircraft at the time of acquisition.

Indebtedness of Executive Officers

        In March 2001, the Company authorized the making of a loan to an executive officer of the Company; the loan shall not bear interest until the first day of March 2004. Thereafter, the loan will bear interest equal to the Company's rate for borrowing. The loan is due on the earlier of termination of employment or March 31, 2008. The following table contains the particulars of outstanding indebtedness:


TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
OTHER THAN IN RESPECT OF SECURITIES PURCHASES

Name and Principal Position
   Involvement of Issuer or Subsidiary
   Largest Amount Outstanding during 2002 (U.S.$)
   Amount Outstanding as at April 30, 2003 (U.S.$)
   Security for Indebtedness
William S. Poole
    President, North American Pharmaceuticals		   Lender   600,000   600,000   Promissory
Note

91

        In September 2001, the Company authorized the making of loans to certain of its executive officers, as named in the table set forth below, in order to finance the acquisition of common shares of the Company on the open market. These loans are full recourse and are secured by the common shares and bear interest at a rate that is equal to the Company's rate for borrowings. Interest is payable quarterly in arrears. Each loan is due on the earliest of: (a) September 30, 2003; (b) 30 days following termination or cessation of the executive officer's employment; or (c) when the executive officer disposes of common shares of the Company with a value equal to or greater than that of the loan.

        The following table sets forth details of indebtedness to, or guaranteed or supported by, the Company or any of its subsidiaries, of each director, executive officer, senior officer, proposed nominee for election as a director of the Company and each associate of any such director, officer or proposed nominee, for the fiscal year ended December 31, 2002 in connection with a purchase of securities of the Company.


TABLE OF INDEBTEDNESS
UNDER EXECUTIVE SECURITIES PURCHASE PROGRAM

Name and Principal Position
   Involvement of the Company
   Largest Amount Outstanding During 2002 (U.S. $)
   Amount Outstanding as at April 30, 2003 (U.S. $)
   Financially Assisted Securities Purchased during 2001 (#)
   Security for Indebtedness
Eugene N. Melnyk
    Chairman of the Board and Chief Executive Officer		   Lender   2,034,433   2,005,432   44,020   44,020 (Common Shares)
Kenneth C. Cancellara
    Senior Vice President, General Counsel and Corporate Secretary		   Lender   2,034,433   2,005,432   44,020   44,020 (Common Shares)
Brian H. Crombie
    Senior Vice President and Chief Financial Officer		   Lender   2,034,433   2,005,432   44,020   44,020 (Common Shares)
Kenneth G. Howling
    Vice President, Finance		   Lender   2,034,433   2,005,432   44,020   44,020 (Common Shares)
John R. Miszuk
    Vice President, Controller and Assistant Secretary		   Lender   2,034,433   2,005,432   44,020   44,020 (Common Shares)

        The aggregate indebtedness of these Directors, Executive Officers and Senior Officers as at April 30, 2003 is U.S. $10,627,160.

        The indebtness more particularly described above is "grand fathered" pursuant to the Sarbanes-Oxley Act.


C.    Interests of Experts and Counsel

        Not applicable.

Item 8. Financial Information

A.    Consolidated Statements and Other Financial Information

        The financial statements filed as part of this annual report are filed under Item 18.

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Litigation

        From time to time, the Company becomes involved in various legal proceedings which it considers to be in the ordinary course of business. The vast majority of these proceedings involve intellectual property issues that often result in patent infringement suits brought by patent holders upon the filing of ANDA applications. The timing of these actions is mandated by statute and may result in a delay of FDA approval for such filed ANDAs until the final resolution of such actions or the expiry of 30 months, whichever occurs earlier. There are also ordinary course employment dismissal and related issues and other types of claims in which we routinely become involved but which individually and collectively are not material.

        At different times in the early part of 1998 the Company was sued in separate lawsuits by Bayer AG and Bayer Corporation (collectively "Bayer"), as well as by Pfizer, upon the filing by Biovail of separate ANDAs for generic versions of Procardia XL and Adalat CC. These actions make the usual, technical claims of infringement. We are vigorously defending these suits and are aggressively pursuing motions for summary judgment. We have denied the allegations and have pleaded affirmative defenses that the patents are invalid, have not been infringed and are unenforceable. We believe that Bayer/Pfizer's claims are without merit.

        On April 23, 1998, the Company filed a four-count complaint against Bayer and Pfizer seeking a declaratory judgment that their patent is invalid, unenforceable, and not infringed by our filing of the ANDAs. Biovail has also asserted that Bayer and Pfizer have violated anti-trust laws and have interfered with our prospective economic advantage. This action has been stayed until the conclusion of the patent infringement suits.

        In February, 2001, the Company commenced an action against Mylan and Pfizer claiming damages resulting from an agreement between Mylan and Pfizer that had the effect of blocking the timely marketing of the Company's generic version of Pfizer's 30 mg Procardia XL. Biovail's action alleges that in entering into, and implementing, such agreement Mylan and Pfizer contravened various statutory provisions and common law obligations. Discovery is currently underway for this action, however a timeline for a trial has not yet been established. While Biovail believes its action is meritorious, nevertheless, it is not possible, at this stage, to determine the quantum of damages that may be the subject of an award.

        Biovail commenced an action against Mylan with respect to Mylan's breach of contract relating to its supply product obligations to the Company. This legal proceeding was completed in January 2003. Biovail was successful in the action and was awarded judgment and interest.

        On May 11, 2001 the Company commenced an action against Lilly in which it was seeking substantial damages as a result of Lilly's voluntary recall of our product Keftab. Lilly is under contract with Biovail to manufacture and supply the product to Biovail for marketing in the United States. Lilly had forced a recall of the product because it had been unable to supply a stable product. In March 2003 Biovail settled its action with Lilly and received compensation for lost margin on Keftab sales and expenses incurred with respect to the Keftab recall.

        In February 2002 a plaintiff commenced an action against BPI alleging personal injuries arising from her use of Duravent, a product containing Phenylpropanolamine ("PPA") and formerly marketed by BPI. The Company believes that this claim is without merit and, in the event the case proceeds further, it will be vigorously defended. This action has been currently stayed.

        Several class action complaints have been filed against the Company in which these plaintiffs have alleged that Biovail has improperly impeded the approval of a generic form of Tiazac®. The Company has filed an Answer denying any impropriety or illegality. The Company believes that the complaints are totally without merit and that its actions were in accord with its rights as contained in the Hatch-Waxman Amendments and the law. Moreover, the Company's position is that none of its actions was responsible for the inability of that product to receive final marketing approval by the FDA since a generic version of Tiazac® did not receive FDA approval for a long period of time following the removal of all legal or regulatory impediments by the Company. Indeed, that product's failure to receive timely approval was due to its own scientific issues unrelated to any regulatory action taken by the Company. The Company will vigorously defend these actions. One such action has been voluntarily discontinued.

        Several consumer class action suits have been commenced jointly against Biovail and Elan and against Teva Pharmaceuticals USA, Inc. ("Teva") relating to an agreement between a Biovail subsidiary and Elan for Biovail's

93


in-licensing of Adalat® CC products from Elan. The agreement in question has since been dissolved as a result of a settlement agreement with the Federal Trade Commission. Biovail will vigorously defend these suits in due course. Biovail believes these suits are without merit since the delay in the marketing or out-licensing of the Adalat® CC product was due to manufacturing difficulties the Company encountered relating its Adalat® CC product and not because of any improper activity on its part.

        RhoxalPharma Inc. ("RhoxalPharma") has filed an abbreviated new drug submission ("ANDS") in Canada, seeking approval of a generic version of Tiazac®. In an attempt to comply with the Patented Medicines (Notice of Compliance) Regulations, RhoxalPharma has alleged to Health Canada that Canadian Patent No. 2,111,085, of which Biovail is the exclusive licensee, would not be infringed by the sale in Canada of RhoxalPharma's generic version of Tiazac®. RhoxalPharma served a notice of that allegation on Biovail. In response to that notice, Biovail instituted proceedings in the Federal Court of Canada in March 2002 to prohibit the issue of a Notice of Compliance (which is needed before RhoxalPharma can market its product in Canada) to RhoxalPharma until the merits of RhoxalPharma's allegations can be determined by the Federal Court. Until those proceedings are concluded, or until the expiry of 24 months after March 2002, whichever is earlier, no Notice of Compliance will be issued to RhoxalPharma.

        A Certificate of Non-Infringement was served by Torpharm, Inc. ("Torpharm") on Aventis in October 2001 in respect of its filed ANDA of a generic version of Cardizem® CD (120 mg, 180 mg and 300 mg) with the FDA. The patents against which Torpharm certified were acquired by the Company as part of the Cardizem® family of products acquisition. Biovail has determined that Torpharm's ANDA infringes its patents and a legal suit has been commenced against Torpharm, the effect of which was to trigger the Hatch-Waxman provisions. As a result, the FDA is statutorily and automatically precluded from granting approval to Torpharm until the earlier of 30 months after the filing of the legal suit, a final court decision of non-infringement or patent invalidity or a court's decision to abbreviate the 30-month stay.

        A Certificate of Non-Infringement was served by Torpharm on the Company in July 2002 in respect of Torpharm's filed ANDA for a generic version of Tiazac® as marketed in the United States. Biovail has made a determination that Torpharm's formulation infringes its Tiazac® patents and has therefore instituted a patent infringement suit against Torpharm, pursuant to the provisions of the Hatch-Waxman Act. As a result of Biovail's suit, the FDA is statutorily and automatically precluded from granting approval to Torpharm until the earlier of 30 months after the filing of the legal suit, a final court order of non-infringement or patent invalidity, or a court decision to abbreviate the 30-month stay.

        On November 22, 2002, the Company filed an action against Verum Pharmaceuticals Inc. ("Verum"), and a number of its officers and employees seeking injunctive relief and damages to enjoin these Defendants from illegally obtaining information from Biovail's computers, misappropriated Biovail's trade secrets, soliciting Biovail's employees, and competing unfairly with Biovail in violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and Defendants' contractual, statutory and common law obligations. On February 14, 2003 the Court granted the Company's injunctive motion and ordered Defendants to cease their employment with Verum and further ordered Verum to cease its operations. The Company has recently settled with one of the Officers of Verum; however it still intends to pursue its action for damages against Verum and the remaining personal defendants.

        Glaxo Group Limited and the Company entered into a Rights Agreement, dated December 1, 2002, wherein the Company acquired the exclusive marketing rights to Zyban® and Wellbutrin® SR in Canada. Novopharm Limited ("Novopharm") has filed an abbreviated new drug submission ("ANDS") in Canada, seeking approval of a generic version of Wellbutrin® SR. In an attempt to comply with the Patented Medicines (Notice of Compliance) Regulations, Novopharm has alleged to Health Canada that Canadian Patent Nos. 1,321,754, 2,142,320 and 2,168,364 are invalid, and alternatively, that they would not be infringed by the sale in Canada of Novopharm's generic version of Wellbutrin® SR. Novopharm served a Notice of Allegation on GlaxoSmithKline Inc. ("Glaxo") on February 18, 2003. The Company has the exclusive right to institute, and have carriage of, patent infringement proceedings and has determined that it will pursue a Notice of Application proceeding against Novopharm. Until the legal proceedings are concluded, or until the expiry of 24 months after March 31, 2003, thedate of the Notice, whichever is earlier, no Notice of Compliance will be issued to Novopharm.

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        A Certificate of Non-Infringement was served by KV Pharmaceutical Company ("KV") on the Company in March 2003, in respect of KV's filed ANDA for a generic version of Tiazac® 420 mg, exclusively, as marketed in the United States. The Company has determined that KV's formulation infringes the Tiazac® patent and a patent infringement suit has been commenced pursuant to the provisions of the Hatch-Waxman Act. The effect of this legal action is that KV's formulation cannot receive FDA's approval until the earlier of 30 months and a final decision of non-infringement or invalidity.

        On April 29, 2003, Jerry I. Treppel commenced an action naming as defendants the Company, Eugene Melnyk, Kenneth Cancellara, Michael Sitrick and Sitrick & Company, Inc. The Company has not been served with the Complaint, and as such the legal process has not yet begun. The Plaintiff has publicly indicated that he has not yet decided on whether to pursue this legal action and that he filed the Complaint merely to preserve his legal rights before the Statute of Limitations barred any such action. If and when the Company is served with the Complaint, the Company plans to defend the action vigorously as it believes it is without merit.

        For additional discussion of our legal proceedings, see note 21 to our consolidated financial statements included elsewhere in this annual report.


B.    Significant Changes

        Except as otherwise disclosed in this annual report, there has been no material adverse change in the financial position of the Company since the date of the audited consolidated financial statements.

Item 9.    The Offer and Listing Details

A.    Nature of Trading Market

        Our common shares are traded on the New York Stock Exchange ("NYSE") and on the Toronto Stock Exchange ("TSX") under the symbol "BVF". The last reported sales price of our common shares on May 9, 2003 on the NYSE was $41.14 and on the TSX was Cdn$57.50. The following table sets forth the high and low per share sales prices for our common shares on the NYSE and TSX for the periods indicated.

 
   Common Shares
 
   NYSE
   TSX
 
   High
$
   Low
$
   High
C$
   Low
C$
1998   12.38   5.11   17.55   8.00
1999   23.44   8.09   33.95   11.97
2000   45.38   19.13   69.50   27.50

2001
 
 
 
 
 
 
 
 
Quarter 1   47.70   29.03   73.00   46.50
Quarter 2   45.10   29.10   68.58   45.80
Quarter 3   48.45   37.70   74.50   59.13
Quarter 4   57.18   44.46   91.00   70.15

2002
 
 
 
 
 
 
 
 
Quarter 1   56.40   40.11   89.41   63.75
Quarter 2   52.05   26.00   81.99   39.42
Quarter 3   30.63   19.90   47.66   31.52
Quarter 4   35.22   23.52   54.91   37.40
November   34.14   30.25   53.90   47.59
December   35.22   25.01   54.91   38.62

2003
 
 
 
 
 
 
 
 
January   31.89   26.72   48.90   42.40
February   37.49   28.30   55.59   43.00
March   41.00   34.70   60.62   51.27
April   44.59   35.67   64.71   51.10
May (through to May 9, 2003)   41.23   35.10   57.50   49.80

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Market Price Volatility of Common Shares

        Market prices for the securities of pharmaceutical and biotechnology companies, including our securities, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as: fluctuations in our operating results, the aftermath of public announcements by us, concern as to safety of drugs, and general market conditions, can have an adverse effect on the market price of our Common Shares and other securities.


B.    Plan of Distribution

        Not applicable.


C.    Markets

        Our Common Shares, no par value (the "Common Shares") are traded on the NYSE and the TSX under the symbol "BVF".


D.    Selling Shareholders

        Not applicable.


E.    Dilution

        Not applicable.


F.     Expenses of the Issue

        Not applicable.

Item 10. Additional Information


A.    Share Capital

        Not applicable.


B.    Memorandum and Articles of Association

Articles of Amalgamation

        We are governed by our articles of amalgamation (the "Articles") under the OBCA and by our by-laws (the "By-laws"). Our Ontario corporation number is 1402077. Our articles provide that there are no restrictions on the business we may carry on or on the powers we may exercise. Companies incorporated under the OBCA are not required to include specific objects or purposes in their articles or by-laws.

Directors

        Subject to certain exceptions, including in respect of their own compensation, directors may not vote on matters in which they have a material interest. The directors are entitled to remuneration as shall from time to time be determined by the Board. The directors may exercise all of our powers to borrow money. These powers may be amended by resolution of the shareholders. Directors are not required to retire at a particular age. There is no requirement for the directors to hold shares.

Rights, Preferences and Dividends Attaching to Shares

        Any dividend unclaimed after a period of six years from the date on which such dividend is declared to be payable shall be forfeited and shall revert to us. Each of the holders of our common shares, as of the record date prior to a meeting, is entitled to attend and to cast one vote for each common share held at such annual and/or special meeting, including with respect to the re-election of directors. Subject to the provisions of our By-laws, all directors may, if still qualified to serve as directors, stand for re-election. Our board of directors is not replaced at staggered intervals.

96


        The holders of our common shares have the right to receive dividends if and when declared. On a distribution of assets on a winding-up, dissolution or other return of capital (subject to certain exceptions) the holders of our common shares shall have a right to receive their pro rata share of such distribution. Our shareholders have no liability to further capital calls as all shares issued and outstanding are fully paid and non-assessable. There are no sinking fund or redemption provisions in respect of our common shares.

        We are permitted under our Articles to issue Class A Shares on such terms and in such manner as the directors may determine. As of the date hereof, no Class A shares are issued and outstanding.

Action Necessary to Change the Rights of Shareholders

        The rights attaching to the different classes of shares may be varied by special resolution passed at a meeting of that class's shareholders.

Limitations on the Rights to Own Shares

        The Articles do not contain any limitations on the rights to own shares.

Annual and Special Meetings of Shareholders

        We are required to mail a notice of meeting and management information circular to registered shareholders not less than 21 days prior to the date of the meeting. Such materials must be filed concurrently with the applicable securities regulatory authorities in Canada and the U.S. Subject to certain provisions of the By-laws, a quorum of two shareholders in person or represented by proxy holding or representing by proxy not less than a prescribed percentage of the total number of issued and outstanding shares is required. Shareholders and their duly appointed proxies and corporate representatives are entitled to be admitted to our annual and/or special meetings.

Other Provisions of Articles and By-laws

        There are no provisions in the Articles or By-laws:


C.    Material Contracts

        Not applicable.


D.    Exchange Controls

        There are currently no limitations imposed by Canadian federal or provincial laws on the rights of non-resident or foreign owners of Canadian securities to hold or vote the securities held. There are also no such limitations imposed by the Articles and Bylaws with respect to our common shares.

Investment Canada Act

        Under the Investment Canada Act, the acquisition of control of a Canadian business by a "non-Canadian" will be subject to review by a government agency if it meets certain financial thresholds. A reviewable acquisition will not be allowed unless the responsible Minister finds that the investment is likely to be of "net benefit" to Canada.

        An acquisition of control by a non-Canadian other than a member of the World Trade Organization ("WTO") will be reviewable by the Investment Review Division of Industry Canada ("Investment Canada"), if the value of the assets of the Canadian business of which control is being acquired is (i) Cdn$5 million or more

97


in the case of a "direct" acquisition of a Canadian business; (ii) Cdn$50 million or more in the case of an "indirect" acquisition, unless the Canadian assets acquired constitute more than 50% of the asset value of all entities acquired, in which case the lower threshold of Cdn $5 million or more applies.

        These thresholds have been increased where the investor is a WTO member, including the U.S. or a WTO member-controlled company or a non-WTO investor, where the Canadian business that is subject of the acquisition is, prior to the acquisition, controlled by a WTO investor. A direct acquisition by a WTO investor or of a WTO investor-controlled business is reviewable only if it involves the direct acquisition of a Canadian business with assets of Cdn $223 million or more for the year 2003 (this figure is adjusted annually to reflect inflation). Indirect acquisitions by WTO investors or of WTO investor-controlled businesses are not reviewable, regardless of the size of the Canadian business acquired, unless the Canadian assets acquired constitute more than 50% of the value of all entities acquired, in which case the Cdn $223 million threshold may apply. However, Investment Canada expressed the view (in September 2002) that an indirect acquisition of control of a non-sensitive sector Canadian business does not require approval regardless of whether the value of the Canadian assets is more than 50% of the value of all of the assets that are acquired in the transaction.

        These increased thresholds applicable to WTO investors do not apply to the acquisition of control of a Canadian business that is engaged in certain sensitive areas such as uranium production, financial services, transportation or culture. In the case of the acquisition of control of a cultural business, the Minister of Canadian Heritage can elect to review the transaction even where it does not exceed the lower asset threshold tests above. Even if the transaction is not reviewable, a non-Canadian must still give notice to Investment Canada of the acquisition of control of a Canadian business within 30 days after its implementation.

Competition Act

        Under the Competition Act (Canada) (the "Competition Act"), certain transactions are subject to pre-merger notification requirements whereby notification of the transaction and specific information in connection therewith must be provided to the Commissioner of Competition (the "Commissioner"). Such transactions may not be completed until (i) the applicable statutory waiting periods namely 14 days or 42 days for a short-form or long-form filing, respectively have expired or been earlier terminated by the Commissioner or ii) the Commissioner has issued an advance ruling certificate or has waived the obligation to notify. Where the parties elect to file a short-form notification, the Commissioner may require a long-form filing, in which case the waiting period is 42 days from the time the parties submit their long form-filing.

        A proposed transaction is subject to pre-merger notification only if the parties to the transaction together with their affiliates have total assets in Canada or total revenues from sales in, from or into Canada that exceed Cdn $400 million in aggregate value. Having met this first threshold, the parties must then provide a pre-merger notification if 1) for an acquisition of assets in Canada, the aggregate value of the assets in Canada or the gross revenues from sales in or from Canada generated by these assets exceeds Cdn $50 million; or 2) in the case of an acquisition of shares of a company, as a result of the proposed acquisition, the person acquiring the shares, together with its affiliates, would own more than 20% (or, if the person making the acquisition already owns more than 20% or more of the voting shares of the target, then more than 50%) of the voting shares of a corporation that are publicly traded, or in the case of a company of which the shares are not publicly traded, the threshold is more than 35% of the voting shares (and more than 50% if the acquiror owns 35% or more of the voting shares of the subject company prior to making the acquisition) and the aggregate value of the assets owned by the target company or corporations controlled by that company in Canada or the revenues in or from Canada generated by those assets exceeds Cdn $50 million.

        Whether or not a pre-merger notification filing is required, the Commissioner may apply to the Competition Tribunal, a specialized tribunal empowered to deal with certain matters under the Competition Act, with respect to a "merger" (as defined in the Competition Act) and, if the Competition Tribunal finds that a merger is likely to prevent or lessen competition substantially it may order that the merger not proceed or, if the merger has been completed, order its dissolution or the disposition of some of the assets or shares involved.

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E.    Taxation

Canadian Federal Income Taxation

        The following discussion is a summary of the principal Canadian federal income tax considerations generally applicable to a holder of our Common Shares who, for the purposes of the Canadian Tax Act (as defined below), is or was neither resident nor deemed to be resident in Canada at any time while holding such Common Shares, deals at arm's length with the Company, holds such Common Shares as capital property, does not use or hold and is not deemed or otherwise considered to use or hold such Common Shares in carrying on a business in Canada and whose Common Shares do not otherwise constitute "taxable Canadian property" (a "Non-Resident Shareholder"). Common Shares of a non-resident of Canada will generally not constitute "taxable Canadian property" unless either (a) at any time during the period of 60 months immediately preceding the disposition of such Common Shares by such non-resident, 25% or more of the issued shares of any class or series of the capital stock of the Company (and, in the view of the Canada Customs and Revenue Agency, taking into account any rights to acquire shares) were owned by the non-resident, by persons with whom the non-resident did not deal at arm's length, or any combination thereof, or (b) the non-resident's Common Shares are otherwise deemed to be "taxable Canadian property".

        This summary is based upon the current provisions of the Income Tax Act (Canada) (the "Canadian Tax Act"), the regulations thereunder, the Canada-United States Income Tax Convention, 1980, and the Company's understanding of the current administrative and assessing policies and practices published by the Canada Customs and Revenue Agency. This summary also takes into account all specific proposals to amend the Canadian Tax Act and the regulations thereunder publicly announced by the Minister of Finance (Canada) prior to the date hereof. This summary does not otherwise take into account or anticipate changes in the law, whether by way of judicial, governmental or legislative decision or action, nor does it take into account provincial, territorial or foreign tax legislation or considerations.

        This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice generally or to any particular holder. Holders should consult their own tax advisors with respect to their particular tax positions. A holder that is, as defined under the Canadian Tax Act, a "specified financial institution", or is otherwise a "financial institution" subject to special provisions of the Canadian Tax Act applicable to "mark-to-market property", or a holder that is an insurer that carries on an insurance business in Canada and elsewhere, should consult its own tax advisors as the following summary does not apply to such a holder.

        No tax will generally be payable under the Canadian Tax Act on any capital gain realized by a Non-Resident Shareholder on the disposition of such Non-Resident Shareholder's Common Shares.

        Subject to the provisions of an applicable income tax treaty, dividends (including deemed dividends, which could arise upon, among other circumstances, the disposition of Common Shares to the Company) paid or credited by the Company on the Common Shares to a Non-Resident Shareholder will generally be subject to non-resident withholding tax under the Canadian Tax Act, at a rate of 25% of the amounts paid or credited. Under the provisions of the Canada-United States Income Tax Convention, 1980, as amended (the "Convention"), the rate of withholding tax on dividends paid by the Company to a Non-Resident Shareholder that is a resident of the United States for the purposes of the Convention and is the beneficial owner of such dividends is generally reduced to (a) 5% if the Non-Resident Shareholder is a company which owns at least 10% of the Company's voting stock or (b) 15% in all other cases.

U.S. Federal Income Taxation

        The following discussion is a summary of certain material U.S. federal income tax consequences of the ownership and disposition of common shares to U.S. Holders (as defined below) who hold common shares as capital assets. This discussion is based upon laws, regulations, rulings and decisions currently in effect, all of which are subject to change, retroactively or prospectively.

99


        The discussion is for general information only and may not apply to certain categories of shareholders subject to special treatment under the Internal Revenue Code of 1986, as amended (the "Code"), such as Non-U.S. Holders (as defined below), holders that are passthrough entities or investors in passthrough entities, dealers or traders in securities or currencies, banks, insurance companies, traders who elect to mark-to-market their securities, persons whose "functional currency" is not the U.S. dollar, tax-exempt entities, and persons that hold common shares as a position in a straddle or as part of a "hedging," "integrated, "constructive sale" or "conversion" transaction. Moreover, the discussion summarizes only federal income tax consequences and does not address any other U.S. federal tax consequences or any state, local or other tax consequences. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON SHARES TO THEM, INCLUDING ANY U.S. FEDERAL, STATE, LOCAL OR OTHER TAX CONSEQUENCES (INCLUDING ANY TAX RETURN FILING OR OTHER TAX REPORTING REQUIREMENTS) OF THE OWNERSHIP AND DISPOSITION OF COMMON SHARES.

        For purposes of the following discussion, the term "U.S. Holder" means a beneficial owner of common shares that is, for U.S. federal income tax purposes, a U.S. citizen or resident, a corporation created or organized in or under the laws of the United States or any political subdivision thereof, an estate the income of which is includable in gross income for U.S. income tax purposes regardless of its source, or a trust if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person. A "Non-U.S. Holder" means a beneficial owner of common shares that is, for U.S. federal income tax purposes, a nonresident alien or a corporation, estate or trust that is not a U.S. Holder.

        Subject to the following discussion of special rules applicable to "PFICs," U.S. Holders generally will treat the gross amount of any dividends, if any, paid by the Company, without reduction for Canadian withholding taxes, as ordinary taxable income for U.S. federal income tax purposes. In certain circumstances, however, U.S. Holders may be eligible to receive a foreign tax credit for the Canadian withholding taxes and, in the case of a corporate U.S. Holder owning 10% or more of the voting shares of the Company, for a portion of the Canadian taxes paid by the Company itself. Dividends paid by the Company, if any, generally will not qualify for the dividends received deduction otherwise available to corporate U.S. Holders.

        The amount of any dividend paid in Canadian dollars will equal the U.S. dollar value of the Canadian dollars received calculated by reference to the exchange rate in effect on the date the dividend is distributed regardless of whether the Canadian dollars are converted into U.S. dollars. If the Canadian dollars received as a dividend are not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the Canadian dollars equal to its U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Canadian dollars will be treated as ordinary income or loss.

        It is possible that the Company is, or at some future time will be, at least 50% owned by United States persons. Dividends paid by a foreign corporation that is at least 50% owned by United States persons may be treated as United States source income (rather than foreign source income) for foreign tax credit purposes to the extent the foreign corporation has more than an insignificant amount of United States source income. The effect of this rule may be to treat a portion of any dividends paid by the Company as United States source income. The Code permits a U.S. Holder entitled to benefits under the Canada-U.S. Income Tax Treaty to elect to treat any Company dividends as foreign source income for foreign tax credit limitation purposes if the dividend income is separated from other income items for purposes of calculating the U.S. Holder's foreign tax credit. U.S. Holders should consult their own tax advisors about the desirability of making, and the method of making, such an election.

Sale, Exchange or Other Disposition

        Subject to the following discussion of special rules applicable to "PFICs," U.S. Holders will generally recognize capital gain or loss on the sale, exchange or other disposition of common shares. Such gain or loss will be long-term capital gain or loss if the common shares have been held for more than one year. Any gain or loss

100


recognized by a U.S. Holder will generally be treated as United States source gain or loss. The deduction of capital losses is subject to limitations.

        A "passive foreign investment company" (a "PFIC") is any foreign corporation if, after the application of certain "look-through" rules, (i) at least 75% of its gross income is "passive income" or (ii) at least 50% of the average value of its assets is attributable to assets that produce passive income or are held for the production of passive income. The determination as to PFIC status is made annually. If a U.S. Holder is treated as owning PFIC stock, the U.S. Holder will be subject to special rules generally intended to eliminate the benefit of the deferral of U.S. federal income tax that results from investing in a foreign corporation that does not distribute all its earnings currently. These rules may adversely affect the tax treatment to a U.S. Holder of dividends paid by the Company and of sales, exchanges and other dispositions of the Company common shares, and may result in other adverse U.S. federal income tax consequences.

        The Company believes that it is not currently a PFIC and does not expect to become a PFIC in the future. However, there can be no assurance that the Internal Revenue Service will not successfully challenge the Company's position or that the Company will not become a PFIC at some future time as a result of changes in its assets, income or business operations.

        In general, information reporting requirements will apply to dividends in respect of the common shares and the proceeds received on the disposition of common shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients (such as corporations), and backup withholding may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number or is otherwise subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder's U.S. federal income tax liability.


F.     Dividends and Paying Agents

        We have not paid cash dividends on our Common Shares, and at this time we intend to continue this policy for the foreseeable future in order to retain earnings for the development and growth of business. Our dividend policy will be reviewed periodically depending on our financial position, capital requirements, general business conditions and on other factors.


G.    Statements by Experts

        Not applicable.


H.    Documents on Display

        We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

        We are required to file reports and other information with the securities commissions in all provinces of Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronics Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the SEC's electronic document gathering and retrieval system.

        We "incorporate by reference" information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is

101


an important part of this Annual Report on Form 20-F and more recent information automatically updates and supersedes more dated information contained or incorporated by reference in this Annual Report on Form 20-F.

        As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements to shareholder. We have included in this report certain information disclosed in our Proxy Statement prepared under Canadian securities rules.

        We will provide without charge to each person, including any beneficial owner, to whom a copy of this Annual Report has been delivered, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this Annual Report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: Biovail Corporation, 7150 Mississauga Road, Mississauga, Ontario, Canada, L5N 8M5, Attention: Investor Relations, telephone number (905) 286-3000.

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I.     Subsidiary Information

        At December 31, 2002, Biovail had the following principal subsidiaries

Company
   Jurisdiction of Incorporation
   Nature of Business
   Group Share %
   Registered Office
Biovail Americas Corp.   Delaware   Holding company   100   170 Southport Drive, Morrisville NC 27560
Biovail Holdings Ltd.   Barbados   Holding company   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados
Biovail Insurance Inc.   Barbados   Insurance company   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados
Biovail International Holdings Limited   Ireland   Holding company   100   Units 1&2
70 Heather Road
Sandyford Industrial Estate
Dublin 18
Biovail International Limited   Ireland   Holding company   100   Units 1&2
70 Heather Road
Sandyford Industrial Estate
Dublin 18
Biovail International S.a.r.l.   Luxembourg   Holding company   100   38-40, rue Sainte Zithe
L-2763 Luxembourg
Biovail Ireland Limited   Ireland   Holding company   100   Units 1&2
70 Heather Road
Sandyford Industrial Estate
Dublin 18
Biovail Laboratories Incorporated   Barbados   Manufacture, development, licensing of pharmaceutical products   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados
Biovail Pharmaceuticals, Inc.   Delaware   Sales and distribution of pharmaceutical products   100   170 Southport Drive, Morrisville NC 27560
Biovail SA   Switzerland   Development and licensing of pharmaceutical products   100   c/o Treuhand- und Revisionsgesellschaft Zug, Baarerstrasse 112, CH-6302 Zug, Switzerland
Biovail Technologies (Ireland) Limited   Ireland   Development of pharmaceutical products   100   Units 1&2
70 Heather Road
Sandyford Industrial Estate
Dublin 18
Biovail Technologies Ltd.   Delaware   Manufacture and development of pharmaceutical products   100   3701 Concorde Parkway, Chantilly, Virginia 20151
Biovail Technologies West Ltd.   Ontario   Holding company   100   7150 Mississauga Road
Mississauga Ontario L5N 8M5
Forzair Limited   Ireland   Holding company   100   Units 1&2
70 Heather Road
Sandyford Industrial Estate
Dublin 18
Hythe Property Inc.   Barbados   Owns real property   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados
Nutravail Technologies Inc.   Delaware   Manufacture, development, sales and distribution of nutraceutical products   100   14790 Flint Lee Road, Chantilly VA 20151
Pharma Pass Limited   Barbados   Development of pharmaceutical products   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados
Pharmaceutical Technologies Corporation   Barbados   Development of pharmaceutical products   100   Chelston Park, Bldg 2,
Collymore Rock,
St. Michael, Barbados

103

Item 11.    Quantitiative and Qualitative Disclosures About Market Risk

        Information relating to quantitative and qualitative disclosures about market risk is detailed in Item 5.

Item 12.    Description of Securities Other Than Equity Securities

        Not applicable.


PART II

Item 13.    Defaults, Dividend Arrearages and Delinquencies

        None.

Item 14.    Material Modification to the Rights of Security Holders and Use of Proceeds

        On December 31, 1999 we filed Articles of Amendment to effect a subdivision of our common shares on the basis of two common shares for every one common share held and an increase in our authorized capital from 120,000,000 common shares to an unlimited number of common shares. An amendment was also made to our current by-law to change the quorum requirements for shareholders meetings from two shareholders holding 51% of the outstanding shares to two shareholders holding 25% of the outstanding shares.

        On October 10, 2000, we filed Articles of Amendment to effect a subdivision of our common shares on the basis of two common shares for every one common shares.

Item 15.    Controls and Procedures

Item 16.    [Reserved]


PART III

Item 17.    Financial Statements

        The Company has elected to provide financial statements pursuant to Item 18.

Item 18.    Financial Statements

104



INDEX TO FINANCIAL STATEMENTS

 
   Page
BIOVAIL CORPORATION — Financial Statements completed in accordance with U.S. GAAP    
  Management Report   F-2
  Auditors' Report   F-3
  Consolidated Balance Sheets as at December 31, 2002 and 2001   F-4
  Consolidated Statements of Income (Loss) for the years ended December 31, 2002, 2001 and 2000   F-5
  Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000   F-6
  Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000   F-8
  Notes to the Consolidated Financial Statements   F-9
BIOVAIL CORPORATION — Financial Statements completed in accordance with Canadian GAAP    
  Management Report   F-42
  Auditors' Report   F-43
  Consolidated Balance Sheets as at December 31, 2002 and 2001   F-44
  Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000   F-45
  Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000   F-46
  Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000   F-48
  Notes to the Consolidated Financial Statements   F-49

F-1


MANAGEMENT REPORT

        The Company's management is responsible for preparing the accompanying consolidated financial statements in conformity with United States generally accepted accounting principles ("GAAP"). In preparing these consolidated financial statements, management selects appropriate accounting policies and uses its judgment and best estimates to report events and transactions as they occur. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial data included throughout this Annual Report is prepared on a basis consistent with that of the consolidated financial statements.

        The consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments and estimates of the expected effects of current events and transactions with appropriate consideration to materiality. In addition, in preparing the financial information management must interpret the requirements described above, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. The MD&A also includes information regarding the estimated impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.

        The Company maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded and that transactions are executed and recorded in accordance with the Company's policies for doing business. This system is supported by written policies and procedures for key business activities; the hiring of qualified, competent staff; and by a continuous planning and monitoring program.

        Ernst & Young LLP has been engaged by the Company's shareholders to audit the consolidated financial statements. During the course of their audit, Ernst & Young LLP reviewed the Company's system of internal controls to the extent necessary to render their opinion on the consolidated financial statements.

        The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out the responsibility principally through its Audit Committee. The members of the Audit Committee are outside Directors. The Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the external auditors. Ernst & Young LLP has full and free access to the Audit Committee.

        Management acknowledges its responsibility to provide financial information that is representative of the Company's operations, is consistent and reliable, and is relevant for the informed evaluation of the Company's activities.

        The Company's Chief Executive Officer and Chief Financial Officer will be certifying the Company's annual disclosure document filed with the U.S. Securities and Exchange Commission (Form 20-F) as required by the new Sarbanes-Oxley Act in the United States.

/s/    EUGENE N. MELNYK   /s/    BRIAN H. CROMBIE

Eugene N. Melnyk
 
Brian H. Crombie
Chairman of the Board and
Chief Executive Officer		   Senior Vice President and
Chief Financial Officer

F-2


AUDITORS' REPORT

To the Shareholders of
Biovail Corporation

        We have audited the consolidated balance sheets of Biovail Corporation as at December 31, 2002 and 2001 and the consolidated statements of income (loss), shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

        In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in accordance with United States generally accepted accounting principles.

        As discussed in note 2 to the consolidated financial statements, during 2002 the Company changed its method of accounting for goodwill and intangible assets.

        On April 9, 2003, we reported separately to the shareholders of Biovail Corporation on the consolidated financial statements for the same periods, prepared in accordance with Canadian generally accepted accounting principles.

Toronto, Canada   /s/    ERNST & YOUNG LLP
April 9, 2003   Chartered Accountants

F-3


BIOVAIL CORPORATION

CONSOLIDATED BALANCE SHEETS

In accordance with U.S. generally accepted accounting principles

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

 
   As at December 31
  
 
   2002
   2001
  
ASSETS              
Current              
Cash and cash equivalents   $ 56,080   $ 434,891  
Accounts receivable     190,980     96,556  
Inventories     53,047     38,506  
Deposits and prepaid expenses     21,524     6,643  
   
 
 
      321,631     576,596  
   
 
 
Long-term investments     79,324     2,355  
Property, plant and equipment, net     136,784     85,581  
Goodwill, net     102,212     96,477  
Intangible assets, net     1,080,503     556,360  
Other assets, net     113,350     14,114  
   
 
 
    $ 1,833,804   $ 1,331,483  
   
 
 
LIABILITIES              
Current              
Accounts payable   $ 71,641   $ 31,811  
Accrued liabilities     95,289     59,989  
Income taxes payable     35,691     17,318  
Deferred revenue     19,947     27,030  
Current portion of long-term obligations     122,590     12,592  
   
 
 
      345,158     148,740  
   
 
 
Deferred revenue     18,200     23,100  
Long-term obligations     624,760     33,569  
   
 
 
      988,118     205,409  
   
 
 
SHAREHOLDERS' EQUITY              
Common shares, no par value, unlimited shares authorized, 158,120,144 and 157,496,407 issued and outstanding at December 31, 2002 and 2001, respectively     1,433,624     1,407,507  
Stock options outstanding     4,856     5,067  
Executive Stock Purchase Plan loans     (9,988 )   (9,988 )
Warrants outstanding     —     6,221  
Deficit     (580,413 )   (280,004 )
Accumulated other comprehensive loss     (2,393 )   (2,729 )
   
 
 
      845,686     1,126,074  
   
 
 
    $ 1,833,804   $ 1,331,483  
   
 
 

Commitments and contingencies (notes 3, 20, 23, 24 and 25)

The accompanying notes are an integral part of the consolidated financial statements.

On behalf of the Board:

 
    

/s/    EUGENE N. MELNYK
Eugene N. Melnyk
Chairman of the Board and
Chief Executive Officer
 
/s/    PAUL W. HADDY
Paul W. Haddy
Director

F-4


BIOVAIL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

In accordance with U.S. generally accepted accounting principles

([All dollar amounts expressed in thousands of U.S. dollars, except per share data)

 
   Years ended December 31
  
 
   2002
   2001
   2000
  
REVENUE                    
Product sales   $ 645,986   $ 521,154   $ 217,004  
Research and development     28,425     14,596     66,834  
Co-promotion, royalty and licensing     113,614     47,513     25,332  
   
 
 
 
      788,025     583,263     309,170  
   
 
 
 
EXPENSES                    
Cost of goods sold     164,706     125,995     67,980  
Research and development     52,150     51,017     51,709  
Selling, general and administrative     165,697     110,100     51,857  
Amortization     71,499     44,513     7,232  
Write-down of assets     31,944     80,482     —  
Acquired research and development     167,745     —     208,424  
   
 
 
 
      653,741     412,107     387,202  
   
 
 
 
Operating income (loss)     134,284     171,156     (78,032 )
Interest income     3,608     2,742     23,693  
Interest expense     (32,005 )   (36,242 )   (20,738 )
Other income     3,408     —     —  
Debt conversion premiums     —     (34,923 )   —  
   
 
 
 
Income (loss) before provision for income taxes     109,295     102,733     (75,077 )
Provision for income taxes     21,500     15,285     9,360  
   
 
 
 
Income (loss) before extraordinary item and cumulative effect of change in accounting principle     87,795     87,448     (84,437 )
Extraordinary item     —     —     (20,039 )
   
 
 
 
Income (loss) before cumulative effect of change in accounting principle     87,795     87,448     (104,476 )
Cumulative effect of change in accounting principle     —     —     (43,500 )
   
 
 
 
Net income (loss)   $ 87,795     87,448     (147,976 )
   
 
 
 
Basic earnings (loss) per share                    
Income (loss) before extraordinary item and cumulative effect of change in accounting principle   $ 0.58   $ 0.64   $ (0.66 )
Extraordinary item   $ —   $ —   $ (0.16 )
Cumulative effect of change in accounting principle   $ —   $ —   $ (0.34 )
   
 
 
 
Net income (loss)   $ 0.58   $ 0.64   $ (1.16 )
   
 
 
 
Diluted earnings (loss) per share                    
Income (loss) before extraordinary item and cumulative effect of change in accounting principle   $ 0.55   $ 0.58   $ (0.66 )
Extraordinary item   $ —   $ —   $ (0.16 )
Cumulative effect of change in accounting principle   $ —   $ —   $ (0.34 )
   
 
 
 
Net income (loss)   $ 0.55   $ 0.58   $ (1.16 )
   
 
 
 
Weighted average number of common shares outstanding (000s)                    
Basic     151,960     136,928     128,824  
Diluted     160,463     150,690     143,512  
   
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

F-5


BIOVAIL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

In accordance with U.S. generally accepted accounting principles

(All dollar amounts are expressed in thousands of U.S. dollars)

 
   Common shares
    
    
    
    
    
    
    
  
 
   Shares (000s)
   Amount
   Stock options outstanding
   Executive Stock Purchase Plan loans
   Warrants outstanding
   Warrant subscription receivable
   Deficit
   Accumulated other comprehensive income (loss)
   Total
  
Balance, January 1, 2000   124,392   $ 363,579   $ 10,383   $ —   $ 8,244   $ (2,287 ) $ (113,843 ) $ 1,260   $ 267,336  
Issued on the exercise of stock options   2,436     17,027     (3,302 )   —     —     —     —     —     13,725  
Issued under Employee Stock Purchase Plan   5     150     —     —     —     —     —     —     150  
Issued pursuant to equity offering   4,000     101,125     —     —     —     —     —     —     101,125  
Issue costs   —     (5,782 )   —     —     —     —     —     —     (5,782 )
Issued on conversion of Convertible Subordinated Preferred Equivalent Debentures   —     15     —     —     —     —     —     —     15  
Issued on exercise of warrants   601     6,342     —     —     (332 )   —     —     —     6,010  
Issue of non-employee options   —     —     590     —     —     —     —     —     590  
Fuisz Technologies Ltd.:                                                      
  Additional shares issued on acquisition   27     386     —     —     —     —     —     —     386  
DJ Pharma, Inc.:                                                      
  Fair value of unvested options granted to employees on acquisition   —     —     7,480     —     —     —     —     —     7,480  
Unearned compensation relating to future service period at acquisition date   —     —     (5,721 )   —     —     —     —     —     (5,721 )
Compensation cost for employee stock options   —     —     461     —     —     —     —     —     461  
Collection of warrant subscription receivable   —     —     —     —     —     2,287     —     —     2,287  
   
 
 
 
 
 
 
 
 
 
    131,461     482,842     9,891     —     7,912     —     (113,843 )   1,260     388,062  
   
 
 
 
 
 
 
 
 
 
Net loss   —     —     —     —     —     —     (147,976 )   —     (147,976 )

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment   —     —     —     —     —     —     —     (1,735 )   (1,735 )
Unrealized holding loss on long-term investments   —     —     —     —     —     —     —     (893 )   (893 )
   
 
 
 
 
 
 
 
 
 
Other comprehensive loss   —     —     —     —     —     —     —     (2,628 )   (2,628 )
   
 
 
 
 
 
 
 
 
 
Comprehensive loss                                                   (150,604 )
Balance, December 31, 2000   131,461   $ 482,842   $ 9,891   $ —   $ 7,912   $ —   $ (261,819 ) $ (1,368 ) $ 237,458  
   
 
 
 
 
 
 
 
 
 

F-6

 
   Common shares
    
    
    
    
    
    
    
  
 
   Shares (000s)
   Amount
   Stock options outstanding
   Executive Stock Purchase Plan loans
   Warrants outstanding
   Warrant subscription receivable
   Deficit
   Accumulated other comprehensive income (loss)
   Total
  
Issued on the exercise of stock options   2,906   $ 33,650   $ (4,826 ) $ —   $ —   $ —   $ —   $ —   $ 28,824  
Issued under Employee Stock Purchase Plan   6     280     —     —     —     —     —     —     280  
Cancelled under stock repurchase program   (2,871 )   (14,354 )   —     —     —     —     (105,633 )   —     (119,987 )
Issued pursuant to equity offering   12,500     587,500     —     —     —     —     —     —     587,500  
Issue costs   —     (27,454 )   —     —     —     —     —     —     (27,454 )
Issued on surrender and redemption of Convertible Subordinated Preferred Equivalent Debentures   10,433     314,259     —     —     —     —     —     —     314,259  
Issued on exercise of warrants   3,061     30,784     —     —     (1,691 )   —     —     —     29,093  
Cancellation of non-employee options   —     —     (735 )   —     —     —     —     —     (735 )
Compensation cost for employee stock options   —     —     737     —     —     —     —     —     737  
Executive Stock Purchase Plan loans   —     —     —     (9,988 )   —     —     —     —     (9,988 )
   
 
 
 
 
 
 
 
 
 
    157,496     1,407,507     5,067     (9,988 )   6,221     —     (367,452 )   (1,368 )   1,039,987  
   
 
 
 
 
 
 
 
 
 
Net income   —     —     —     —     —     —     87,448     —     87,448  

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment   —     —     —     —     —     —     —     (2,254 )   (2,254 )
Unrealized holding loss on long-term investments   —     —     —     —     —     —     —     (72 )   (72 )
Reclassification adjustment for loss on long-term investment included in net income   —     —     —     —     —     —     —     965     965  
   
 
 
 
 
 
 
 
 
 
Other comprehensive loss   —     —     —     —     —     —     —     (1,361 )   (1,361 )
   
 
 
 
 
 
 
 
 
 
Comprehensive income                                                   86,087  
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2001   157,496     1,407,507     5,067     (9,988 )   6,221     —     (280,004 )   (2,729 )   1,126,074  
   
 
 
 
 
 
 
 
 
 
Issued on the exercise of stock options   2,197     21,506     (2,210 )   —     —     —     —     —     19,296  
Issued under Employee Stock Purchase Plan   17     463     —     —     —     —     —     —     463  
Cancelled under stock repurchase program   (12,872 )   (114,896 )   —     —     —     —     (388,204 )   —     (503,100 )
Issued on exercise of warrants   11,282     119,044     —     —     (6,221 )   —     —     —     112,823  
Compensation cost for employee stock options   —     —     1,999     —     —     —     —     —     1,999  
   
 
 
 
 
 
 
 
 
 
    158,120     1,433,624     4,856     (9,988 )   —     —     (668,208 )   (2,729 )   757,555  
   
 
 
 
 
 
 
 
 
 
Net income   —     —     —     —     —     —     87,795     —     87,795  

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment   —     —     —     —     —     —     —     336     336  
   
 
 
 
 
 
 
 
 
 
Other comprehensive income   —     —     —     —     —     —     —     336     336  
   
 
 
 
 
 
 
 
 
 
Comprehensive income                                                   88,131  
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2002   158,120   $ 1,433,624   $ 4,856   $ (9,988 ) $ —   $ —   $ (580,413 ) $ (2,393 ) $ 845,686  
   
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

F-7


BIOVAIL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

In accordance with U.S. generally accepted accounting principles
(All dollar amounts expressed in thousands of U.S. dollars)

 
   Years ended December 31
  
 
   2002
   2001
   2000
  
CASH FLOWS FROM OPERATING ACTIVITIES                    
Net income (loss)   $ 87,795   $ 87,448   $ (147,976 )

Add (deduct) items not involving cash
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization     82,368     55,287     20,988  
Amortization of deferred financing costs     2,267     1,580     538  
Amortization of discounts on long-term obligations     5,329     10,999     —  
Compensation cost for employee stock options     1,999     737     461  
Write-down of assets     31,944     80,482     —  
Acquired research and development     167,745     —     208,424  
Debt conversion premiums, net of cash paid     —     23,574     —  
Interest paid through the issuance of common shares     —     1,250     —  
Extraordinary item     —     —     20,039  
Cumulative effect of change in accounting principle     —     —     43,500  
Other     (3,408 )   1,450     3,750  
   
 
 
 
      376,039     262,807     149,724  
Net change in non-cash operating items     (41,935 )   21,314     (47,230 )
   
 
 
 
Cash provided by operating activities     334,104     284,121     102,494  
   
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
Acquisitions of intangible assets     (375,385 )   (27,445 )   (27,752 )
Acquisitions of businesses, net of cash acquired     (240,581 )   —     (622,145 )
Acquisitions of long-term investments     (85,119 )   (866 )   (2,454 )
Additions to property, plant and equipment     (61,382 )   (44,436 )   (15,845 )
Increase in loan receivable     (30,000 )   —     —  
Proceeds on reduction in intangible assets     —     15,000     —  
Maturity of short-term investments, net     —     —     65,893  
Proceeds from sale of assets held for disposal     —     —     20,000  
   
 
 
 
Cash used in investing activities     (792,467 )   (57,747 )   (582,303 )
   
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
Issuance of common shares, net of issue costs     19,615     589,150     109,604  
Repurchase of common shares     (503,100 )   (119,987 )   —  
Proceeds from exercise of warrants     112,823     29,093     6,010  
Collection of warrant subscription receivable     —     —     2,287  
Advance of Executive Stock Purchase Plan loans     —     (9,988 )   —  
Issuance of Senior Subordinated Notes, net of financing costs     384,280     —     —  
Advances (repayments) under revolving term credit facility, including financing costs     107,895     (211,300 )   207,000  
Repayments of other long-term obligations     (41,980 )   (193,366 )   (45,602 )
Issuance of Convertible Subordinated Preferred Equivalent Debentures, net of financing costs     —     —     288,772  
Repurchase of U.S. Dollar Senior Notes     —     —     (141,017 )
   
 
 
 
Cash provided by financing activities     79,533     83,602     427,054  
   
 
 
 
Effect of exchange rate changes on cash and cash equivalents     19     (229 )   (187 )
   
 
 
 
Net increase (decrease) in cash and cash equivalents     (378,811 )   309,747     (52,942 )
Cash and cash equivalents, beginning of year     434,891     125,144     178,086  
   
 
 
 
Cash and cash equivalents, end of year   $ 56,080   $ 434,891   $ 125,144  
   
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

F-8


BIOVAIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with U.S. generally accepted accounting principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)

1.     GOVERNING STATUTE AND NATURE OF OPERATIONS

2.     SIGNIFICANT ACCOUNTING POLICIES

F-9

Buildings   25 years
Machinery and equipment   5-10 years
Other equipment   3-10 years
Leasehold improvements   Term of lease
 
   2002
   2001
   2000
  
Net income (loss) as reported   $ 87,795   $ 87,448   $ (147,976 )
Goodwill amortization     —     5,583     2,850  
Workforce amortization     —     1,071     421  
   
 
 
 
Adjusted net income (loss)   $ 87,795   $ 94,102   $ (144,705 )
   
 
 
 
Basic earnings (loss) per share                    
Net income (loss) as reported   $ 0.58   $ 0.64   $ (1.16 )
Goodwill amortization   $ —   $ 0.04   $ 0.02  
Workforce amortization   $ —   $ 0.01   $ —  
   
 
 
 
Adjusted net income (loss)   $ 0.58   $ 0.69   $ (1.14 )
   
 
 
 
Diluted earnings (loss) per share                    
Net income (loss) as reported   $ 0.55   $ 0.58   $ (1.16 )
Goodwill amortization   $ —   $ 0.04   $ 0.02  
Workforce amortization   $ —   $ 0.01   $ —  
   
 
 
 
Adjusted net income (loss)   $ 0.55   $ 0.63   $ (1.14 )
   
 
 
 

F-10

Brand names   20 years
Product rights   8-20 years
Core technology   15 years
Revolving term credit facility   3 years
Senior Subordinated Notes   8 years
Convertible Subordinated Preferred Equivalent Debentures   25 years

F-11

F-12

 
   2002
   2001
   2000
  
Net income (loss) as reported   $ 87,795   $ 87,448   $ (147,976 )
Total stock-based compensation expense determined under fair value based method     14,254     12,216     16,680  
   
 
 
 
Pro forma net income (loss)     73,541     75,232     (164,656 )
   
 
 
 
Basic earnings (loss) per share                    
As reported   $ 0.58   $ 0.64   $ (1.16 )
Pro forma   $ 0.48   $ 0.55   $ (1.28 )
Diluted earnings (loss) per share                    
As reported   $ 0.55   $ 0.58   $ (1.16 )
Pro forma   $ 0.46   $ 0.50   $ (1.28 )
 
   2002
   2001
   2000
  
Expected option life (years)   3.8   4.0   4.2  
Volatility   46.8 % 36.9 % 41.1 %
Risk-free interest rate   4.5 % 5.2 % 5.8 %

F-13

3.     ACQUISITIONS

 
   Wellbutrin® and Zyban®
   Vasotec® and Vaseretic®
   Teveten®
   Zovirax
   Total
Acquired assets                              
Prepaid expenses   $ 2,609   $ —   $ —   $ —   $ 2,609
Product rights     45,000     79,500     94,340     173,364     392,204
Trademarks     24,349     165,804     —     —     190,153
   
 
 
 
 
    $ 71,958   $ 245,304   $ 94,340   $ 173,364   $ 584,966
   
 
 
 
 
Consideration                              
Cash paid, net of gross profit on acquired assets   $ 1,997   $ 145,684   $ 94,340   $ 133,364   $ 375,385
Long-term obligations     69,961     99,620     —     40,000     209,581
   
 
 
 
 
    $ 71,958   $ 245,304   $ 94,340   $ 173,364   $ 584,966
   
 
 
 
 

F-14

F-15

F-16

 
   Pharma Tech
   Pharma Pass
   Total
  
Acquired assets                    
Acquired research and development   $ 60,558   $ 107,187   $ 167,745  
Product rights     5,000     63,800     68,800  
Core technology     —     7,700     7,700  
Current liabilities     (3,664 )   —     (3,664 )
   
 
 
 
Cash paid, net of cash acquired   $ 61,894   $ 178,687   $ 240,581  
   
 
 
 

F-17

 
   2002
   2001
Total revenue   $ 778,492   $ 579,815
Net income     105,741     5,411
Basic earnings per share   $ 0.70   $ 0.04
Diluted earnings per share   $ 0.66   $ 0.04

F-18

 
   2002
   2001
  
Total revenue   $ 794,827   $ 587,408  
Net income (loss)     198,004     (19,672 )
Basic earnings (loss) per share   $ 1.30   $ (0.14 )
Diluted earnings (loss) per share   $ 1.23   $ (0.14 )

F-19

 
   Intelligent Polymers
   Cardizem®
   DJ Pharma
   Total
  
Acquired research and development   $ 208,424   $ —   $ —   $ 208,424  
Current assets     3,287     —     14,705     17,992  
Equipment     —     —     672     672  
Deferred compensation trust fund     —     —     8,268     8,268  
Assembled workforce     —     —     5,200     5,200  
Brand names and product rights     5,000     406,070     130,500     541,570  
Goodwill     —     —     70,497     70,497  
Current liabilities     (14,270 )   —     (22,844 )   (37,114 )
Deferred compensation obligation     —     —     (8,268 )   (8,268 )
Debt assumed     —     —     (34,169 )   (34,169 )
   
 
 
 
 
    $ 202,441   $ 406,070   $ 164,561   $ 773,072  
   
 
 
 
 
Consideration                          
Cash paid, net of cash acquired   $ 202,441   $ 239,652   $ 162,802   $ 604,895  
Issue of non-employee options     —     590     —     590  
Fair value of options granted to employees     —     —     1,759     1,759  
Accrued acquisition costs     —     4,000     —     4,000  
Cardizem® obligation     —     161,828     —     161,828  
   
 
 
 
 
    $ 202,441   $ 406,070   $ 164,561   $ 773,072  
   
 
 
 
 
 
   Purchase price
Before October 1, 2000   $ 39.06
On or after October 1, 2000 and on or before September 30, 2001     48.83
On or after October 1, 2001 and on or before September 30, 2002     61.04

F-20

F-21

F-22

4.     CASH AND CASH EQUIVALENTS

 
   2002
   2001
Cash and bank certificates of deposit   $ 39,111   $ 235,038
Money market funds and corporate debt securities     16,969     70,729
Canadian and U.S. government securities     —     129,124
   
 
    $ 56,080   $ 434,891
   
 

F-23

5.     ACCOUNTS RECEIVABLE

 
   2002
   2001
Trade (net of allowance for doubtful accounts of $3,440,000 and $7,085,000
at December 31, 2002 and 2001, respectively)		   $ 141,308   $ 86,325
Royalties     30,104     6,313
Other     19,568     3,918
   
 
    $ 190,980   $ 96,556
   
 

6.     INVENTORIES

 
   2002
   2001
Raw materials   $ 14,949   $ 12,110
Work in process     11,901     5,818
Finished goods     26,197     20,578
   
 
    $ 53,047   $ 38,506
   
 

7.     LONG-TERM INVESTMENTS

 
   2002
   2001
Ethypharm S.A.   $ 67,802   $ —
DepoMed, Inc.     6,277     —
Other     5,245     2,355
   
 
    $ 79,324   $ 2,355
   
 

F-24

8.     PROPERTY, PLANT AND EQUIPMENT

 
   2002
   2001
 
   Cost
   Accumulated depreciation
   Cost
   Accumulated depreciation
Land   $ 10,477   $ —   $ 7,357   $ —
Buildings     59,341     6,959     27,154     5,116
Machinery and equipment     62,736     16,920     43,225     14,168
Other equipment and leasehold improvements     42,401     14,292     37,603     10,474
   
 
 
 
      174,955   $ 38,171     115,339   $ 29,758
         
       
Less accumulated depreciation     38,171           29,758      
   
       
     
    $ 136,784         $ 85,581      
   
       
     

9.     INTANGIBLE ASSETS

 
   2002
   2001
 
   Cost
   Accumulated amortization
   Cost
   Accumulated amortization
Brand names   $ 596,223   $ 47,794   $ 406,070   $ 20,932
Product rights     571,105     55,531     175,296     19,342
Core technology     18,885     2,385     11,185     1,639
Workforce     —     —     7,241     1,519
   
 
 
 
      1,186,213   $ 105,710     599,792   $ 43,432
           
       
Less accumulated amortization     105,710           43,432      
   
       
     
    $ 1,080,503         $ 556,360      
   
       
     
2003   $ 100,000
2004     62,000
2005     62,000
2006     62,000
2007     62,000
   

F-25

10.   OTHER ASSETS

 
   2002
   2001
Deferred financing costs   $ 17,348   $ 4,300
Less accumulated amortization     3,536     1,260
   
 
      13,812     3,040
Zovirax distribution agreement     40,656     —
Loan receivable     30,000     —
Interest rate swap contracts     18,647     —
Deferred compensation trust fund     5,681     6,520
Long-term receivable     4,554     4,554
   
 
    $ 113,350   $ 14,114
   
 

F-26

11.   ACCRUED LIABILITIES

 
   2002
   2001
Product returns, rebates and chargebacks   $ 42,976   $ 27,945
Employee costs     12,690     9,708
Interest     9,512     2
Inventory     7,974     1,638
Cardizem® transitional expenses     5,394     9,725
Other     16,743     10,971
   
 
    $ 95,289   $ 59,989
   
 

12.   DEFERRED REVENUE

 
   2002
   2001
Up-front research and development fees   $ 13,000   $ 33,289
Up-front licensing fees and other     21,559     14,022
Customer prepayments     3,588     2,819
   
 
      38,147     50,130
Less current portion     19,947     27,030
   
 
    $ 18,200   $ 23,100
   
 

F-27

13.   LONG-TERM OBLIGATIONS

 
   2002
   2001
Senior Subordinated Notes   $ 400,000   $ —
Unamortized discount     (2,646 )   —
Fair value adjustment     15,239     —
   
 
      412,593     —
Revolving term credit facility     110,000     —
Zovirax obligation     80,656     —
Wellbutrin® obligation     69,961     —
Vasotec® obligation     67,942     —
Adalat obligation     —     38,626
Deferred compensation     6,198     7,535
   
 
      747,350     46,161
Less current portion     122,590     12,592
   
 
    $ 624,760   $ 33,569
   
 
Year
   Percentage of principal amount
  
2006   103.938 %
2007   101.969  
2008 and thereafter   100.000  

F-28

F-29

2003   $ 122,590
2004     46,034
2005     124,428
2006     24,361
2007     11,146
Thereafter     418,791
   
    $ 747,350
   

14.   SHAREHOLDERS' EQUITY

F-30

 
   Options (000s)
   Weighted average exercise price
Outstanding balance, December 31, 1999   10,447   $ 10.81
Granted   2,345     27.06
Exercised   (2,436 )   5.79
Forfeited   (307 )   18.29
   
 
Outstanding balance, December 31, 2000   10,049     15.58
Granted   314     43.03
Exercised   (2,906 )   9.92
Forfeited   (1,204 )   17.69
   
 
Outstanding balance, December 31, 2001   6,253     18.53
Granted   2,068     36.84
Exercised   (2,197 )   8.71
Forfeited   (199 )   28.48
   
 
Outstanding balance, December 31, 2002   5,925   $ 28.23
   
 
Weighted average fair value of stock options granted during the period       $ 13.58
       
Range of exercise prices
   Outstanding (000s)
   Weighted average remaining contractual life (years)
   Weighted average exercise price
   Exercisable (000s)
   Weighted average exercise price
$  0.81 – $3.52 1   138   7.0   $ 3.05   93   $ 2.89
    7.59 – 10.50   601   1.1     9.35   601     9.35
  12.77 – 17.50   206   2.0     17.37   206     17.37
  22.50 – 31.00   2,887   4.2     25.59   1,883     23.10
  36.00 – 45.00   2,093   4.4     40.01   741     38.94
   
 
 
 
 
    5,925   4.0   $ 28.23   3,524   $ 23.22
   
 
 
 
 

F-31

15.   WRITE-DOWN OF ASSETS

F-32

16.   DEBT CONVERSION PREMIUMS

17.   INCOME TAXES

 
   2002
   2001
   2000
Current                  
Domestic   $ 1,250   $ 3,670   $ 800
Foreign     20,250     10,165     4,810
   
 
 
      21,500     13,835     5,610
Deferred                  
Domestic     —     —     —
Foreign     —     1,450     3,750
   
 
 
      —     1,450     3,750
   
 
 
    $ 21,500   $ 15,285   $ 9,360
   
 
 

F-33

 
   2002
   2001
   2000
  
Income (loss) before provision for income taxes   $ 109,295   $ 102,733   $ (75,077 )
Expected Canadian statutory rate     39.42 %   42.12 %   44.39 %
   
 
 
 
Expected provision for (recovery of) income taxes     43,084     43,271     (33,327 )

Non-deductible amounts
 
 
 
 
 
 
 
 
 
 
Amortization expense     26,130     14,600     1,265  
Acquired research and development     66,125     —     92,519  

Foreign tax rate differences
 
 
(126,862
)
 
(100,619
)
 
(58,379
)
Unrecognized income tax benefit of losses     9,347     24,524     5,922  
Increase in valuation allowance     —     32,236     —  
Other     3,676     1,273     1,360  
   
 
 
 
    $ 21,500   $ 15,285   $ 9,360  
   
 
 
 
 
   2002
   2001
  
Deferred tax assets              
Tax loss carryforwards   $ 68,639   $ 40,315  
Scientific Research and Experimental Development pool     17,544     13,881  
Investment tax credits     15,948     12,802  
Deferred financing and share issue costs     15,573     19,602  
Reserves     14,601     4,372  
Plant, equipment and technology     4,819     4,547  
Intangible assets     —     2,889  
Other     3,378     4,062  
   
 
 
Total deferred tax assets     140,502     102,470  
Less valuation allowance     (116,521 )   (98,685 )
   
 
 
Net deferred tax assets     23,981     3,785  
   
 
 

Deferred tax liabilities
 
 
 
 
 
 
 
Intangible assets     20,958     3,785  
Other     3,023     —  
   
 
 
Total deferred tax liabilities     23,981     3,785  
   
 
 
Net deferred income taxes   $ —   $ —  
   
 
 

F-34

18.   EXTRAORDINARY ITEM

19.   EARNINGS (LOSS) PER SHARE

 
   2002
   2001
   2000
  
Net income (loss)   $ 87,795   $ 87,448   $ (147,976 )
   
 
 
 
Basic weighted average number of common shares outstanding (000s)     151,960     136,928     128,824  
Dilutive effect of warrants and stock options (000s)     8,503     13,762     —  
   
 
 
 
Adjusted weighted average number of common shares outstanding (000s)     160,463     150,690     128,824  
   
 
 
 
Basic earnings (loss) per share   $ 0.58   $ 0.64   $ (1.16 )
Diluted earnings (loss) per share   $ 0.55   $ 0.58   $ (1.16 )
   
 
 
 
 
   2002
   2001
   2000
Basic weighted average number of common shares outstanding (000s)   151,960   136,928   128,824
Dilutive effect of warrants (000s)   5,992   10,183   9,657
Dilutive effect of stock options (000s)   2,511   3,579   5,031
   
 
 
Diluted weighted average number of common shares outstanding (000s)   160,463   150,690   143,512
   
 
 

F-35

20.   OPERATING LEASES

2003   $ 6,667
2004     5,820
2005     4,835
2006     2,700
2007     1,346
Thereafter     1,107

21.   CASH FLOW INFORMATION

 
   2002
   2001
   2000
  
Accounts receivable   $ (93,241 ) $ 4,778   $ (35,950 )
Inventories     (14,643 )   (14,341 )   (3,886 )
Deposits and prepaid expenses     (12,265 )   (1,296 )   (1,673 )
Accounts payable     35,717     1,138     (5,432 )
Accrued liabilities     36,863     24,489     (9,840 )
Income taxes payable     17,618     10,649     3,779  
Deferred revenue     (11,984 )   (4,103 )   5,772  
   
 
 
 
    $ (41,935 ) $ 21,314   $ (47,230 )
   
 
 
 
 
   2002
   2001
   2000
  
Long-term obligation related to the acquisition of Vasotec® and Vaseretic®   $ (99,620 ) $ —   $ —  
Long-term obligation related to the amendments to the Zovirax distribution agreement     (80,656 )   —     —  
Long-term obligation related to the acquisition of Wellbutrin® and Zyban®     (69,921 )   —     —  
Issuance of common shares on the surrender and redemption of Debentures     —     (314,259 )   —  
Long-term obligation related to the acquisition of Cardizem®     —     —     (161,828 )
Accrued acquisition costs related to Cardizem®     —     —     (4,000 )
Long-term obligation related to the Adalat Agreement     —     —     (58,090 )
   
 
 
 
    $ (250,197 ) $ (314,259 ) $ (223,918 )
   
 
 
 
 
   2002
   2001
   2000
Interest paid   $ 14,899   $ 22,837   $ 20,546
Income taxes paid     5,063     4,380     1,889
Debt conversion premium paid     —     11,241     —

22.   RELATED PARTY TRANSACTIONS

F-36

23.   LEGAL PROCEEDINGS

F-37

24.   CO-PROMOTION ARRANGEMENTS

F-38

25.   RESEARCH AND DEVELOPMENT COLLABORATIONS

F-39

26.   SEGMENTED INFORMATION AND MAJOR CUSTOMERS

 
   Revenue 1
   Long-lived assets 2
 
   2002
   2001
   2000
   2002
   2001
   2000
Canada   $ 62,848   $ 44,705   $ 21,110   $ 94,519   $ 44,139   $ 49,919
United States and Puerto Rico     713,615     528,722     226,559     271,122     231,763     298,345
Barbados and other Caribbean     9,533     3,448     53,224     1,039,868     475,381     496,853
Other countries     2,029     6,388     8,277     27,340     1,249     140
   
 
 
 
 
 
    $ 788,025   $ 583,263   $ 309,170   $ 1,432,849   $ 752,532   $ 845,257
   
 
 
 
 
 

F-40

 
   Percentage of total revenue
  
 
   2002
   2001
   2000
  
Customer A   12 % 16 % 30 %
Customer B   23   31   30  
Customer C   11   9   5  
Customer D   —   —   17  

27.   COMPARATIVE FIGURES

F-41


BIOVAIL CORPORATION


AUDITORS' REPORT

To the Shareholders of
 Biovail Corporation

        We have audited the consolidated balance sheets of Biovail Corporation as at December 31, 2002 and 2001 and the consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

        In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in accordance with Canadian generally accepted accounting principles.

        On April 9, 2003, we reported separately to the shareholders of Biovail Corporation on the consolidated financial statements for the same periods, prepared in accordance with United States generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
Chartered Accountants

Toronto, Canada,

April 9, 2003

F-43


BIOVAIL CORPORATION

CONSOLIDATED BALANCE SHEETS

In accordance with Canadian generally accepted accounting principles
(All dollar amounts expressed in thousands of U.S. dollars)

 
   As at December 31
  
 
   2002
$
   2001
$
  
ASSETS          
Current          
Cash and cash equivalents (note 4)   56,080   434,891  
Accounts receivable (note 5)   190,980   96,556  
Inventories (note 6)   53,047   38,506  
Deposits and prepaid expenses   21,524   6,643  
   
 
 
    321,631   576,596  
   
 
 
Long-term investments (note 7)   79,324   2,355  
Property, plant and equipment, net (note 8)   136,784   85,581  
Goodwill, net (note 2)   104,827   101,521  
Intangible assets, net (notes 2 and 9)   1,500,397   862,859  
Other assets, net (note 10)   94,703   14,114  
   
 
 
    2,237,666   1,643,026  
   
 
 
LIABILITIES          
Current          
Accounts payable   71,641   31,811  
Accrued liabilities (note 11)   95,289   59,989  
Income taxes payable   35,691   17,318  
Deferred revenue (note 12)   19,947   27,030  
Current portion of long-term obligations (note 13)   122,590   12,592  
   
 
 
    345,158   148,740  
   
 
 
Deferred revenue (note 12)   18,200   23,100  
Future income taxes (notes 2 and 17)   —   12,200  
Long-term obligations (note 13)   609,521   33,569  
   
 
 
    972,879   217,609  
   
 
 
SHAREHOLDERS' EQUITY          
Common shares (note 14)   1,455,548   1,430,457  
Stock options outstanding   4,206   3,391  
Executive Stock Purchase Plan loans (note 14)   (9,988 ) (9,988 )
Warrants outstanding (note 14)   —   6,221  
Deficit   (182,586 ) (1,935 )
Cumulative translation adjustment   (2,393 ) (2,729 )
   
 
 
    1,264,787   1,425,417  
   
 
 
    2,237,666   1,643,026  
   
 
 
Commitments and contingencies (notes 3, 20, 23, 24 and 25)          

On behalf of the Board:


 
 
 
     

/s/ EUGENE N. MELYNK
Chairman of the Board and Chief Executive Officer
 
/s/ PAUL W. HADDY
Director

The accompanying notes are an integral part of the consolidated financial statements.

F-44


BIOVAIL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

In accordance with Canadian generally accepted accounting principles
(All dollar amounts expressed in thousands of U.S. dollars, except per share data)

 
   Years ended December 31
  
 
   2002
$
   2001
$
   2000
$
  
REVENUE                    
Product sales     645,986     521,154     217,004  
Research and development     28,425     14,596     69,121  
Co-promotion, royalty and licensing     113,614     47,513     25,332  
   
 
 
 
      788,025     583,263     311,457  
   
 
 
 
EXPENSES                    
Cost of goods sold     164,706     125,995     67,980  
Research and development     52,150     51,017     51,709  
Selling, general and administrative     165,697     111,362     59,317  
Amortization     125,849     98,097     16,228  
Write-down of assets (note 15)     31,944     80,482     —  
   
 
 
 
      540,346     466,953     195,234  
   
 
 
 
Operating income     247,679     116,310     116,223  
Interest income     3,608     2,742     23,693  
Interest expense (note 13)     (32,005 )   (21,060 )   (4,629 )
Premium paid on early extinguishment of U.S. Dollar Senior Notes (note 16)     —     —     (20,039 )
   
 
 
 
Income before provision for (recovery of) income taxes     219,282     97,992     115,248  
Provision for (recovery of) income taxes (note 17)     11,729     (25,998 )   5,795  
   
 
 
 
Net income     207,553     123,990     109,453  
Interest on Convertible Subordinated Preferred Equivalent Debentures (note 18)     —     (28,436 )   (28,290 )
Debt conversion premiums (note 18)     —     (10,001 )   —  
   
 
 
 
Net income attributable to common shareholders     207,553     85,553     81,163  
   
 
 
 
Earnings per share(note 19)                    
Basic   $ 1.37   $ 0.62   $ 0.63  
Diluted   $ 1.29   $ 0.57   $ 0.57  
   
 
 
 
Weighted average number of common shares outstanding (000s) (note 19)                    
Basic     151,960     136,928     128,824  
Diluted     160,463     150,690     143,512  
   
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

F-45


BIOVAIL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

In accordance with Canadian generally accepted accounting principles
(All dollar amounts expressed in thousands of U.S. dollars)

 
    
   Common shares
    
    
    
    
    
    
  
 
   Convertible Subordinated Preferred Equivalent Debentures
$
   Shares (000s)
   Amount
$
   Stock options outstanding
$
   Executive Stock Purchase Plan loans
$
   Warrants outstanding
$
   Retained earnings (deficit)
$
   Cumulative translation adjustment
$
   Total
$
  
Balance, January 1, 2000   —   124,392   368,538   —   —   8,244   13,752   1,260   391,794  
Change in accounting policy for income taxes (note 2)   —   —   —   —   —   —   (51,848 ) —   (51,848 )
Issued on the exercise of stock options (note 14)   —   2,436   13,725   —   —   —   —   —   13,725  
Issued under Employee Stock Purchase Plan (note 14)   —   5   150   —   —   —   —   —   150  
Issued pursuant to equity offering (note 14)   —   4,000   101,125   —   —   —   —   —   101,125  
Issue costs (note 14)   —   —   (5,782 ) —   —   —   —   —   (5,782 )
Convertible Subordinated Preferred Equivalent Debentures (note 18)                                      
    Issued pursuant to offering   300,000   —   —   —   —   —   —   —   300,000  
    Financing costs   (11,228 ) —   —   —   —   —   —   —   (11,228 )
    Accretion of principal and interest components   28,290   —   —   —   —   —   (28,290 ) —   —  
    Interest paid   (15,750 ) —   —   —   —   —   —   —   (15,750 )
    Conversion   (15 ) —   15   —   —   —   —   —   —  
Issued on exercise of warrants (note 14)   —   601   6,342   —   —   (332 ) —   —   6,010  
Issue of non-employee options   —   —   —   590   —   —   —   —   590  
Fuisz Technologies Ltd. (note 3)                                      
  Additional shares issued on acquisition   —   27   386   —   —   —   —   —   386  
DJ Pharma, Inc. (note 3)                                      
  Fair value of unvested options granted to employees on acquisition   —   —   —   7,480   —   —   —   —   7,480  
  Unearned compensation relating to future service period at acquisition date   —   —   —   (5,721 ) —   —   —   —   (5,721 )
  Compensation cost for employee stock options   —   —   —   461   —   —   —   —   461  
Net income   —   —   —   —   —   —   109,453   —   109,453  
Foreign currency translation adjustment   —   —   —   —   —   —   —   (1,735 ) (1,735 )
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2000   301,297   131,461   484,499   2,810   —   7,912   43,067   (475 ) 839,110  
                                       

F-46

Issued on the exercise of stock options (note 14)   —   2,906   29,507   (683 ) —   —   —   —   28,824  
Issued under Employee Stock Purchase Plan (note 14)   —   6   280   —   —   —   —   —   280  
Cancelled under stock repurchase program (note 14)   —   (2,871 ) (14,354 ) —   —   —   (105,633 ) —   (119,987 )
Issued pursuant to equity offering (note 14)   —   12,500   587,500   —   —   —   —   —   587,500  
Issue costs (note 14)   —   —   (27,454 ) —   —   —   —   —   (27,454 )
Convertible Subordinated Preferred Equivalent Debentures (note 18)                                      
  Accretion of principal and interest components   28,436   —   —   —   —   —   (28,436 ) —   —  
  Interest paid   (13,612 ) —   —   —   —   —   —   —   (13,612 )
  Issued on surrender and redemption   (316,013 ) 10,433   339,695   —   —   —   (34,923 ) —   (11,241 )
  Redeemed for cash   (108 ) —   —   —   —   —   —   —   (108 )
Issued on exercise of warrants (note 14)   —   3,061   30,784   —   —   (1,691 ) —   —   29,093  
Cancellation of non-employee options   —   —   —   (735 ) —   —   —   —   (735 )
Compensation cost for employee stock options   —   —   —   1,999   —   —   —   —   1,999  
Executive Stock Purchase Plan loans (note 14)   —   —   —   —   (9,988 ) —   —   —   (9,988 )
Net income   —   —   —   —   —   —   123,990   —   123,990  
Foreign currency translation adjustment   —   —   —   —   —   —   —   (2,254 ) (2,254 )
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2001   —   157,496   1,430,457   3,391   (9,988 ) 6,221   (1,935 ) (2,729 ) 1,425,417  
Issued on the exercise of stock options (note 14)   —   2,197   20,480   (1,184 ) —   —   —   —   19,296  
Issued under Employee Stock Purchase Plan (note 14)   —   17   463   —   —   —   —   —   463  
Cancelled under stock repurchase program (note 14)   —   (12,872 ) (114,896 ) —   —   —   (388,204 ) —   (503,100 )
Issued on exercise of warrants (note 14)   —   11,282   119,044   —   —   (6,221 ) —   —   112,823  
Compensation cost for employee stock options   —   —   —   1,999   —   —   —   —   1,999  
Net income   —   —   —   —   —   —   207,553   —   207,553  
Foreign currency translation adjustment   —   —   —   —   —   —   —   336   336  
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2002   —   158,120   1,455,548   4,206   (9,988 ) —   (182,586 ) (2,393 ) 1,264,787  
   
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

F-47


BIOVAIL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

In accordance with Canadian generally accepted accounting principles
(All dollar amounts expressed in thousands of U.S. dollars)

 
   Years ended December 31
  
 
   2002
$
   2001
$
   2000
$
  
CASH FLOWS FROM OPERATING ACTIVITIES              
Net income   207,553   123,990   109,453  
Add (deduct) items not involving cash              
Depreciation and amortization (notes 8 and 9)   136,718   108,871   29,984  
Amortization of deferred financing costs (note 10)   2,267   1,260   179  
Amortization of discounts on long-term obligations (note 13)   5,329   10,999   —  
Compensation cost for employee stock options   1,999   1,999   461  
Write-down of assets (note 15)   31,944   80,482   —  
Future income taxes (note 17)   (9,771 ) (39,833 ) 185  
Premium paid on early extinguishment of U.S. Dollar Senior Notes (note 16)   —   —   20,039  
   
 
 
 
    376,039   287,768   160,301  
Net change in non-cash operating items (note 21)   (41,935 ) 21,314   (47,230 )
   
 
 
 
Cash provided by operating activities   334,104   309,082   113,071  
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES              
Acquisitions of intangible assets (note 3)   (375,385 ) (27,445 ) (27,752 )
Acquisitions of businesses, net of cash acquired (note 3)   (240,581 ) —   (614,685 )
Acquisitions of long-term investments (note 7)   (85,119 ) (866 ) (2,454 )
Additions to property, plant and equipment   (61,382 ) (44,436 ) (15,845 )
Increase in loan receivable (note 10)   (30,000 ) —   —  
Proceeds on reduction in intangible assets (note 3)   —   15,000   —  
Maturity of short-term investments, net   —   —   65,893  
Proceeds from sale of assets held for disposal (note 3)   —   —   20,000  
   
 
 
 
Cash used in investing activities   (792,467 ) (57,747 ) (574,843 )
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES              
Issuance of common shares, net of issue costs (note 14)   19,615   589,150   109,604  
Repurchase of common shares (note 14)   (503,100 ) (119,987 ) —  
Proceeds from exercise of warrants (note 14)   112,823   29,093   6,010  
Advance of Executive Stock Purchase Plan loans (note 14)   —   (9,988 ) —  
Issuance of Senior Subordinated Notes, net of financing costs (note 13)   384,280   —   —  
Advances (repayments) under revolving term credit facility, including financing costs (note 13)   107,895   (211,300 ) 207,000  
Repayments of other long-term obligations (note 13)   (41,980 ) (193,366 ) (45,602 )
Interest paid on Convertible Subordinated Preferred Equivalent Debentures (note 18)   —   (13,612 ) (15,750 )
Payment on redemption of Convertible Subordinated Preferred Equivalent Debentures (note 18)   —   (11,349 ) —  
Issuance of Convertible Subordinated Preferred Equivalent Debentures, net of financing costs (note 18)   —   —   288,772  
Repurchase of U.S. Dollar Senior Notes (note 16)   —   —   (141,017 )
   
 
 
 
Cash provided by financing activities   79,533   58,641   409,017  
   
 
 
 
Effect of exchange rate changes on cash and cash equivalents   19   (229 ) (187 )
   
 
 
 
Net increase (decrease) in cash and cash equivalents   (378,811 ) 309,747   (52,942 )
Cash and cash equivalents, beginning of year   434,891   125,144   178,086  
   
 
 
 
Cash and cash equivalents, end of year   56,080   434,891   125,144  
   
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

F-48

BIOVAIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with Canadian generally accepted accounting principles
(All tabular dollar amounts expressed in thousands of U.S. dollars, except per share data)

1.     GOVERNING STATUTE AND NATURE OF OPERATIONS

2.     SIGNIFICANT ACCOUNTING POLICIES

F-49

Buildings   25 years
Machinery and equipment   5-10 years
Other equipment   3-10 years
Leasehold improvements   Term of lease
 
   2002
$
   2001
$
   2000
$
Net income attributable to common shareholders as reported   207,553   85,553   81,163
Goodwill amortization   —   5,816   2,058
Workforce amortization, net of tax   —   612   247
   
 
 
Adjusted net income attributable to common shareholders   207,553   91,981   83,468
   
 
 

Basic earnings per share
 
 
 
 
 
 
Net income attributable to common shareholders as reported   1.37   0.62   0.63
Goodwill amortization   —   0.04   0.02
Workforce amortization, net of tax   —   —   —
   
 
 
Adjusted net income attributable to common shareholders   1.37   0.66   0.65
   
 
 

Diluted earnings per share
 
 
 
 
 
 
Net income attributable to common shareholders as reported   1.29   0.57   0.57
Goodwill amortization   —   0.04   0.01
Workforce amortization, net of tax   —   —   —
   
 
 
Adjusted net income attributable to common shareholders   1.29   0.61   0.58
   
 
 

F-50

Brand names   20 years
Product rights   8-20 years
Acquired research and development   5-15 years
Core technology   15 years
Revolving term credit facility   3 years
Senior Subordinated Notes   8 years

F-51

F-52

3.     ACQUISITIONS

 
   Wellbutrin® and Zyban®
$
   Vasotec® and Vaseretic®
$
   Teveten®
$
   Zovirax
$
   Total
$
Acquired assets                    
Prepaid expenses   2,609   —   —   —   2,609
Product rights   45,000   79,500   94,340   173,364   392,204
Trademarks   24,349   165,804   —   —   190,153
   
 
 
 
 
    71,958   245,304   94,340   173,364   584,966
   
 
 
 
 
Consideration                    
Cash paid, net of gross profit on acquired assets   1,997   145,684   94,340   133,364   375,385
Long-term obligations   69,961   99,620   —   40,000   209,581
   
 
 
 
 
    71,958   245,304   94,340   173,364   584,966
   
 
 
 
 

F-53

F-54

F-55

 
   Pharma Tech
$
   Pharma Pass
$
   Total
$
  
Acquired assets              
Product rights   5,000   63,800   68,800  
Acquired research and development   60,558   107,187   167,745  
Core technology   —   7,700   7,700  
Current liabilities   (3,664 ) —   (3,664 )
   
 
 
 
Cash paid, net of cash acquired   61,894   178,687   240,581  
   
 
 
 

F-56

 
   2002
$
   2001
$
Total revenue   778,492   579,815
Net income attributable to common shareholders   152,829   51,962
Basic earnings per share   1.01   0.38
Diluted earnings per share   0.95   0.34

F-57

 
   2002
$
   2001
$
Total revenue   794,827   587,408
Net income attributable to common shareholders   190,138   64,183
Basic earnings per share   1.25   0.47
Diluted earnings per share   1.18   0.43

F-58

 
   Intelligent Polymers
$
   Cardizem®
$
   DJ Pharma
$
   Total
$
  
Current assets   3,287   —   14,705   17,992  
Equipment   —   —   672   672  
Deferred compensation trust fund   —   —   8,268   8,268  
Assembled workforce   —   —   5,200   5,200  
Brand names and product rights   5,000   406,070   130,500   541,570  
Acquired research and development   208,424   —   —   208,424  
Goodwill   —   —   70,497   70,497  
Current liabilities   (14,270 ) —   (22,844 ) (37,114 )
Deferred compensation obligation   —   —   (8,268 ) (8,268 )
Debt assumed   —   —   (34,169 ) (34,169 )
   
 
 
 
 
    202,441   406,070   164,561   773,072  
   
 
 
 
 
Consideration                  
Cash paid, net of cash acquired   202,441   239,652   162,802   604,895  
Issue of non-employee options   —   590   —   590  
Fair value of options granted to employees   —   —   1,759   1,759  
Accrued acquisition costs   —   4,000   —   4,000  
Cardizem® obligation   —   161,828   —   161,828  
   
 
 
 
 
    202,441   406,070   164,561   773,072  
   
 
 
 
 

F-59

 
   Purchase price
$
Before October 1, 2000   39.06
On or after October 1, 2000 and on or before September 30, 2001   48.83
On or after October 1, 2001 and on or before September 30, 2002   61.04

F-60

F-61

F-62

4.     CASH AND CASH EQUIVALENTS

 
   2002
$
   2001
$
Cash and bank certificates of deposit   39,111   235,038
Money market funds and corporate debt securities   16,969   70,729
Canadian and U.S. government securities   —   129,124
   
 
    56,080   434,891
   
 

5.     ACCOUNTS RECEIVABLE

 
   2002
$
   2001
$
Trade (net of allowance for doubtful accounts of $3,440,000 and $7,085,000 at December 31, 2002 and 2001, respectively)   141,308   86,325
Royalties   30,104   6,313
Other   19,568   3,918
   
 
    190,980   96,556
   
 

6.     INVENTORIES

 
   2002
$
   2001
$
Raw materials   14,949   12,110
Work in process   11,901   5,818
Finished goods   26,197   20,578
   
 
    53,047   38,506
   
 

F-63

7.     LONG-TERM INVESTMENTS

 
   2002
$
   2001
$
Ethypharm S.A.   67,802   —
DepoMed, Inc.   6,277   —
Other   5,245   2,355
   
 
    79,324   2,355
   
 

8.     PROPERTY, PLANT AND EQUIPMENT

 
   2002
   2001
 
   Cost
$
   Accumulated depreciation
$
   Cost
$
   Accumulated depreciation
$
Land   10,477   —   7,357   —
Buildings   59,341   6,959   27,154   5,116
Machinery and equipment   62,736   16,920   43,225   14,168
Other equipment and leasehold improvements   42,401   14,292   37,603   10,474
   
 
 
 
    174,955   38,171   115,339   29,758
       
     
Less accumulated depreciation   38,171       29,758    
   
     
   
    136,784       85,581    
   
     
   

F-64

9.     INTANGIBLE ASSETS

 
   2002
   2001
 
   Cost
$
   Accumulated amortization
$
   Cost
$
   Accumulated amortization
$
Brand names   596,223   47,794   406,070   20,932
Product rights   596,105   61,156   200,296   22,467
Acquired research and development   513,639   113,120   345,894   61,270
Core technology   18,885   2,385   11,185   1,639
Workforce   —   —   7,241   1,519
   
 
 
 
    1,724,852   224,455   970,686   107,827
       
     
Less accumulated amortization   224,455       107,827    
   
     
   
    1,500,397       862,859    
   
     
   

10.   OTHER ASSETS

 
   2002
$
   2001
$
Deferred financing costs   17,348   4,300
Less accumulated amortization   3,536   1,260
   
 
    13,812   3,040
Zovirax distribution agreement   40,656   —
Loan receivable   30,000   —
Deferred compensation trust fund   5,681   6,520
Long-term receivable   4,554   4,554
   
 
    94,703   14,114
   
 

F-65

11.   ACCRUED LIABILITIES

 
   2002
$
   2001
$
Product returns, rebates and chargebacks   42,976   27,945
Employee costs   12,690   9,708
Interest   9,512   2
Inventory   7,974   1,638
Cardizem® transitional expenses   5,394   9,725
Other   16,743   10,971
   
 
    95,289   59,989
   
 

12.   DEFERRED REVENUE

 
   2002
$
   2001
$
Up-front research and development fees   13,000   33,289
Up-front licensing fees and other   21,559   14,022
Customer prepayments   3,588   2,819
   
 
    38,147   50,130
Less current portion   19,947   27,030
   
 
    18,200   23,100
   
 

F-66

13.   LONG-TERM OBLIGATIONS

 
   2002
$
   2001
$
Senior Subordinated Notes   400,000   —
Unamortized discount   (2,646 ) —
   
 
    397,354   —
Revolving term credit facility   110,000   —
Zovirax obligation   80,656   —
Wellbutrin® obligation   69,961   —
Vasotec® obligation   67,942   —
Adalat obligation   —   38,626
Deferred compensation   6,198   7,535
   
 
    732,111   46,161
Less current portion   122,590   12,592
   
 
    609,521   33,569
   
 
 
   Percentage of principal amount
2006   103.938%
2007   101.969%
2008 and thereafter   100.000%

F-67

F-68

 
   $
2003   122,590
2004   46,034
2005   124,428
2006   24,361
2007   11,146
Thereafter   403,552
   
    732,111
   

14.   SHAREHOLDERS' EQUITY

F-69

 
   Options
(000s)
   Weighted average exercise price
$
Outstanding balance, December 31, 1999   10,447   10.81
Granted   2,345   27.06
Exercised   (2,436 ) 5.79
Forfeited   (307 ) 18.29
   
 
Outstanding balance, December 31, 2000   10,049   15.58
Granted   314   43.03
Exercised   (2,906 ) 9.92
Forfeited   (1,204 ) 17.69
   
 
Outstanding balance, December 31, 2001   6,253   18.53
Granted   2,068   36.84
Exercised   (2,197 ) 8.71
Forfeited   (199 ) 28.48
   
 
Outstanding balance, December 31, 2002   5,925   28.23
   
 
Weighted average fair value of stock options granted during the period       13.58
       
Range of exercise prices
$
   Outstanding
(000s)
   Weighted average remaining contractual life
(years)
   Weighted average exercise price
$
   Exercisable
(000s)
   Weighted average exercise price
$
  0.81 — 3.52(i)   138   7.0   3.05   93   2.89
  7.59 — 10.50   601   1.1   9.35   601   9.35
12.77 — 17.50   206   2.0   17.37   206   17.37
22.50 — 31.00   2,887   4.2   25.59   1,883   23.10
36.00 — 45.00   2,093   4.4   40.01   741   38.94
   
 
 
 
 
    5,925   4.0   28.23   3,524   23.22
   
 
 
 
 

F-70

 
   2002
$
   2001
$
   2000
$
Net income attributable to common shareholders as reported   207,553   85,553   81,163
Total stock-based compensation expense determined under fair value-based method   14,254   12,216   16,680
   
 
 
Pro forma net income attributable to common shareholders   193,299   73,337   64,483
   
 
 
Basic earnings per share            
As reported   1.37   0.62   0.63
Pro forma   1.27   0.54   0.50

Diluted earnings per share
 
 
 
 
 
 
As reported   1.29   0.57   0.57
Pro forma   1.20   0.49   0.45
   
 
 
 
   2002
   2001
   2000
  
Expected option life (years)   3.8   4.0   4.2  
Volatility   46.8 % 36.9 % 41.1 %
Risk-free interest rate   4.5 % 5.2 % 5.8 %

F-71

15.   WRITE-DOWN OF ASSETS

F-72

16.   PREMIUM PAID ON EARLY EXTINGUISHMENT OF U.S. DOLLAR SENIOR NOTES

17.   INCOME TAXES

 
   2002
$
   2001
$
   2000
$
Current            
Domestic   1,250   3,670   800
Foreign   20,250   10,165   4,810
   
 
 
    21,500   13,835   5,610

Future
 
 
 
 
 
 
Domestic   —   —   —
Foreign   (9,771 ) (39,833 ) 185
   
 
 
    (9,771 ) (39,833 ) 185
   
 
 
    11,729   (25,998 ) 5,795
   
 
 
 
   2002
$
   2001
$
   2000
$
  
Income before provision for (recovery of) income taxes   219,282   97,992   115,248  
Expected Canadian statutory rate   39.42%   42.12%   44.39%  
   
 
 
 
Expected provision for income taxes   86,441   41,274   51,159  

Non-deductible amount
 
 
 
 
 
 
 
Amortization expense   43,942   33,309   914  

Foreign tax rate differences
 
(133,068
)
(102,386
)
(58,615
)
Unrecognized income tax benefit of losses   10,738   —   10,977  
Other   3,676   1,805   1,360  
   
 
 
 
    11,729   (25,998 ) 5,795  
   
 
 
 

F-73

 
   2002
$
   2001
$
  
Future tax assets          
Tax loss carryforwards   68,639   40,315  
Scientific Research and Experimental Development pool   17,544   13,881  
Investment tax credits   15,948   12,802  
Deferred financing and share issue costs   15,573   19,602  
Reserves   14,601   4,372  
Plant, equipment and technology   4,819   4,547  
Intangible assets   —   2,889  
Other   3,378   4,062  
   
 
 
Total future tax assets   140,502   102,470  
Less valuation allowance   (75,255 ) (59,999 )
   
 
 
Net future tax assets   65,247   42,471  
   
 
 

Future tax liabilities
 
 
 
 
 
Intangible assets   63,250   54,671  
Other   1,997   —  
   
 
 
Total future tax liabilities   65,247   54,671  
   
 
 
Net future income taxes   —   12,200  
   
 
 

F-74

 
   Tax losses
    
 
   Canada
    
    
 
   Federal
$
   Provincial
$
   United
States
$
   Investment
tax credits
$
2003   —   —   —   400
2004   —   2,600   —   500
2005   —   7,600   —   1,100
2006   500   2,800   —   1,100
2007   —   —   4,300   1,400
2008   23,200   27,100   6,100   3,000
2009   8,800   8,800   6,700   400
2010   —   —   3,100   2,600
2011   —   —   16,400   2,600
2012   —   —   15,500   2,800
2018   —   —   22,100   —
2019   —   —   13,500   —
2020   —   —   100   —
2021   —   —   41,600   —
2022   —   —   18,500   —
   
 
 
 
    32,500   48,900   147,900   15,900
   
 
 
 

18.   DEBT CONVERSION PREMIUMS

F-75

19.   EARNINGS PER SHARE

 
   2002
   2001
   2000
Net income attributable to common shareholders   $ 207,553   $ 85,553   $ 81,163
   
 
 
Basic weighted average number of common shares outstanding (000s)     151,960     136,928     128,824
Dilutive effect of warrants (000s)     5,992     10,183     9,657
Dilutive effect of stock options (000s)     2,511     3,579     5,031
   
 
 
Diluted weighted average number of common shares outstanding (000s)     160,463     150,690     143,512
   
 
 
Basic earnings per share   $ 1.37   $ 0.62   $ 0.63
Diluted earnings per share   $ 1.29   $ 0.57   $ 0.57
   
 
 

20.   OPERATING LEASES

 
   $
2003   6,667
2004   5,820
2005   4,835
2006   2,700
2007   1,346
Thereafter   1,107

F-76

21.   CASH FLOW INFORMATION

 
   2002
$
   2001
$
   2000
$
  
Accounts receivable   (93,241 ) 4,778   (35,950 )
Inventories   (14,643 ) (14,341 ) (3,886 )
Deposits and prepaid expenses   (12,265 ) (1,296 ) (1,673 )
Accounts payable   35,717   1,138   (5,432 )
Accrued liabilities   36,863   24,489   (9,840 )
Income taxes payable   17,618   10,649   3,779  
Deferred revenue   (11,984 ) (4,103 ) 5,772  
   
 
 
 
    (41,935 ) 21,314   (47,230 )
   
 
 
 
 
   2002
$
   2001
$
   2000
$
  
Long-term obligation related to the acquisition of Vasotec® and Vaseretic®   (99,620 ) —   —  
Long-term obligation related to the amendments to the Zovirax distribution agreement   (80,656 ) —   —  
Long-term obligation related to the acquisition of Wellbutrin® and Zyban®   (69,921 ) —   —  
Issuance of common shares on the surrender and redemption of Debentures   —   (316,013 ) —  
Long-term obligation related to the acquisition of Cardizem®   —   —   (161,828 )
Accrued acquisition costs related to Cardizem®   —   —   (4,000 )
Long-term obligation related to the Adalat Agreement   —   —   (58,090 )
   
 
 
 
    (250,197 ) (316,013 ) (223,918 )
   
 
 
 
 
   2002
$
   2001
$
   2000
$
Interest paid   14,899   22,837   20,546
Income taxes paid   5,063   4,380   1,889
Debt conversion premium paid   —   11,241   —

22.   RELATED PARTY TRANSACTIONS

23.   LEGAL PROCEEDINGS

F-77

F-78

24.   CO-PROMOTION ARRANGEMENTS

F-79

25.   RESEARCH AND DEVELOPMENT COLLABORATIONS

F-80

26.   SEGMENTED INFORMATION AND MAJOR CUSTOMERS

 
   Revenue(i)
   Long-lived assets(ii)
 
   2002
$
   2001
$
   2000
$
   2002
$
   2001
$
   2000
$
Canada   62,848   44,705   21,110   75,872   44,139   39,050
United States and Puerto Rico   713,615   528,722   226,559   382,457   354,692   429,222
Barbados and other Caribbean   9,533   3,448   55,511   1,351,042   663,995   729,652
Other countries   2,029   6,388   8,277   27,340   1,249   140
   
 
 
 
 
 
    788,025   583,263   311,457   1,836,711   1,064,075   1,198,064
   
 
 
 
 
 
 
   Percentage of total revenue
 
   2002 %
   2001 %
   2000 %
Customer A   12   16   30
Customer B   23   31   30
Customer C   11   9   5
Customer D   —   —   18

27.   COMPARATIVE FIGURES

F-81

F-82

Item 19.    Exhibits

II-1


SIGNATURES

        The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Date: May 20, 2003   BIOVAIL CORPORATION

 
 
/s/  BRIAN H. CROMBIE      
Brian H. Crombie
 Senior Vice President and
Chief Financial Officer

II-2


CERTIFICATIONS

        I, Eugene N. Melnyk, Chief Executive Officer and Chairman of the Board of Biovail Corporation certify that:

1.
I have reviewed this annual report on Form 20-F of Biovail Corporation;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.

6.
The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 20, 2003

By:
 
/s/  EUGENE N. MELNYK      
    Name:   Eugene N. Melnyk
    Title:   Chairman of the Board and Chief Executive Officer

II-3


CERTIFICATIONS

        I, Brian H. Crombie, Senior Vice President and Chief Financial Officer of Biovail Corporation certify that:

1.
I have reviewed this annual report on Form 20-F of Biovail Corporation;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.

6.
The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 20, 2003

By:
 
/s/  BRIAN CROMBIE      
    Name:   Brian Crombie
    Title:   Senior Vice President and Chief Financial Officer

II-4

EXHIBIT INDEX

1.1
Amendment to By-Laws of the Company to change quorum requirements for meetings of shareholders of the Corporation, dated December 30, 1999(1)

1.2
Conforming Copy of Amended By-Laws of the Company effective December 30, 1999(1)

1.3
Articles of Amendment dated December 31, 1999 effecting a stock split and an increase in the authorized share capital of the Company(2)

1.4
Articles of Amalgamation dated February 18, 2000 effecting a change in the name of the Company(2)

1.5
Articles of Amalgamation of Biovail Corporation International(2)

1.6
Articles of Amendment of Biovail Corporation International(2)

1.7
Articles of Amalgamation of Biovail Corporation(2)

1.8
By-Law No. A of Biovail Corporation(2)

2.1
Indenture, dated as of March 28, 2002, between Biovail Corporation, Computershare Trust Company, Inc., as U.S. trustee and Computershare Trust Company of Canada, as Canadian trustee(3)

2.2
First Supplemental Indenture, dated as of March 28, 2002, between Biovail Corporation, Computershare Trust Company, Inc., as U.S. trustee and Computershare Trust Company of Canada, as Canadian trustee(4)

8.1
Subsidiaries of Biovail Corporation (see Item 10.I of this report)

10.a.1
Consent of Ernst & Young LLP

99.1
Certificate of the Chairman of the Board and Chief Executive Officer of Biovail Corporation to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2
Certificate of the Senior Vice President and Chief Financial Officer of Biovail Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1)
Incorporated by reference to Registrant's Annual Report on Form 20-F for the fiscal year ended December 31, 1999, File No. 001-11145.

(2)
Incorporated by reference to Registrant's Registration Statement on Form 8-A, filed with the SEC on March 17, 2000, File No. 001-14956.

(3)
Incorporated by reference to Exhibit 1.1 on registrants report on Form 6-K dated May 21, 2002 submitted to the SEC on May 21, 2002, file #00114956.

(4)
Incorporated by reference to Exhibit 1.1 on registrants report on Form 6-K dated May 21, 2002 submitted to the SEC on May 21, 2002, file #00114956.

II-5



QuickLinks

TABLE OF CONTENTS GENERAL INFORMATION PART 1
PART I
In accordance with U.S. GAAP (All dollar amounts are expressed in thousands of U.S. dollars, except number of shares and per share data)
In accordance with Canadian GAAP (All dollar amounts are expressed in thousands of U.S. dollars, except number of shares and per share data)
BIOVAIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDEX
SUMMARY COMPENSATION TABLE
Options Granted in Last Fiscal Year
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND OPTION VALUES
TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS OTHER THAN IN RESPECT OF SECURITIES PURCHASES
TABLE OF INDEBTEDNESS UNDER EXECUTIVE SECURITIES PURCHASE PROGRAM
PART II
PART III
INDEX TO FINANCIAL STATEMENTS
MANAGEMENT REPORT
AUDITORS' REPORT
BIOVAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS) In accordance with U.S. generally accepted accounting principles ([All dollar amounts expressed in thousands of U.S. dollars, except per share data)
BIOVAIL CORPORATION
AUDITORS' REPORT
SIGNATURES
CERTIFICATIONS
CERTIFICATIONS