Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been updated through March 1, 2017 and should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. Additional company information, including this Form 10-K, is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission (the “SEC”) website at  www.sec.gov . All currency amounts are expressed in U.S. dollars, unless otherwise noted.

OVERVIEW

Valeant Pharmaceuticals International, Inc. (“we”, “us”, “our” or the “Company”) is a multinational, specialty pharmaceutical and medical device company that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries. We are diverse not only in our sources of revenue from our broad drug and medical device portfolio, but also among the therapeutic classes and geographies we serve.

We generated revenues for 2016, 2015 and 2014, of $9,674 million , $10,447 million and $8,206 million , respectively. Our portfolio of products falls into three reportable segments: (1) Bausch + Lomb/International, (2) Branded Rx and (3) U.S. Diversified Products. These segments are discussed in detail in Note 22 , "SEGMENT INFORMATION" to our audited Consolidated Financial Statements.

We are focused on core geographies and the therapeutic classes discussed above which have the potential for strong operating margins and offer growth opportunities. Through low risk, output-focused R&D (“R&D”), we have advanced certain development programs to drive commercial growth, while creating efficiencies in our R&D efforts and expenses.

History

Following the Company’s (then named Biovail Corporation) acquisition of Valeant on September 28, 2010 (the “Merger”), we supplemented our internal R&D efforts with strategic acquisitions to expand our portfolio offerings and geographic footprint. In 2013, we acquired Bausch & Lomb Holdings Incorporated (“B&L”) (the “B&L Acquisition”), a global eye health company that focuses on the development, manufacture and marketing of eye health products, including contact lenses, contact lens care solutions, ophthalmic pharmaceuticals and ophthalmic surgical products. In 2015, we acquired Salix Pharmaceuticals, Ltd. (“Salix”) (the "Salix Acquisition") a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of variety of gastrointestinal ("GI") disorders with a portfolio of over 20 marketed products, including Xifaxan®, Uceris®, Apriso®, Glumetza®, and Relistor®. In 2015, we acquired the exclusive licensing rights to develop and commercialize brodalumab, an IL-17 receptor monoclonal antibody in development for patients with moderate-to-severe plaque psoriasis for which, following internal development work, we received FDA approval on February 15, 2017 and which we expect to launch in the U.S. in the second half of 2017 (to be marketed as Siliq™ in the U.S.). We believe the investments we have made in B&L, Salix, brodalumab and other acquisitions, as well as our ongoing investments in our internal R&D efforts, are helping us to capitalize on the core geographies and therapeutic classes which have the potential for strong operating margins and offer attractive growth opportunities. While business development through acquisitions may continue to be a component of our long-term strategy, during 2016, we made minimal acquisitions and we expect the volume and size of acquisitions to be much

lower in the foreseeable future as compared to prior periods. See Note 3, "ACQUISITIONS" to our audited Consolidated Financial Statements for additional details regarding acquisitions.

Key Initiatives

Heading into 2016, we had completed a series of significant mergers and acquisitions which were key to the Company’s previous strategy for growth. The integration of these businesses is substantially complete and we have begun experiencing the operating results, synergies and other benefits that we expected when entering into these transactions.

In 2016, the Company transitioned away from a focus on acquisitions, took steps to stabilize its business and began placing greater emphasis on a select number of internal R&D projects. The Company’s key initiatives included: (1) concentrating our focus on core businesses where we believe we have an existing and sustainable competitive edge, (2) identifying opportunities to improve operational efficiencies and reviewing our internal allocation of capital and (3) strengthening the Company’s balance sheet and capital structure.

Focus on Core Businesses - We believe that there is significant opportunity in the eye health and branded prescription pharmaceutical businesses. Our existing portfolio, commercial footprint and pipeline of product development projects should position us to compete and be successful in these markets. As a result, we believe these businesses provide us with the greatest opportunity to build value for our stakeholders. In order to focus our efforts, in 2016, we performed a review of our portfolio of assets to identify those areas where we believe we have, and can maintain, a competitive advantage. We identify these areas as “core”, meaning that we believe these assets generally have greater value to our company than to other owners, as we believe we are best positioned to grow and develop them. By narrowing our focus, we have the opportunity to reduce complexity in our business and maximize the value of our core businesses. We describe our core areas by business and by geography. Within our Branded Rx segment, our core businesses include GI and dermatology. We also view our global eye health business, within our Bausch + Lomb/International segment, as core. Although the business units that fall outside our definition of “core” assets may be solid, the focus of their product pipelines and geographic footprint are not fully aligned with the focus of our core business, and they are, therefore, at a disadvantage when competing against our core activities for resources and capital within the Company.

Internal Capital Allocation and Operating Efficiencies - In support of the key initiatives outlined above, in 2016, a new leadership team was recruited and many of the executive roles were realigned or expanded to drive value in our product portfolio and generate operational efficiencies. Beginning in the latter part of 2016, the leadership team began to address a number of issues affecting performance and other operational matters. These operational matters included:

The ranking of our business units during 2016 changed our view of how capital should be allocated across our activities. Our first step was to review each business unit, come to points of view about the appropriate levels of operating expense and to

eliminate non-productive costs. As a result of that review, we identified several hundred million dollars of cost savings opportunities. We also identified areas of under-investment, specifically in our GI business, global eye care business, quality organization, supply chain and in R&D.

To position the Company to drive the value of our core assets, in the latter part of 2016, we made a number of leadership changes and took steps to increase our promotional efforts, particularly in GI, and, earlier in the year, to increase our commitment to R&D.

The GI unit initiated a significant sales force expansion program in November 2016 to reach potential primary care physician ("PCP") prescribers of Xifaxan® for irritable bowel syndrome with diarrhea and Oral Relistor® for opioid induced constipation.  The investment in these additional sales resources, including an increase in associated promotional costs, is expected to be in the range of $50 million to $60 million, but we believe this spend is needed to allow us to capitalize on the full potential of Xifaxan® and Oral Relistor®. The costs of this investment in our GI unit reduced our profitability in the fourth quarter of 2016 and are expected to begin driving incremental revenue for Xifaxan® beginning in the second half of 2017.

We increased our R&D expenditures by 26% in 2016, as we began the transition away from growth by acquisition and toward organic growth supported by investment in R&D. Our R&D organization focuses on the development of products through clinical trials and consists of over 1,000 dedicated R&D and quality assurance employees in 21 R&D facilities. Our R&D expenses excluding impairment charges for 2016, 2015 and 2014 were $421 million , $334 million , and $246 million , respectively, and represent a substantial increase in our R&D expenditures and in 2017, we expect to maintain this level of R&D investment. Currently, we have over 100 R&D projects in the pipeline, 45 of which are actively funded, and we have launched or expect to launch over 15 products associated with those in-process R&D projects during 2017.

Core assets that have received a significant portion of our recent R&D investment are:

Our increased investment in R&D reflects our commitment to drive organic growth through internal development of new products, a pillar of our new strategy.

Strengthening the Balance Sheet/Capital Structure - We are focused on reducing our outstanding debt levels and improving our capital structure. Using our cash flows from operations and the net cash proceeds from sales of certain non-core assets we repaid approximately $1,268 million of long-term debt during 2016. As we look longer term, we continue to believe that using the cash flows from the divestiture of other non-core assets and operations, we will continue to improve our capital structure while we divest ourselves of assets that are not aligned with our core objectives.

For instance, in January 2017 we entered into a definitive agreement to sell all of the outstanding equity of our subsidiary Dendreon. Dendreon’s only commercialized product, Provenge®, is an autologous cellular immunotherapy (vaccine) for prostate cancer treatment approved by the FDA in April 2010.  Our revenues from Provenge® were $303 million, $250 million and $0 in 2016, 2015 and 2014, respectively. With this sale, we are exiting the urological oncology business which we do not believe to be core to our success and which will allow us to better align our product portfolio with our new operating model.

Also in January 2017, we entered into a definitive agreement with a global beauty company to sell our CeraVe®, AcneFree ™ and AMBI® skincare brands, which have aggregate annual revenue of less than $200 million. We believe these products will benefit from the resources and capabilities of a global beauty company, which is well equipped to build on the success of these brands.

These transactions are expected to close in the first half of 2017, and are subject to customary closing conditions, including receipt of applicable regulatory approvals. These transactions represent a substantial return on our original investments. We expect to receive approximately $2,100 million in gross proceeds, from which we expect to pay transaction and legal fees of approximately $13 million and to pay the related income taxes and other taxes associated with these transactions, if any. The balance of the proceeds will be used to repay debt under our Senior Secured Credit Facilities. We continue to evaluate other opportunities to simplify our business and strengthen our balance sheet. While we intend to focus our divestiture activities on non-core assets, consistent with our duties to our shareholders and other stakeholders, we will consider dispositions in core areas that we believe are in the best interest of the Company as well.

For more information regarding these and other divestitures, see Note 4, "DIVESTITURES" and Note 24, "SUBSEQUENT EVENTS" to our audited Consolidated Financial Statements.

Other Business Matters

In addition to the acquisition and divestiture actions outlined above, the following events have affected and are expected to affect our business trends:

Walgreens Fulfillment Arrangements

At the beginning of 2016, we launched a brand fulfillment arrangement with Walgreens and extended these programs to additional participating independent retail pharmacies. Under the terms of the brand fulfillment arrangement, we made available certain of our products to eligible patients through a patient access and co-pay program available at Walgreens U.S. retail pharmacy locations, as well as participating independent retail pharmacies. The program under this 20-year agreement initially covers certain of our dermatology products, including Jublia®, Luzu®, Solodyn®, Retin-A Micro® Gel 0.08%, Onexton® and Acanya® Gel, certain of our ophthalmology products, including Besivance®, Lotemax®, Alrex®, Prolensa®, Bepreve®, and Zylet®, and our Addyi® product line. As a result of this fulfillment arrangement, during 2016, we experienced increased volumes and lower average realized prices associated with these products across all distribution channels. However, we believe we have addressed most of the operational issues we initially experienced as we implemented this arrangement with Walgreens and, as a result, have begun seeing improving average realized prices through this new fulfillment arrangement.

U.S. Healthcare Reform

The U.S. federal and state governments continue to propose and pass legislation designed to regulate the healthcare industry. In March 2010, the Patient Protection and Affordable Care Act (the “Act”) was enacted in the U.S. The Act contains several provisions that impact our business, including: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program; (ii) the extension of the Medicaid rebates to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; (iii) the expansion of the 340(B) Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers; and (iv) a fee payable to the federal government based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs.

In addition to the above, in 2013: (i) federal subsidies began to be phased in for brand-name prescription drugs filled in the Medicare Part D cover gap and (ii) the law requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of most medical devices. However, the Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, includes a two year moratorium on the medical device excise tax. Thus, the medical device excise tax does not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016, and ending on December 31, 2017. The Act also included provisions designed to increase the number of Americans covered by health insurance. In 2014, the Act’s private health insurance exchanges began to operate along with the mandate on individuals to purchase health insurance. The Act also allows states to expand Medicaid coverage with most of the expansion’s cost paid for by the federal government.

For 2016, 2015 and 2014 we incurred costs of $36 million, $28 million and $9 million, respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). For 2016, 2015 and 2014 we also incurred costs of $128 million, $104 million and $43 million on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”), respectively. The increase in Medicare Part D coverage gap liability is

mainly due to Xifaxan®. Under the legislation which provides for a two-year moratorium on the medical device excise tax beginning January 1, 2016 as discussed above, the Company incurred medical device excise taxes for 2016, 2015 and 2014 of $0, $5 million and $6 million, respectively.

In July 2014, the Internal Revenue Service issued final regulations related to the branded pharmaceutical drug annual fee pursuant to the Act. Under the final regulations, an entity’s obligation to pay the annual fee is triggered by qualifying sales in the current year, rather than the liability being triggered upon the first qualifying sale of the following year. We adopted this guidance in the third quarter of 2014, and it did not have a material impact on our financial position or results of operations.

The financial impact of the Act may be affected by certain additional developments over the next few years, including pending implementation guidance and certain healthcare reform proposals. It is possible that under the new administration, legislation will be introduced and passed by the Republican-controlled Congress repealing the Health Care Reform Act in whole or in part. On January 20, 2017, an executive order was signed requiring the Secretary of Health and Human Services and all other executive departments and agencies to waive, defer, grant exemptions from or delay implementation of aspects of the Health Care Reform Act that impose a fiscal burden on any state or a regulatory burden on individuals, healthcare providers and insurers, among others. Additionally, policy efforts designed specifically to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Legislative efforts relating to drug pricing have been proposed and considered at the U.S. federal and state level. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare delivery system.

Competition and Loss of Exclusivity

In addition, certain of our products face the expiration of their patent or regulatory exclusivity in 2017 or in later years, following which we anticipate generic competition of these products. In addition, in certain cases, as a result of negotiated settlements of some of our patent infringement proceedings against generic competitors, we have granted licenses to such generic companies, which will permit them to enter the market with their generic products prior to the expiration of our applicable patent or regulatory exclusivity. Finally, for certain of our products that lost patent or regulatory exclusivity in prior years, we anticipate that generic competitors may launch in 2017 or in later years. Following a loss of exclusivity of and/or generic competition for a product, we would anticipate that product sales from such product would decrease significantly shortly following such loss of exclusivity or the entry of a generic competitor. Where we have the rights, we may elect to launch an authorized generic of such product (either ourselves or through a third party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material.

Based on patent expiration dates, settlement agreements and/or competitive information, we believe that our products facing a potential loss of exclusivity and/or generic competition in the five year period from 2017 to and including 2021 include, among others, the following key products in the U.S.: in 2017, Deflux®, Istalol®, Isuprel®, Lotemax® Gel, Lotemax® Suspension, Mephyton®, Solesta®, and Syprine®, which in aggregate represented 7% of our U.S. and Puerto Rico revenues for 2016; in 2018, Acanya®, Cuprimine®, Elidel®, Migranal®, Moviprep® and certain strengths of Solodyn®, which in aggregate represented 6% of our U.S. and Puerto Rico revenues for 2016; in 2019, certain strengths of Solodyn® and Zyclara®, which in aggregate represented 2% of our U.S. and Puerto Rico revenues for 2016; in 2020, Clindagel® which represented 1% of our U.S. and Puerto Rico revenues for 2016; and, in 2021, Bepreve® and Preservision®, which represented 3% of our U.S. and Puerto Rico revenues for 2016. These dates may change based on, among other things, successful challenge to our patents, settlement of existing or future patent litigation and at-risk generic launches.

In addition, for a number of our products (including Apriso®, Carac®, Cardizem®, Moviprep®, Onexton®, Uceris®, Relistor®, Solodyn® and Xifaxan® in the U.S. and Wellbutrin® XL in Canada), we have commenced infringement proceedings against potential generic competitors in the U.S. and Canada. If we are not successful in these proceedings, we may face increased generic competition for these products. See Note 20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for further details regarding certain infringement proceedings.

See Item 1A “Risk Factors” of this Form 10-K for additional information on our competition risks.

Summary of 2016 Compared with 2015

Our revenue for 2016 and 2015 was $9,674 million and $10,447 million , respectively, a decrease of $773 million , or 7% . The decrease is attributable to decreases in the Branded Rx segment and U.S. Diversified Products segment revenues. The changes in our segment revenues and segment profits are discussed in detail in the subsequent section titled "Reportable Segment Revenues and Profits".

Our operating loss for 2016 was $566 million as compared to operating income for 2015 of $1,527 million , a decrease of $2,093 million . Our 2016 operating loss compared to our 2015 operating income reflects among other factors:

Our loss before income taxes for 2016 and 2015 was $2,435 million and $155 million , respectively, an increase of $2,280 million . The increase is primarily attributable to (i) the decrease in operating income of $2,093 million described above and (ii) an increase in interest expense of $273 million primarily driven by the increase in our debt level in the second half of 2015 offset in part by the pay down of debt during 2016. These increases in our loss before income taxes were partially offset by (i) lower foreign exchange loss and other in 2016 of $62 million and (ii) the loss on the extinguishment of debt of $20 million in 2015 which did not occur in 2016.

Our net loss for 2016 and 2015 was $2,408 million and $288 million , respectively, an increase of $2,120 million . The increase is primarily attributable to (i) the increase in loss before income taxes of $2,280 million described above and (ii) the recovery of income taxes in 2016. The 2016 net loss includes a recovery of income taxes of $27 million while the 2015 net loss includes a provision for income taxes of $133 million . See Note 17, "INCOME TAXES" to our audited Consolidated Financial Statements for further details related to income taxes.

Summary of 2015 Compared with 2014

Our revenue for 2015 and 2014 was $10,447 million and $8,206 million , respectively, an increase of $2,241 million , or 27% . The increase is attributable to increases in the Branded Rx segment and U.S. Diversified Products segment revenues, which were partially offset by a decrease in the Bausch + Lomb/International segment revenues.

Our operating income for 2015 and 2014 was $1,527 million and $2,001 million , respectively, a decrease of $474 million . Our 2015 operating income compared to our 2014 operating income reflects among other factors: