UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

————————————————————

FORM 10-Q

————————————————————

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended ~~September~~June 30, ~~2012~~2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-10269

Allergan, Inc.

(Exact Name of Registrant as Specified in its Charter)



Delaware	95-1622442
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2525 Dupont Drive Irvine, California (Address of Principal Executive Offices)	92612 (Zip Code)

(714) 246-4500

(Registrant’s Telephone Number, Including Area Code)

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filerþ	þ		Accelerated filer	¨
Non-accelerated filer	¨	~~(Do~~ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of ~~October 31, 2012~~August 1, 2013, there were ~~307,534,860~~307,554,060 shares of common stock outstanding (including ~~7,033,964~~10,698,576 shares held in treasury).

ALLERGAN, INC.

FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2012~~2013

INDEX



		Page

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

(A)	Unaudited Condensed Consolidated Statements of Earnings — Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2012~~2013 and ~~September~~June 30, ~~2011~~2012	3

(B)	Unaudited Condensed Consolidated Statements of Comprehensive Income — Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2012~~2013 and ~~September~~June 30, ~~2011~~2012	4

(C)	Unaudited Condensed Consolidated Balance Sheets — ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011~~2012	5

(D)	Unaudited Condensed Consolidated Statements of Cash Flows — ~~Nine~~Six Months Ended ~~September~~June 30, ~~2012~~2013 and ~~September~~June 30, ~~2011~~2012	6

(E)	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations		2528

Item 3 — Quantitative and Qualitative Disclosures About Market Risk		4650

Item 4 — Controls and Procedures		5054

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings		5155

Item 1A — Risk Factors		5255

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		5255

Item 3 — Defaults Upon Senior Securities		5356

Item 4 — Mine Safety Disclosures		5356

Item 5 — Other Information		5356

Item 6 — Exhibits		5356

SIGNATURE		5457

EXHIBIT INDEX		5558

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ALLERGAN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts)


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011			June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Revenues:
Product net sales	$	1,391.1		$	1,311.1		$	4,224.2		$	3,964.3		$	1,577.0		$	1,426.1		$	3,009.5		$	2,747.8
Other revenues	22.8			17.3			73.0			52.5			20.7			24.0			47.8			50.2
Total revenues	1,413.9			1,328.4			4,297.2			4,016.8			1,597.7			1,450.1			3,057.3			2,798.0

Operating costs and expenses:
Cost of sales (excludes amortization of acquired intangible assets)	188.8			188.1			586.3			566.7
Cost of sales (excludes amortization of intangible assets)													199.1			195.3			399.0			385.3
Selling, general and administrative	540.8			538.5			1,710.5			1,694.7			609.9			563.1			1,214.7			1,127.9
Research and development	293.3			221.3			750.3			676.4			266.5			227.7			515.3			447.7
Amortization of acquired intangible assets	33.2			31.9			98.1			95.6
Impairment of intangible assets and related costs	—			4.3			—			23.7
Restructuring charges (reversal)	3.8			(0.1		)	4.7			4.6
Amortization of intangible assets													29.0			23.1			59.7			44.4
Restructuring charges													—			0.9			4.3			0.9
Operating income	354.0			344.4			1,147.3			955.1			493.2			440.0			864.3			791.8

Non-operating income (expense):
Interest income	1.9			1.8			4.8			5.6			2.0			1.7			3.6			2.9
Interest expense	(15.9		)	(15.2		)	(48.8		)	(55.1		)	(20.0		)	(17.1		)	(37.4		)	(32.9		)
Other, net	(9.2		)	25.8			(19.3		)	10.4			11.2			4.9			2.5			(10.1		)
	(23.2		)	12.4			(63.3		)	(39.1		)	(6.8		)	(10.5		)	(31.3		)	(40.1		)

Earnings before income taxes	330.8			356.8			1,084.0			916.0
Earnings from continuing operations before income taxes													486.4			429.5			833.0			751.7
Provision for income taxes	80.2			105.8			306.7			257.6			132.4			132.4			206.0			226.2

Earnings from continuing operations													354.0			297.1			627.0			525.5

Discontinued operations:
Earnings (loss) from discontinued operations, net of applicable income tax expense (benefit) of $3.7 million and $(0.5) million for the three months ended June 30, 2013 and 2012, respectively, and $3.7 million and $0.2 million for the six months ended June 30, 2013 and 2012, respectively													7.2			(0.7		)	7.6			1.2
Expected loss on sale of discontinued operations, net of applicable income tax benefit of $87.2 million													—			—			(259.0		)	—
Discontinued operations													7.2			(0.7		)	(251.4		)	1.2

Net earnings	250.6			251.0			777.3			658.4			361.2			296.4			375.6			526.7
Net earnings attributable to noncontrolling interest	1.2			1.2			2.7			3.7			1.3			1.0			3.2			1.5
Net earnings attributable to Allergan, Inc.	$	249.4		$	249.8		$	774.6		$	654.7		$	359.9		$	295.4		$	372.4		$	525.2

Earnings per share attributable to Allergan, Inc. stockholders:
Basic	$	0.83		$	0.82		$	2.56		$	2.15
Diluted	$	0.82		$	0.81		$	2.52		$	2.11
Basic earnings per share attributable to Allergan, Inc. stockholders:
Continuing operations													$	1.19		$	0.98		$	2.10		$	1.73
Discontinued operations													0.03			—			(0.85		)	—
Net basic earnings per share attributable to Allergan, Inc. stockholders													$	1.22		$	0.98		$	1.25		$	1.73

Diluted earnings per share attributable to Allergan, Inc. stockholders:
Continuing operations													$	1.17		$	0.96		$	2.06		$	1.70
Discontinued operations													0.02			—			(0.83		)	—
Net diluted earnings per share attributable to Allergan, Inc. stockholders													$	1.19		$	0.96		$	1.23		$	1.70

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

ALLERGAN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

Three Months Ended Nine Months Ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011

Net earnings $ 250.6
$ 251.0
$ 777.3
$ 658.4

Other comprehensive income, net of tax:
Foreign currency translation adjustments 14.9
(80.8 ) (2.1 ) (30.5 )
Reclassification adjustment for foreign currency translation gains included in net earnings from the substantially complete liquidation of an investment in a foreign subsidiary —
—
—
(9.4 )
Amortization of deferred holding gains on derivatives designated as cash flow hedges included in net earnings, net of tax benefit of $0.1 million for the three months ended September 30, 2012 and 2011, respectively, and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively (0.2 ) (0.2 ) (0.6 ) (0.6 )
Net gain on remeasurement of postretirement benefit plan liability, net of tax expense of $7.4 million —
—
—
13.1
Other comprehensive income (loss) 14.7
(81.0 ) (2.7 ) (27.4 )

Total comprehensive income 265.3
170.0
774.6
631.0
Comprehensive income (loss) attributable to noncontrolling interest 2.1
(1.1 ) 3.4
2.4

Comprehensive income attributable to Allergan, Inc. $ 263.2
$ 171.1
$ 771.2
$ 628.6



	Three Months Ended						Six Months Ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012

Net earnings	$	361.2		$	296.4		$	375.6		$	526.7

Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(17.2		)	(40.6		)	(39.1		)	(17.0		)
Amortization of deferred holding gains on derivatives designated as cash flow hedges included in net earnings, net of income tax benefit of $0.1 million and $0.2 million for the three months ended June 30, 2013 and 2012, respectively, and $0.3 million for the six months ended June 30, 2013 and 2012, respectively	(0.2		)	(0.2		)	(0.4		)	(0.4		)
Other comprehensive loss	(17.4		)	(40.8		)	(39.5		)	(17.4		)

Total comprehensive income	343.8			255.6			336.1			509.3
Comprehensive income attributable to noncontrolling interest	—			0.3			1.2			1.3

Comprehensive income attributable to Allergan, Inc.	$	343.8		$	255.3		$	334.9		$	508.0

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

ALLERGAN, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)


	September 30, 2012			December 31, 2011			June 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and equivalents	$	2,655.0		$	2,406.1		$	2,484.0		$	2,701.8
Short-term investments	279.9			179.9			184.8			260.6
Trade receivables, net	872.6			730.6			917.2			739.0
Inventories	265.1			249.7			274.4			272.3
Other current assets	463.2			482.0			468.2			448.6
Assets held for sale							153.6			512.6
Total current assets	4,535.8			4,048.3			4,482.2			4,934.9
Investments and other assets	191.7			247.1			194.4			192.1
Deferred tax assets	188.3			152.6			88.7			206.9
Property, plant and equipment, net	822.8			807.0			866.2			851.5
Goodwill	2,092.9			2,088.4			2,326.6			2,133.8
Intangibles, net	1,079.4			1,165.2			1,716.9			860.1
Total assets	$	8,910.9		$	8,508.6		$	9,675.0		$	9,179.3
LIABILITIES AND EQUITY
Current liabilities:
Notes payable	$	40.7		$	83.9		$	51.6		$	48.8
Accounts payable	210.6			200.4			237.0			232.2
Accrued compensation	204.9			200.6			195.4			222.4
Other accrued expenses	596.2			470.1			610.3			586.8
Income taxes	2.5			—
Liabilities held for sale							3.6			5.3
Total current liabilities	1,054.9			955.0			1,097.9			1,095.5
Long-term debt	1,515.5			1,515.4			2,104.6			1,512.4
Other liabilities	746.2			705.8			725.2			708.8
Commitments and contingencies
Equity:
Allergan, Inc. stockholders’ equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued	—			—			—			—
Common stock, $.01 par value; authorized 500,000,000 shares; issued 307,534,860 shares as of September 30, 2012 and 307,527,460 shares as of December 31, 2011	3.1			3.1
Common stock, $.01 par value; authorized 500,000,000 shares; issued 307,554,060 shares as of June 30, 2013 and 307,537,860 shares as of December 31, 2012							3.1			3.1
Additional paid-in capital	2,854.1			2,761.8			2,975.6			2,900.6
Accumulated other comprehensive loss	(244.8		)	(241.4		)	(282.1		)	(244.6		)
Retained earnings	3,602.9			2,969.3			4,089.4			3,832.1
	6,215.3			5,492.8			6,786.0			6,491.2
Less treasury stock, at cost (7,153,557 shares as of September 30, 2012 and 2,254,935 shares as of December 31, 2011)	(645.7		)	(183.2		)
Less treasury stock, at cost (10,739,838 shares as of June 30, 2013 and 7,213,757 shares as of December 31, 2012)							(1,064.1		)	(654.1		)
Total stockholders’ equity	5,569.6			5,309.6			5,721.9			5,837.1
Noncontrolling interest	24.7			22.8			25.4			25.5
Total equity	5,594.3			5,332.4			5,747.3			5,862.6
Total liabilities and equity	$	8,910.9		$	8,508.6		$	9,675.0		$	9,179.3

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

ALLERGAN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)


	Nine Months Ended						Six Months Ended
	September 30, 2012			September 30, 2011			June 30, 2013			June 30, 2012
Cash flows from operating activities:
Net earnings	$	777.3		$	658.4		$	375.6		$	526.7
Non-cash items included in net earnings:
Depreciation and amortization	191.4			189.4			134.4			126.9
Amortization of original issue discount and debt issuance costs	1.4			9.2			1.2			1.0
Amortization of net realized gain on interest rate swaps	(4.2		)	(1.0		)	(7.2		)	(0.7		)
Deferred income tax benefit	(40.6		)	(50.8		)	(101.3		)	(12.3		)
Loss (gain) on disposal and impairment of assets	5.0			(2.1		)
Unrealized loss (gain) on derivative instruments	15.2			(12.0		)
Loss on disposal and impairment of assets							1.2			—
Unrealized (gain) loss on derivative instruments							(11.9		)	8.1
Expense of share-based compensation plans	79.7			64.3			56.8			52.8
Impairment of intangible assets	—			20.4
Expected loss on sale of discontinued operations							346.2			—
Expense from changes in fair value of contingent consideration	15.8			2.3			3.3			13.4
Restructuring charges	4.7			4.6			4.3			0.9
Gain on investments, net	—			(1.4		)
Loss on investment							3.7			—
Changes in operating assets and liabilities:
Trade receivables	(151.1		)	(81.7		)	(193.0		)	(152.2		)
Inventories	(12.2		)	(19.4		)	(19.6		)	(10.0		)
Other current assets	(19.4		)	(26.4		)	28.7			1.0
Other non-current assets	46.5			(13.4		)	(8.6		)	(3.4		)
Accounts payable	13.6			(32.1		)	(6.4		)	4.0
Accrued expenses	114.0			21.9			(18.8		)	33.2
Income taxes	38.4			(37.9		)	(14.1		)	34.1
Other liabilities	24.5			9.2			26.6			14.8
Net cash provided by operating activities	1,100.0			701.5			601.1			638.3

Cash flows from investing activities:
Purchases of short-term investments	(704.6		)	(391.2		)	(184.8		)	(504.7		)
Acquisitions, net of cash acquired	(3.1		)	(98.9		)	(892.1		)	(3.1		)
Additions to property, plant and equipment	(98.1		)	(75.4		)	(62.4		)	(57.3		)
Additions to capitalized software	(7.5		)	(7.9		)	(5.6		)	(3.7		)
Additions to intangible assets	(4.1		)	(0.3		)	(0.3		)	(3.5		)
Proceeds from maturities of short-term investments	604.7			1,073.9			260.6			379.8
Proceeds from sale of equity investments	—			1.4
Proceeds from sale of property, plant and equipment	1.3			1.1			0.1			0.6
Net cash (used in) provided by investing activities	(211.4		)	502.7
Net cash used in investing activities							(884.5		)	(191.9		)

Cash flows from financing activities:
Repayments of convertible borrowings	—			(808.9		)
Dividends to stockholders	(45.4		)	(45.8		)	(29.7		)	(30.4		)
Payments to acquire treasury stock	(723.3		)	(374.0		)	(649.1		)	(549.0		)
Payments of contingent consideration	(5.1		)	(3.0		)	(11.1		)	(5.1		)
Net (repayments) borrowings of notes payable	(43.1		)	25.7
Debt issuance costs							(4.8		)	—
Proceeds from issuance of senior notes, net of discount							598.5			—
Net borrowings (repayments) of notes payable							2.8			(41.5		)
Sale of stock to employees	153.9			205.7			140.6			127.1
Excess tax benefits from share-based compensation	24.5			20.8			31.8			21.0
Net cash used in financing activities	(638.5		)	(979.5		)
Net cash provided by (used in) financing activities							79.0			(477.9		)

Effect of exchange rate changes on cash and equivalents	(1.2		)	(3.9		)	(13.4		)	(5.9		)
Net increase in cash and equivalents	248.9			220.8
Net decrease in cash and equivalents							(217.8		)	(37.4		)
Cash and equivalents at beginning of period	2,406.1			1,991.2			2,701.8			2,406.1
Cash and equivalents at end of period	$	2,655.0		$	2,212.0		$	2,484.0		$	2,368.7

Supplemental disclosure of cash flow information
Cash paid for:
Interest, net of amount capitalized	$	39.9		$	46.7		$	36.2		$	31.4
Income taxes, net of refunds	$	261.3		$	307.6		$	191.6		$	166.3

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to present fairly the financial information contained therein. These statements do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP) for annual periods and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, ~~2011.~~2012. The Company prepared the unaudited condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. The results of operations for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2012~~2013 or any other period(s).

Reclassifications

Certain reclassifications of prior year amounts have been made to conform with the current year presentation.

The Company has completed its previously announced review of strategic options for maximizing the value of its obesity intervention business, and has formally committed to pursue a sale of that business unit. Accordingly, beginning in the first quarter of 2013, the Company has reported the financial results from that business unit as discontinued operations in the consolidated statements of earnings and has classified the related assets and liabilities as held for sale in the consolidated balance sheet. The prior period consolidated statements of earnings and consolidated balance sheet as of December 31, 2012 have been retrospectively revised to reflect the obesity intervention business unit as discontinued operations and the related assets and liabilities as held for sale.

Recently Adopted Accounting Standards

In ~~June 2011,~~February 2013, the Financial Accounting Standards Board (FASB) issued an accounting standards update that ~~eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and~~ requires an entity to ~~present items~~report the effect of ~~net income and~~significant reclassifications out of accumulated other comprehensive income ~~either~~on the respective line items in ~~a single continuous statement of comprehensive~~net income orif the amounts are required to be reclassified in ~~two separate but consecutive statements. This guidance also requires~~their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to ~~present on the face of the financial statements reclassification adjustments from~~cross-reference to other ~~comprehensive income to net income.~~disclosures that provide additional detail about those amounts. This guidance became effective for ~~fiscal years~~reporting periods beginning after December 15, 2011. In December 2011, the FASB issued an accounting standards update that defers the presentation requirement for other comprehensive income reclassifications on the face of the financial statements.2012, with early adoption permitted. The Company adopted the provisions of the guidance in the first quarter of ~~2012~~2013 and ~~elected to present items~~had no significant reclassifications out of ~~net income and~~accumulated other comprehensive income ~~in two separate but consecutive statements.~~

~~In May 2011,~~to net income during the ~~FASB issued an accounting standards update that clarifies~~second quarter and amends the existing fair value measurement and disclosure requirements. This guidance became effective prospectively for interim and annual periods beginning after December 15, 2011. The Company adopted the provisions of the guidance in the first ~~quarter~~six months of ~~2012. The adoption did not have a material impact on the Company’s consolidated financial statements.~~

~~New Accounting Standards Not Yet Adopted~~2013.

In July 2012, the FASB issued an accounting standards update that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. This guidance ~~will be~~became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted the provisions of the guidance in the first quarter of 2013. The adoption did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted

In July 2013, the FASB issued an accounting standards update that requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. This guidance will be effective for fiscal years beginning after December 15, 2013, which will be the Company's fiscal year ~~2013,~~2014, with early adoption permitted. The Company currently does not expect the adoption of the guidance will have a material impact on the Company's consolidated financial statements.

In March 2013, the FASB issued an accounting standards update that provides guidance on the accounting for the cumulative translation adjustment (CTA) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. Under this guidance, an entity should recognize the CTA in earnings based on meeting certain criteria, including when it ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity or upon a sale or transfer that results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resides. This guidance will be effective for fiscal years beginning on or after December 15, 2013, which will be

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the Company's fiscal year 2014, with early adoption permitted. The Company currently does not expect the adoption of the guidance will have a material impact on the Company's consolidated financial statements.

Note 2: Acquisitions and Collaborations

MAP Acquisition

On March 1, 2013, the Company completed the acquisition of MAP Pharmaceuticals, Inc. (MAP), a biopharmaceutical company based in the United States focused on developing and commercializing new therapies in neurology, including Levadex^®, an orally inhaled drug for the potential acute treatment of migraine in adults, for an aggregate purchase price of approximately $871.7 million, net of cash acquired. The acquisition was funded from a combination of current cash and equivalents and short-term investments.

The Company recognized tangible and intangible assets acquired and liabilities assumed in connection with the MAP acquisition based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of net assets acquired was recognized as goodwill. The goodwill acquired in the MAP acquisition is not deductible for federal income tax purposes. In connection with the acquisition, the Company acquired assets with a fair value of $1,232.9 million, consisting of current assets of $2.3 million, property, plant and equipment of $7.7 million, other non-current assets of $0.3 million, deferred tax assets of $136.5 million, intangible assets of $915.6 million and goodwill of $170.5 million, and assumed liabilities of $361.2 million, consisting of current liabilities of $27.4 million and deferred tax liabilities of $333.8 million.

The intangible assets consist of an in-process research and development asset of $683.5 million associated with Levadex^®, which is currently under review with the U.S. Food and Drug Administration (FDA), and a core technology asset of $232.1 million associated with MAP's proprietary Tempo^® delivery system that has an estimated useful life of 15 years.

Goodwill represents the excess of the MAP purchase price over the sum of the amounts assigned to assets acquired less liabilities assumed. The MAP acquisition broadens the Company's product offering for the treatment of migraine headaches and MAP's proprietary drug particle and inhalation technology provides the potential for new product development opportunities, which the Company believes support the amount of goodwill recognized as a result of the purchase price paid for MAP, in relation to other acquired tangible and intangible assets.

Exemplar Acquisition

On April 12, 2013, the Company completed the acquisition of Exemplar Pharma, LLC (Exemplar), a third party contract manufacturer for MAP's Tempo^® delivery system, for an aggregate purchase price of approximately $16.1 million, net of cash acquired. Prior to the acquisition, the Company also had a $1.9 million payable to Exemplar, which was effectively settled upon the acquisition. In connection with the acquisition, the Company acquired assets with a fair value of $16.6 million, consisting of current assets of $0.5 million, property, plant and equipment of $2.1 million and goodwill of $14.0 million, and assumed current liabilities of $0.5 million. The goodwill acquired in the Exemplar acquisition is deductible for federal income tax purposes.

SkinMedica Acquisition

On December 19, 2012, the Company completed the acquisition of SkinMedica, Inc. (SkinMedica), a privately-held aesthetics skin care company based in the United States focused on developing and commercializing products that improve the appearance of skin, for an upfront payment of $348.9 million, net of cash acquired. The Company may also be required to pay up to an additional $25.0 million, contingent upon acquired products achieving certain sales milestones. The estimated fair value of the contingent consideration as of the acquisition date was $2.2 million. The acquisition was funded from the Company's cash and equivalents balances.

The Company recognized tangible and intangible assets acquired, liabilities assumed and the contingent consideration liability in connection with the SkinMedica acquisition based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of net assets acquired was recognized as goodwill. The goodwill acquired in the SkinMedica acquisition is not deductible for federal income tax purposes. In connection with the acquisition, the Company acquired assets with a fair value of $438.1 million, consisting of current assets of $30.2 million, property, plant and equipment of $6.6 million, deferred tax assets of $43.2 million, intangible assets of $200.9 million and goodwill of $157.2 million, and assumed liabilities of $87.0 million, consisting of current liabilities of $11.2 million and deferred tax liabilities of $75.8 million. As of June 30, 2013, the total estimated fair value of the contingent consideration of $2.2 million was included in “Other liabilities.”

The intangible assets consist of developed technology, customer relationships, trademarks and an in-process research and

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

development asset. Acquired developed technology assets consist of the currently marketed SkinMedica^® family of products, including the TNS (Tissue Nutrient Solution) products, Vaniqa^®, Lytera^® and scar recovery gel. The amounts assigned to each class of intangible assets and the related weighted average amortization periods are summarized in the following table:



	Value of Intangible Assets Acquired		Weighted Average Amortization Period
	(in millions)		(in years)
Developed technology	$	87.5	10.6
Customer relationships	50.6		2.7
Trademarks	62.5		15.0
In-process research and development	0.3		—
	$	200.9

Goodwill represents the excess of the SkinMedica purchase price over the sum of the amounts assigned to assets acquired less liabilities assumed. The SkinMedica acquisition complements the Company's existing facial aesthetics business and enables the Company to take a leadership position in the growing physician-dispensed topical aesthetics skin care market and to create certain sales and marketing operating synergies, which the Company believes support the amount of goodwill recognized as a result of the purchase price paid for SkinMedica, in relation to other acquired tangible and intangible assets.

Purchase of Distributor’s Business in Russia

On February 1, 2012, the Company terminated its existing distributor agreement in Russia and completed the purchase from its distributor of all assets related to the selling and distribution of the Company’s products in Russia. The termination of the existing distributor agreement and purchase of the commercial assets enabled the Company to initiate direct operations for its medical aesthetics and neurosciences businesses in Russia.

The purchase of the commercial assets was accounted for as a business combination. In connection with the purchase of the assets, the Company paid $3.1 million, net of a $6.6 million pre-existing net receivable from the distributor, and is also required to pay additional contingent consideration based on certain contractual obligations of the former distributor over a two year period from the acquisition date. The estimated fair value of the contingent consideration as of the acquisition date was $4.7 million. The Company acquired assets with a fair value of $14.4 million, consisting of inventories of $2.0 million, intangible assets of $8.6

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

million and goodwill of $3.8 million. No liabilities were assumed in connection with the purchase. The intangible assets relate to customer relationships that have an estimated useful life of three years and other contractual rights that have an estimated useful life of two years. As of ~~September~~June 30, ~~2012, the total estimated fair value of the contingent consideration was~~ ~~$4.8 million, of which~~ ~~$2.9 million~~ ~~was included in "Other accrued expenses" and~~ ~~$1.9 million~~ ~~was included in “Other liabilities.”~~

~~Precision Light Acquisition~~

On ~~August 8, 2011~~, the Company completed the acquisition of Precision Light, Inc. (Precision Light), a privately-held medical device company based in the United States focused on developing breast, facial and body imaging systems to simulate the outcome of aesthetic medical procedures, including breast surgery, for an upfront payment of ~~$11.7 million~~, net of cash acquired. The Company is also required to pay additional contingent consideration based on the achievement of certain commercial milestones. The estimated fair value of the contingent consideration as of the acquisition date was ~~$6.2 million. In connection with the acquisition, the Company acquired assets with a fair value of~~ ~~$28.0 million, consisting of an intangible asset of~~ ~~$20.2 million, non-current deferred tax assets of~~ ~~$1.2 million~~ ~~and goodwill of~~ ~~$6.6 million, and assumed liabilities of~~ ~~$10.1 million, consisting of current liabilities of~~ ~~$2.6 million~~ ~~and non-current deferred tax liabilities of~~ ~~$7.5 million. The intangible asset relates to distribution rights that have an estimated useful life of~~ ~~five years. As of September 30, 2012, the total estimated fair value of the contingent consideration was~~ ~~$6.8 million, of which~~ ~~$1.0 million~~ ~~was included in "Other accrued expenses" and~~ ~~$5.8 million~~ ~~was included in “Other liabilities.”~~

~~Vicept Acquisition~~

On ~~July 22, 2011~~, the Company completed the acquisition of Vicept Therapeutics, Inc. (Vicept), a privately-held dermatology company based in the United States focused on developing a novel compound to treat erythema (redness) associated with rosacea, for an upfront payment of ~~$74.1 million, net of cash acquired, plus up to an aggregate of~~ ~~$200.0 million~~ in payments contingent upon achieving certain future development and regulatory milestones plus additional payments contingent upon acquired products achieving certain sales milestones. The estimated fair value of the contingent consideration as of the acquisition date was ~~$163.0 million. In connection with the acquisition, the Company acquired assets with a fair value of~~ ~~$343.8 million, consisting of an in-process research and development asset of~~ ~~$287.0 million, non-current deferred tax assets of~~ ~~$7.6 million~~ ~~and goodwill of~~ ~~$49.2 million, and assumed liabilities of~~ ~~$106.7 million, consisting of current liabilities of~~ ~~$2.3 million~~ ~~and non-current deferred tax liabilities of~~ ~~$104.4 million. As of September 30, 2012,~~2013, the total estimated fair value of the contingent consideration of $~~174.2~~1.9 million was included in ~~“Other liabilities.”~~

~~Purchase of Distributor’s Business in South Africa~~

On ~~July 1, 2011~~, the Company terminated its existing distributor agreement in South Africa and completed the purchase from its distributor of all assets related to the selling and distribution of the Company’s products in South Africa. The termination of the existing distributor agreement and purchase of the commercial assets enabled the Company to initiate direct operations in South Africa.

~~The purchase of the commercial assets was accounted for as a business combination. In connection with the purchase of the assets, the Company paid~~ ~~$8.6 million, net of a~~ ~~$2.2 million~~ ~~pre-existing receivable from the distributor. The Company acquired assets with a fair value of~~ ~~$11.1 million, consisting of inventories of~~ ~~$5.6 million, an intangible asset of~~ ~~$3.9 million~~ ~~and goodwill of~~ ~~$1.6 million, and assumed~~"Other accrued ~~liabilities of~~ ~~$0.3 million. The intangible asset relates to distribution rights that have an estimated useful life of~~ ~~ten years~~.

~~Alacer Acquisition~~

On ~~June 17, 2011~~, the Company completed the acquisition of Alacer Biomedical, Inc. (Alacer), a development stage medical device company focused on tissue reinforcement, for an aggregate purchase price of approximately ~~$7.0 million, net of cash acquired. In connection with the acquisition, the Company acquired assets with a fair value of~~ ~~$12.3 million, consisting of intangible assets of~~ ~~$9.0 million, non-current deferred tax assets of~~ ~~$1.0 million~~ ~~and goodwill of~~ ~~$2.3 million, and assumed liabilities of~~ ~~$5.3 million, consisting of accrued liabilities of~~ ~~$2.0 million~~ ~~and non-current deferred tax liabilities of~~ ~~$3.3 million~~.expenses."

The Company believes that the fair values assigned to the assets acquired, liabilities assumed and the contingent consideration liabilities were based on reasonable assumptions. The Company’s fair value estimates may change during the allowable measurement period, which is up to one year from the acquisition date, if additional information becomes available. ~~The Company does not consider the business combinations noted above to be material, either individually or in the aggregate.~~

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Molecular Partners AG Collaboration

On August 21, 2012, the Company announced that it entered into two separate agreements with Molecular Partners AG to discover, develop, and commercialize proprietary therapeutic DARPin^® products for the treatment of serious ophthalmic diseases. The first agreement is an exclusive license agreement for the design, development and commercialization of a potent dual anti-VEGF-A/PDGF-B DARPin^® (MP0260) and its corresponding backups for the treatment of exudative (wet) age-related macular degeneration and related conditions. The second agreement is an exclusive discovery alliance agreement under which the parties are collaborating to design and develop DARPin^® products against selected targets that are implicated in causing serious diseases of the eye. Under the terms of the agreements, the Company made combined upfront payments of $62.5 million to Molecular Partners AG in August 2012, which were recorded as research and development (R&D) expense in the third quarter of 2012 because the technology has not yet achieved regulatory approval. The terms of the agreements also include potential future development, regulatory and sales milestone payments to Molecular Partners AG of up to $1.4 billion, as well as potential future royalty payments.

On May 4, 2011, the Company announced a license agreement with Molecular Partners AG pursuant to which the Company obtained exclusive global rights in the field of ophthalmology for MP0112, a Phase II proprietary therapeutic anti-VEGF DARPin^®

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

protein under investigation for the treatment of retinal diseases. Under the terms of the agreement, the Company made a $45.0 million upfront payment to Molecular Partners AG in May 2011, which was recorded as R&D expense in the second quarter of 2011 because the technology has not yet achieved regulatory approval. The terms of the agreement also include potential future development, regulatory and sales milestone payments to Molecular Partners AG of up to $375.0 million, as well as potential future royalty payments.

~~The~~Under the exclusive license agreements, subject to certain limited exceptions, the Company ~~has preliminarily determined that~~is responsible for and incurs all expenses related to the conduct of all development activities; the preparation, filing and maintaining of all regulatory materials; the planning and implementation of all commercial activities; and all manufacturing activities. Under the exclusive discovery alliance agreement, during the research term each party will bear all expenses it incurs to conduct its respective activities, subject to certain limited exceptions. Milestone payments made by the Company to Molecular Partners AG ~~qualifies under~~pursuant to these agreements prior to the ~~business scope exception~~achievement of regulatory approval are immediately recognized and ~~is therefore not a variable interest entity (VIE).~~

~~MAP Collaboration~~

On ~~January 28, 2011~~,recorded as R&D expense. Milestone payments, if any, that are made upon, or subsequent to, regulatory approval will be capitalized as intangible assets and amortized over the ~~Company entered into a collaboration agreement and a co-promotion agreement with MAP Pharmaceuticals, Inc. (MAP) for the exclusive development and commercialization by the Company and MAP of~~ ~~Levadex~~^® ~~within the United States to certain headache specialist physicians for the acute treatment of migraine in adults, migraine in adolescents and other indications that may be approved by the parties.~~ ~~Levadex~~^® ~~is a self-administered, orally inhaled therapy consisting of a proprietary formulation of dihydroergotamine administered by using MAP’s proprietary~~ ~~Tempo~~^® ~~delivery system. Under the terms~~estimated remaining commercial life of the ~~agreements, the Company made a~~ ~~$60.0 million~~ ~~upfront payment to MAP in February 2011, which was recorded as selling, general and administrative (SG&A) expense in the first quarter of 2011. The terms of the agreements also include up to~~ ~~$97.0 million~~ ~~in additional payments to MAP upon MAP meeting certain development and regulatory milestones. In August 2011, the Company made a~~ ~~$20.0 million~~ ~~milestone payment to MAP for the U.S. Food and Drug Administration (FDA) acceptance of its New Drug Application for~~ ~~Levadex~~^®~~, which was recorded as SG&A expense in the third quarter of 2011. The upfront and milestone payments were expensed because~~ ~~Levadex~~^® ~~has not yet achieved regulatory approval. If~~ ~~Levadex~~^® ~~receives FDA approval, the Company and MAP will equally share profits from sales of~~ ~~Levadex~~^® ~~generated from its commercialization to neurologists and pain specialists in the United States.~~underlying technology.

Other Collaborations

In March 2010, the Company and Serenity Pharmaceuticals, LLC (Serenity) entered into an agreement for the license, development and commercialization of a Phase III investigational drug currently in clinical development for the treatment of nocturia, a common urological disorder in adults characterized by frequent urination at night time. In conjunction with the agreement, the Company made an upfront payment to Serenity of $43.0 million. In December 2010, the Company and Serenity executed a letter agreement which specified terms and conditions governing additional development activities for a new Phase III trial which were not set forth in the original agreement. Under the letter agreement, the Company agreed to share 50% of the cost of additional development activities for the new Phase III trial. Since the Company is providing a significant amount of the funding for the new Phase III trial, it determined that Serenity is a ~~VIE.~~variable interest entity (VIE). However, the Company determined that it is not the primary beneficiary of the VIE because it does not possess the power to direct Serenity’s research and development activities, which are the activities that most significantly impact Serenity’s economic performance. The Company’s maximum future exposure to loss is the Company's share of additional development activities.

~~As of September 30, 2012,~~In connection with various business development transactions where the Company has outlicensed its technology to third parties, the Company has aggregate potential future milestone receipts of approximately $~~459.0~~35.7 million ~~for the~~as of June 30, 2013, none of which are individually significant. Of that amount, approximately $3.5 million relates to achievement of certain development ~~regulatory and sales~~ milestones, ~~in connection with certain collaboration agreements, including~~approximately $~~373.0~~12.0 million ~~related~~relates to ~~a development~~achievement of certain regulatory milestones, and ~~commercialization agreement that the Company entered into in 2010 with Bristol-Myers Squibb Company (Bristol-Myers Squibb) that granted Bristol-Myers Squibb exclusive worldwide rights~~approximately $20.2 million relates to ~~develop, manufacture~~

~~Table~~achievement of ~~Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~and commercialize an investigational drug for neuropathic pain.~~certain commercial sales milestones. Due to the challenges associated with developing and obtaining approval for pharmaceutical products, there is substantial uncertainty whether any of the future milestones will be achieved. The Company evaluates whether milestone payments are substantive based on the facts and circumstances associated with each milestone payment.

Note 3: Discontinued Operations

On February 1, 2013, the Company completed its previously announced review of strategic options for maximizing the value of its obesity intervention business, and formally committed to pursue a sale of that business unit. The Company is currently considering offers for the sale of that business unit. As a result of the Company's approved plan to pursue a sale of its obesity intervention business unit, beginning in the first quarter of 2013, the Company has reported the financial results from that business unit in discontinued operations in its consolidated statements of earnings and has classified the related assets and liabilities as held for sale in its consolidated balance sheet. The prior period consolidated statements of earnings and consolidated balance sheet as of December 31, 2012 have been retrospectively revised to reflect the obesity intervention business unit as discontinued operations and the related assets and liabilities as held for sale.

The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the obesity intervention business. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the obesity intervention business unit do not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity.

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table summarizes the results of operations from discontinued operations:



	Three Months Ended					Six Months Ended
	June 30, 2013		June 30, 2012			June 30, 2013		June 30, 2012
	(in millions)
Product net sales	$	31.9	$	41.3		$	65.2	$	85.3

Operating costs and expenses:
Cost of sales (excludes amortization of intangible assets)	5.2		6.5			10.5		12.3
Selling, general and administrative	14.6		21.5			30.4		41.8
Research and development	1.2		4.3			2.7		9.3
Amortization of intangible assets	—		10.2			10.3		20.5

Earnings (loss) from discontinued operations before income taxes	$	10.9	$	(1.2	)	$	11.3	$	1.4

Earnings (loss) from discontinued operations, net of income taxes	$	7.2	$	(0.7	)	$	7.6	$	1.2

In the first quarter of 2013, the Company also reported a separate estimated pre-tax disposal loss of $346.2 million ($259.0 million after tax) related to the obesity intervention business unit from the write-down of the net assets held for sale to their estimated fair value less costs to sell. The net assets held for sale include a portion of the Company's medical devices reporting unit's goodwill allocated to the obesity intervention business based on the relative fair value of that business to the portion of the medical devices reporting unit that the Company will retain. The Company determined the estimated fair value of the net assets held for sale based on a range of indicative purchase prices received from prospective buyers participating in an orderly sales process. There has been no change in the estimated fair value during the second quarter of 2013. The estimated fair value is subject to change based on continuing negotiations between the prospective buyers and the Company. This estimated fair value measurement is categorized within Level 3 of the fair value hierarchy. During the first quarter of 2013, the Company tested the remaining goodwill of the medical devices reporting unit for impairment and concluded that no impairment was indicated.

The following table summarizes the assets and liabilities held for sale related to the Company's obesity intervention business unit as of June 30, 2013 and December 31, 2012:



	June 30, 2013			December 31, 2012
	(in millions)
Assets:
Trade receivables, net	$	23.2		$	25.2
Inventories	10.6			10.6
Property, plant and equipment, net	1.2			1.4
Goodwill	105.7			105.7
Intangibles, net	358.7			369.0
Other assets	0.4			0.7
Valuation allowance	(346.2		)	—
Total assets held for sale	$	153.6		$	512.6

Liabilities:
Accounts payable	$	0.8		$	0.9
Accrued expenses	2.6			4.1
Other liabilities	0.2			0.3
Total liabilities held for sale	$	3.6		$	5.3

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 3:4: Restructuring Charges and Integration Costs

~~2012 Restructuring and Realignment Plan~~

In connection with the March 2013 acquisition of MAP and the December 2012 acquisition of SkinMedica, the Company initiated a restructuring ~~and realignment plan~~activities to ~~streamline~~integrate the ~~obesity intervention business and promote organizational efficiency. Specifically,~~operations of the ~~initiatives primarily involve eliminating a number of positions in the U.S. sales, R&D and support staff functions associated~~two acquired businesses with the ~~obesity intervention business, integrating several customer service departments into a single new call center in Austin, Texas~~Company's operations and ~~relocating~~to capture synergies through the centralization of certain ~~other back-office functions to the Austin facility. As a result, in the third quarter of 2012, the Company recorded~~ ~~$4.0 million~~ ofresearch and development, general and administrative and commercial functions. The restructuring charges ~~consisting of~~ ~~$3.9 million~~primarily consist of employee severance and other one-time termination benefits for approximately 6698 ~~people affected by~~people. In the ~~workforce reduction and~~ ~~$0.1 million~~first quarter of ~~other related costs. In addition,~~2013, the Company recorded $~~0.6~~4.3 million of ~~SG&A expenses in~~restructuring charges. In the ~~third~~second quarter of ~~2012 and~~ ~~1.1 million~~ ~~of SG&A expenses and~~ ~~$0.3 million~~ ~~of R&D expenses in the first nine months of 2012 related to the restructuring and realignment initiatives.~~

~~Discontinued Development of EasyBand~~^™

~~In March 2011, the Company decided to discontinue development of the~~ ~~EasyBand~~^™ ~~Remote Adjustable Gastric Band System (EasyBand~~^™), a technology that the Company acquired in connection with its 2007 acquisition of EndoArt SA, and close the related research and development facility in Switzerland. As a result, in the first quarter of 20112013, the Company recorded a ~~pre-tax impairment charge of~~ $~~16.1~~0.9 million ~~for~~restructuring charge reversal.

Included in the ~~intangible assets associated with the~~three and six month periods ended June 30, 2013 are ~~EasyBand~~^™ ~~technology, fixed asset impairment charges of~~ $~~2.3 million~~ ~~and a gain of~~ ~~$9.4 million~~ ~~from the substantially complete liquidation of the Company’s investment in a foreign subsidiary. In addition, the Company recorded~~ ~~$4.6~~0.9 million of restructuring charges ~~consisting of~~ ~~$3.0 million~~ offor employee severance and other one-time termination benefits ~~for approximately~~ 30 ~~people affected by the facility closure,~~ ~~$1.5 million~~ ~~of contract termination costs and~~ ~~$0.1 million~~ ~~of other related costs. In the second quarter of 2011, the Company recorded an additional~~ ~~$0.1 million~~ ~~of restructuring charges primarily~~ related to ~~contract termination costs and a reversal~~the realignment of ~~fixed asset impairment charges of~~ ~~$0.1 million. In the third quarter of 2012, the Company recorded a~~ ~~$0.1 million~~ ~~restructuring charge reversal primarily related to employee severance and other one-time termination benefits.~~

~~Other Restructuring Activities and Integration Costs~~

various business functions initiated in 2013. Included in the three and ~~nine~~six month periods ended ~~September~~June 30, 2012 are a $~~0.1 million~~ ~~restructuring charge reversal and~~ ~~$0.8~~0.9 million of additional restructuring charges ~~respectively,~~for the refurbishment of facilities related to ~~restructuring activities initiated~~the Company's closure of its leased collagen manufacturing facility in ~~prior years. Included in the three and nine month periods ended September 30, 2011 are a~~ ~~$0.1 million~~ ~~restructuring charge reversal related to restructuring activities initiated in prior years.~~Fremont, California.

Included in the three month period ended ~~September~~June 30, ~~2012 are~~ ~~$0.1 million~~ ~~of SG&A expenses and included in the nine month period ended September 30, 2012~~2013 are $0.1 million of cost of sales and $~~0.6~~3.7 million of SG&A expenses and in the six month period ended June 30, 2013 $0.1 million of cost of sales and $15.1 million of SG&A expenses related to transaction and integration costs associated with the purchase of various ~~businesses and licensing and collaboration agreements~~. businesses. Included in the three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2011~~2012 are $~~0.6~~0.1 million of SG&A expenses and in the six month period ended June 30, 2012 $0.1 million of cost of sales and $~~2.2~~0.5 million~~, respectively,~~ of SG&A expenses related to transaction and integration costs associated with the purchase of various businesses. For the six month period ended June 30, 2013, these costs primarily consist of investment banking and ~~licensing, collaboration and co-promotion agreements~~.legal fees.

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Note 4:5: Intangibles and Goodwill

Intangibles

At ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, the components of intangibles and certain other related information were as follows:


	September 30, 2012						December 31, 2011						June 30, 2013						December 31, 2012
	Gross Amount		Accumulated Amortization			Weighted Average Amortization Period	Gross Amount		Accumulated Amortization			Weighted Average Amortization Period	Gross Amount		Accumulated Amortization			Weighted Average Amortization Period	Gross Amount		Accumulated Amortization			Weighted Average Amortization Period
	(in millions)					(in years)	(in millions)					(in years)	(in millions)					(in years)	(in millions)					(in years)
Amortizable Intangible Assets:
Developed technology	$	1,113.9	$	(501.1	)	13.5	$	1,111.0	$	(435.1	)	13.5	$	643.6	$	(312.3	)	11.1	$	644.2	$	(284.5	)	11.1
Customer relationships	3.8		(0.9		)	3.0	42.3		(42.3		)	3.1	54.5		(11.4		)	2.7	54.5		(1.2		)	2.7
Licensing	185.9		(152.7		)	9.3	185.8		(137.2		)	9.3	185.9		(163.5		)	9.3	185.9		(157.8		)	9.3
Trademarks	27.3		(25.2		)	6.3	26.7		(25.0		)	6.2	89.5		(27.3		)	12.4	87.9		(25.3		)	12.3
Core technology	181.0		(80.3		)	15.2	181.3		(71.4		)	15.2	325.4		(54.7		)	14.8	93.8		(46.5		)	14.4
Other	43.5		(11.8		)	6.5	38.5		(5.4		)	6.9	42.2		(17.8		)	6.3	43.9		(14.1		)	6.4
	1,555.4		(772.0		)	12.8	1,585.6		(716.4		)	12.6	1,341.1		(587.0		)	11.3	1,110.2		(529.4		)	10.6
Unamortizable Intangible Assets:
In-process research and development	296.0		—				296.0		—				962.8		—				279.3		—
	$	1,851.4	$	(772.0	)		$	1,881.6	$	(716.4	)		$	2,303.9	$	(587.0	)		$	1,389.5	$	(529.4	)

Developed technology consists primarily of current product offerings, primarily breast aesthetics ~~products, obesity intervention~~ products, dermal fillers, skin care products and eye care products acquired in connection with business combinations, asset acquisitions and initial licensing transactions for products previously approved for marketing. Customer relationship assets consist of the estimated value of relationships with customers acquired in connection with business combinations. Licensing assets consist primarily of capitalized payments to third party licensors related to the achievement of regulatory approvals to commercialize products in specified markets and up-front payments associated with royalty obligations for products that have achieved regulatory approval for marketing. Core technology consists of a drug delivery technology acquired in connection with the Company's 2013 acquisition of MAP, proprietary technology associated with silicone gel breast implants ~~gastric bands and intragastric balloon systems~~ acquired in connection with the Company's 2006 acquisition of Inamed Corporation, dermal filler technology acquired in connection with the Company’s 2007 acquisition of Groupe Cornéal Laboratoires

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

and a drug delivery technology acquired in connection with the Company’s 2003 acquisition of Oculex Pharmaceuticals, Inc. Other intangible assets consist primarily of acquired product registration rights, distributor relationships, distribution rights, government permits and non-compete agreements. The in-process research and development assets consist primarily of an ~~intangible asset~~orally inhaled drug for the potential acute treatment of migraine in adults acquired in connection with the Company's 2013 acquisition of MAP, a novel compound to treat erythema associated with ~~technology that has not yet achieved regulatory approval~~rosacea acquired in connection with the Company’s 2011 acquisition of Vicept ~~in July 2011~~Therapeutics, Inc. that is currently under development and an intangible asset associated with technology acquired in connection with the Company’s 2011 acquisition of Alacer ~~in June 2011~~Biomedical, Inc. that is not yet commercialized.

~~In the first quarter of 2011, the Company recorded a pre-tax charge of~~ ~~$16.1 million~~ ~~related to the impairment of the developed technology and core technology associated with~~ ~~EasyBand~~^™ ~~as a result of the discontinued development of the technology.~~

~~In the third quarter of 2011, the Company recorded a pre-tax charge of~~ ~~$4.3 million~~ related to the impairment of an in-process research and development asset associated with a tissue reinforcement technology that has not yet achieved regulatory approval acquired in connection with the Company’s 2010 acquisition of Serica Technologies, Inc. The impairment charge was recognized because estimates of the anticipated future undiscounted cash flows of the asset were not sufficient to recover its carrying amount.

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

The following table provides amortization expense by major categories of ~~acquired amortizable~~ intangible assets for the three and ~~nine~~six month periods ended ~~September~~June 30, 2013 and 2012, ~~and 2011,~~ respectively:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)				(in millions)				(in millions)
Developed technology	$	22.6	$	22.4	$	66.5	$	67.4	$	14.3	$	13.8	$	28.6	$	26.1
Customer relationships	0.3		—		0.8		—		5.1		0.3		10.2		0.5
Licensing	5.1		5.1		15.3		15.3		0.8		5.1		6.0		10.2
Trademarks	0.1		0.1		0.3		1.3		1.1		0.1		2.2		0.2
Core technology	3.0		3.0		9.0		9.3		5.5		1.7		8.4		3.3
Other	2.1		1.3		6.2		2.3		2.2		2.1		4.3		4.1
	$	33.2	$	31.9	$	98.1	$	95.6	$	29.0	$	23.1	$	59.7	$	44.4

Amortization expense related to acquired intangible assets generally benefits multiple business functions within the Company, such as the Company’s ability to sell, manufacture, research, market and distribute products, compounds and intellectual property. The amount of amortization expense excluded from cost of sales consists primarily of amounts amortized with respect to developed technology and licensing intangible assets.

Estimated amortization expense is $~~131.4 million~~ ~~for 2012,~~ ~~$113.1~~117.2 million for 2013, $~~106.0~~112.7 million for 2014, $~~99.6~~99.2 million for 2015, ~~and~~ $~~89.8~~77.3 million for ~~2016.~~2016 and $56.7 million for 2017.

Goodwill

Changes in the carrying amount of goodwill by operating segment through ~~September~~June 30, ~~2012~~2013 were as follows:

Specialty
Pharmaceuticals

Medical
Devices
Total
(in millions)
Balance at December 31, 2011 $ 150.1
$ 1,938.3
$ 2,088.4
Purchase of distributor’s business in Russia 3.8
—
3.8
Foreign exchange translation effects and other 1.7
(1.0 ) 0.7
Balance at September 30, 2012 $ 155.6
$ 1,937.3
$ 2,092.9



	Specialty Pharmaceuticals		Medical Devices			Total
	(in millions)
Balance at December 31, 2012	$	299.8	$	1,834.0		$	2,133.8
MAP acquisition	170.5		—			170.5
Exemplar acquisition	14.0		—			14.0
Foreign exchange translation effects and other	9.6		(1.3		)	8.3
Balance at June 30, 2013	$	493.9	$	1,832.7		$	2,326.6

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 5:6: Inventories

Components of inventories were:


	September 30, 2012		December 31, 2011		June 30, 2013		December 31, 2012
	(in millions)				(in millions)
Finished products	$	174.6	$	167.1	$	176.2	$	179.9
Work in process	38.7		37.5		39.8		41.3
Raw materials	51.8		45.1		58.4		51.1
Total	$	265.1	$	249.7	$	274.4	$	272.3

At ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, approximately $~~9.8~~11.1 million and $~~7.8~~9.9 million, respectively, of the Company’s finished goods inventories, primarily breast implants, were held on consignment at a large number of doctors’ offices, clinics and hospitals worldwide. The value and quantity at any one location are not significant.

Note 6:7: Long-Term Debt

On March 12, 2013, the Company issued concurrently in a registered offering $250.0 million in aggregate principal amount of 1.35% Senior Notes due 2018 (2018 Notes) and $350.0 million in aggregate principal amount of 2.80% Senior Notes due 2023 (2023 Notes).

The 2018 Notes, which were sold at 99.793% of par value with an effective interest rate of 1.39%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 1.35% per annum, and are redeemable at any time at the Company's option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2018 Notes will be due and payable on March 15, 2018, unless earlier redeemed by the Company. The original discount of approximately $0.5 million and the deferred debt issuance costs associated with the 2018 Notes are being amortized using the effective interest method over the stated term of five years.

The 2023 Notes, which were sold at 99.714% of par value with an effective interest rate of 2.83%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 2.80% per annum, and are redeemable at any time at the Company's option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption, if the redemption occurs prior to December 15, 2022 (three months prior to the maturity of the 2023 Notes). If the redemption occurs after December 15, 2022, then such redemption is not subject to the make-whole provision. The aggregate outstanding principal amount of the 2023 Notes will be due and payable on March 15, 2023, unless earlier redeemed by the Company. The original discount of approximately $1.0 million and the deferred debt issuance costs associated with the 2023 Notes are being amortized using the effective interest method over the stated term of 10 years.

Note 8: Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

U.S. federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions, R&D tax credits available in the United States, California, and other foreign jurisdictions and deductions available in the United States for domestic production activities. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and acquired net operating losses, and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and retroactively reinstated the U.S. R&D tax credit to January 1, 2012. The retroactive benefit of the U.S. R&D tax credit for fiscal year 2012 is estimated to be approximately $17.4 million, which the Company recognized in fiscal year 2013. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers.

The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was $~~14.9~~22.6 million as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011.~~2012.

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The total amount of unrecognized tax benefits was $~~62.3~~58.6 million and $~~53.0~~61.9 million as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $~~54.0~~52.1 million and $~~44.5~~55.2 million as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively. The Company expects that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities will decrease by approximately $~~11.0~~6.0 million to $~~13.0~~7.0 million due to the settlement of income tax audits, Appeals proceedings and Competent Authority negotiations in the United States and certain foreign jurisdictions.

During the second quarter of 2012, the Company settled its federal income tax audit with the U.S. Internal Revenue Service (IRS) for the Company's acquired subsidiary, Inamed, for tax years 2003, 2004 and 2006 and partially settled its federal income tax audit with the IRS for tax year 2005, which resulted in a total settlement of ~~$1.1 million. In the third quarter of 2012, the Company partially settled its federal income tax audit with the IRS for tax years 2005 and 2006, which resulted in a total settlement of~~ ~~$1.5 million~~.

Total interest accrued related to uncertain tax positions included in the ~~Company’s~~Company's unaudited condensed consolidated balance sheets was $~~10.4~~11.0 million and $~~8.1~~10.0 million as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively.

The Company has not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because it has currently reinvested these earnings indefinitely in these foreign operations. At December 31, ~~2011,~~2012, the Company had approximately $~~2,505.1~~3,083.5 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Income tax expense would be incurred if these earnings were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against the Company's U.S. tax liability, if any. The Company annually updates its estimate of unremitted earnings outside the United States after the completion of each fiscal year.

Note 7:9: Share-Based Compensation

The Company recognizes compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated at the grant date and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period.

The fair value of stock option awards that vest based solely on a service condition is estimated using the Black-Scholes option-pricing model. The fair value of share-based awards that contain a market condition is generally estimated using a Monte Carlo simulation model, and the fair value of modifications to share-based awards is generally estimated using a lattice model.

The determination of fair value using the Black-Scholes, Monte Carlo simulation and lattice models is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. The Company currently estimates stock price volatility based upon an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market. The Company estimates employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and the Company has applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. Compensation expense for share-based awards based on a service condition is recognized using the straight-line single option method.

For the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011,~~2012, share-based compensation expense was as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)				(in millions)				(in millions)
Cost of sales	$	1.7	$	1.3	$	5.0	$	4.2	$	1.8	$	1.6	$	3.6	$	3.3
Selling, general and administrative	18.7		15.5		53.7		43.4		18.0		17.5		37.4		34.3
Research and development	6.5		5.6		21.0		16.7		7.5		7.1		14.8		14.1
Pre-tax share-based compensation expense	26.9		22.4		79.7		64.3		27.3		26.2		55.8		51.7
Income tax benefit	8.6		7.0		25.5		21.1		8.7		8.1		18.1		16.6
Net share-based compensation expense	$	18.3	$	15.4	$	54.2	$	43.2	$	18.6	$	18.1	$	37.7	$	35.1

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

As of ~~September~~June 30, ~~2012,~~2013, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $~~202.9~~242.6 million, which is expected to be recognized over the next 5344 months (3233 months on a weighted-average basis). The Company has not capitalized as part of inventory any share-based compensation costs because such costs were negligible as of ~~September~~June 30, ~~2012.~~2013.

Note 8:10: Employee Retirement and Other Benefit Plans

The Company sponsors various qualified defined benefit pension plans covering a substantial portion of its employees. In addition, the Company sponsors two supplemental nonqualified plans covering certain management employees and officers and one retiree health plan covering U.S. retirees and dependents.

Components of net periodic benefit cost for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011,~~2012, respectively, were as follows:


	Three Months Ended												Three Months Ended
	Pension Benefits						Other Postretirement Benefits						Pension Benefits						Other Postretirement Benefits
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011			June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
	(in millions)						(in millions)						(in millions)
Service cost	$	6.4		$	5.9		$	0.4		$	0.5		$	7.1		$	6.4		$	0.5		$	0.4
Interest cost	10.8			10.6			0.5			0.8			11.5			11.0			0.5			0.5
Expected return on plan assets	(10.8		)	(11.0		)	—			—			(11.2		)	(10.8		)	—			—
Amortization of prior service costs	—			—			(0.7		)	(0.1		)	—			—			(0.6		)	(0.7		)
Recognized net actuarial losses	6.7			4.3			0.4			0.3			7.7			6.7			0.3			0.3
Net periodic benefit cost	$	13.1		$	9.8		$	0.6		$	1.5		$	15.1		$	13.3		$	0.7		$	0.5

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~


	Nine Months Ended												Six Months Ended
	Pension Benefits						Other Postretirement Benefits						Pension Benefits						Other Postretirement Benefits
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011			June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
	(in millions)						(in millions)						(in millions)
Service cost	$	19.3		$	17.9		$	1.2		$	1.6		$	14.2		$	12.9		$	0.9		$	0.8
Interest cost	32.9			32.0			1.5			2.4			23.1			22.1			1.0			1.0
Expected return on plan assets	(32.6		)	(33.2		)	—			—			(22.5		)	(21.8		)	—			—
Amortization of prior service costs	—			—			(2.0		)	(0.2		)	—			—			(1.3		)	(1.3		)
Recognized net actuarial losses	20.2			12.9			1.0			0.7			15.5			13.5			0.7			0.6
Net periodic benefit cost	$	39.8		$	29.6		$	1.7		$	4.5		$	30.3		$	26.7		$	1.3		$	1.1

In ~~2012,~~2013, the Company expects to pay contributions of between $~~45.0~~40.0 million and $~~55.0~~50.0 million for its U.S. and non-U.S. pension plans and between $1.0 million and $2.0 million for its other postretirement plan.

Note 9: 11: Contingencies

Legal Proceedings

In the ordinary course of business, the Company is involved in various legal actions, government investigations and environmental proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these actions, proceedings and investigations are described below. The following supplements and amends the discussion set forth in Note ~~13 “Legal~~12 “Commitments and Contingencies — Legal Proceedings” in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012 and Note ~~9 “Legal~~11 “Contingencies — Legal Proceedings” in the Company's Quarterly ~~Reports~~Report on Form 10-Q for the quarterly ~~periods~~period ended March 31, ~~2012 and June 30, 2012~~2013 and is limited to certain recent developments concerning the Company's legal proceedings.

~~Clayworth v. Allergan, et al.~~

Table of Contents

~~In August 2012, the Court~~ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company's legal proceedings range from cases brought by a single plaintiff to a class action with thousands of ~~Appeal~~putative class members. These legal proceedings, as well as other matters, involve various aspects of the ~~State~~Company's business and a variety of ~~California affirmed the Superior Court's orders granting motions~~claims (including but not limited to patent infringement, marketing, product liability, pricing and trade practices and securities law), some of which present novel factual allegations and/or unique legal theories. Complex legal proceedings frequently extend for ~~summary judgment in favor of defendants. In September 2012, plaintiff filed~~several years, and a ~~petition for rehearing with the Court of Appeal, which was denied. In October 2012, plaintiff filed a petition for review with the California Supreme Court seeking review~~number of the ~~Court~~matters pending against the Company are at very early stages of ~~Appeal's decision affirming~~ the ~~Superior Court's granting~~legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of ~~summary judgment.~~

~~Stockholder Derivative Litigation~~

~~Louisiana Municipal Police Employees' Retirement System Action~~

~~In October 2012,~~important factual information and legal issues to enable the ~~Supreme Court~~Company to determine whether the proceeding is material to the Company or to estimate a range of ~~Delaware scheduled oral argument before~~possible loss, if any. Unless otherwise disclosed, the ~~Court~~ ~~en banc~~ ~~for February 5, 2013.~~

~~The~~ Company is ~~involved~~unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in ~~various other lawsuits and claims arising in the ordinary course~~one or more of ~~business. The Company believes that the liability, if any, resulting from the aggregate amount of uninsured damages for any outstanding litigation, investigation or claim will not~~these items currently pending could have a material adverse effect on the Company's consolidated results of operations, financial position ~~liquidity~~ or ~~results~~cash flows.

Stockholder Derivative Litigation

Botox^® Settlement-Related Actions —Delaware Action. In July 2013, the Court of ~~operations. In view~~Chancery of the ~~unpredictable nature~~State of ~~such matters,~~Delaware issued a final order dismissing this action.

Patent Litigation

Zymar^®. In May 2013, the U.S. Court of Appeals for the Federal Circuit heard oral argument and took the matter under submission.

In May 2013, the Company, ~~cannot provide any assurances regarding~~with Senju Pharmaceutical Co., Ltd. (Senju) and Kyorin Pharmaceutical Co., Ltd. (Kyorin), filed a complaint against Strides, Inc. (Strides) and Agila Specialties Private Limited (Agila) in the ~~outcome~~U.S. District Court for the District of ~~any litigation, investigation, inquiry or claim to which~~Delaware alleging infringement of U.S. Patent Number 6,333,045 ('045 patent).

Zymaxid^®. In May 2013, the Company, iswith Senju and Kyorin, filed a ~~party or~~complaint against Strides and Agila in the ~~impact on~~U.S. District Court for the District of Delaware alleging infringement of the '045 patent.

Combigan^®. In May 2013, the U.S. Court of Appeals for the Federal Circuit issued an opinion affirming-in-part and reversing-in-part. In June 2013, the defendants filed a combined petition for panel rehearing and rehearing en banc.

In May 2013, the Company withdrew its motion for preliminary injunction against Sandoz, Inc. (Sandoz).

Latisse^®. In April 2013, the U.S. District Court for the Middle District of North Carolina entered a permanent injunction against Apotex Inc. (Apotex), Sandoz, Hi-Tech, and Watson Pharmaceuticals, Inc. (Watson).

In May 2013, U.S. Court of Appeals for the Federal Circuit denied the Company's motion to dismiss Apotex, Sandoz, and Hi-Tech's appeal, but granted it with respect to Watson. In May 2013, Watson filed an ~~adverse ruling in such matters.~~amended notice of appeal and its appeal was consolidated with that of Apotex, Sandoz, and Hi-Tech.

Lumigan^® 0.01%. In June 2013, the Company dismissed its patent infringement claims regarding U.S. Patent Number 5,688,819. In July 2013, a bench trial was held and the U.S. District Court for the Eastern District of Texas took the matter under submission. In June 2013, after Watson filed an ANDA with the FDA seeking approval to market a generic version of Lumigan^®0.01%, the Company received a paragraph 4 invalidity and noninfringement certification from Watson, contending that U.S. Patent Numbers 8,278,353, 8,299,118, 8,309,605, and 8,338,479 are invalid and not infringed by the proposed generic product.

~~Note 10:~~ Contingencies

In 2009, the Company established a reserve for a contingent liability associated with regulation changes resulting from a final rule issued by the U.S. Department of Defense (DoD) that placed retroactive and prospective pricing limits on certain branded pharmaceuticals under the TRICARE Retail Pharmacy Program, even though such branded pharmaceuticals have not historically been subject to a contract with the Company. As of ~~September 30,~~December 31, 2012, the reserve for the contingent liability iswas $~~20.8~~21.7 million and iswas included in “Other accrued expenses.” In January 2013, the United States Court of Appeals for the District of Columbia Circuit affirmed an earlier decision by the United States District Court for the District of Columbia in favor of the DoD, and the Company subsequently paid all outstanding contingent TRICARE Retail Pharmacy Program claims.

As of June 1, 2012 the Company is largely self-insured for future product liability losses related to all of its products. Future product liability losses are, by their nature, uncertain and are based upon complex judgments and probabilities. The Company

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

accrues for certain potential product liability losses estimated to be incurred, but not reported, to the extent they can be reasonably estimated. The Company estimates these accruals for potential losses based primarily on historical claims experience and data regarding product usage. The total value of self-insured product liability claims settled in the ~~third~~second quarter and the first ~~nine~~six months of ~~2012~~2013 and ~~2011,~~2012, respectively, and the value of known and reasonably estimable incurred but unreported self-insured product

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

liability claims pending as of ~~September~~June 30, ~~2012~~2013 are not material.

The Company has provided reserves for contingencies related to various lawsuits, claims and contractual disputes that management believes are probable and reasonably estimable. The ~~amount~~amounts reserved for these contingencies as of ~~September~~June 30, ~~2012 is~~2013 are not material.

Note ~~11:~~12: Guarantees

The Company’s Amended and Restated Certificate of Incorporation provides that the Company will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person that is involved in or is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The Company has also entered into contractual indemnity agreements with each of its directors and executive officers pursuant to which, among other things, the Company has agreed to indemnify such directors and executive officers against any payments they are required to make as a result of a claim brought against such executive officer or director in such capacity, excluding claims (i) relating to the action or inaction of a director or executive officer that resulted in such director or executive officer gaining illegal personal profit or advantage, (ii) for an accounting of profits made from the purchase or sale of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state law or (iii) that are based upon or arise out of such director’s or executive officer’s knowingly fraudulent, deliberately dishonest or willful misconduct. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. However, the Company has purchased directors’ and officers’ liability insurance policies intended to reduce the Company’s monetary exposure and to enable the Company to recover a portion of any future amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions, but makes no assurance that such amounts will not be paid in the future. The Company currently believes the estimated fair value of these indemnification arrangements is minimal.

The Company customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trials investigators in its drug, biologics and medical device development programs, in sponsored research agreements with academic and not-for-profit institutions, in various comparable agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. The Company also customarily agrees to certain indemnification provisions in its acquisition agreements and discovery and development collaboration agreements. With respect to the Company’s clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of law or certain breaches of the Company’s contractual obligations arising out of the research or clinical testing of the Company’s products, compounds or drug candidates. With respect to real estate lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s acquisition agreements and collaboration agreements are similar, but in addition often provide indemnification for the collaborator in the event of third party claims alleging infringement of intellectual property rights. In each of the above cases, the terms of these indemnification provisions generally survive the termination of the agreement. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability intended to reduce the Company’s exposure for indemnification and to enable the Company to recover a portion of any future amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions. As a result, the Company believes the estimated fair value of these indemnification arrangements is minimal.

Note ~~12:~~13: Product Warranties

The Company provides warranty programs for breast implant sales primarily in the United States, Europe and certain other countries. Management estimates the amount of potential future claims from these warranty programs based on actuarial analyses. Expected future obligations are determined based on the history of product shipments and claims and are discounted to a current value. The liability is included in both current and long-term liabilities in the Company’s consolidated balance sheets. The

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

U.S. programs include the ConfidencePlus^® and ConfidencePlus^® Premier warranty programs. The ConfidencePlus^® program, which is limited to saline breast implants, currently provides lifetime product replacement, $1,200 of financial assistance for surgical procedures within ten years of implantation and contralateral implant replacement. The ConfidencePlus^® Premier program, which ~~normally~~is standard for silicone gel implants and requires a low ~~additional~~ enrollment fee for saline breast implants, generally provides lifetime product replacement, $2,400 of financial assistance for saline breast implants

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

and $3,500 of financial assistance for silicone gel breast implants for surgical procedures within ten years of implantation and contralateral implant replacement. ~~The enrollment fee is deferred and recognized as income over the ten year warranty period for financial assistance.~~ The warranty programs in non-U.S. markets have similar terms and conditions to the U.S. programs. The Company does not warrant any level of aesthetic result and, as required by government regulation, makes extensive disclosures concerning the risks of the use of its products and breast implant surgery. Changes to actual warranty claims incurred and interest rates could have a material impact on the actuarial analysis and the Company’s estimated liabilities. A large majority of the product warranty liability arises from the U.S. warranty programs. The Company does not currently offer any similar warranty program on any other product.

The following table provides a reconciliation of the change in estimated product warranty liabilities through ~~September~~June 30, ~~2012:~~2013:


	(in millions)			(in millions)
Balance at December 31, 2011	$	32.6
Balance at December 31, 2012				$	34.4
Provision for warranties issued during the period	7.4			3.8
Settlements made during the period	(5.9		)	(3.5		)
Balance at September 30, 2012	$	34.1
Balance at June 30, 2013				$	34.7

Current portion	$	6.6		$	6.6
Non-current portion	27.5			28.1
Total	$	34.1		$	34.7

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note ~~13:~~14: Earnings Per Share

The table below presents the computation of basic and diluted earnings per share:


	Three Months Ended				Nine Months Ended				Three Months Ended					Six Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012			June 30, 2013			June 30, 2012
	(in millions, except per share amounts)								(in millions, except per share amounts)

Net earnings attributable to Allergan, Inc.:
Earnings from continuing operations attributable to Allergan, Inc.:
Earnings from continuing operations									$	354.0	$	297.1		$	627.0		$	525.5
Less net earnings attributable to noncontrolling interest									1.3		1.0			3.2			1.5
Earnings from continuing operations attributable to Allergan, Inc.									352.7		296.1			623.8			524.0
Earnings (loss) from discontinued operations									7.2		(0.7		)	(251.4		)	1.2
Net earnings attributable to Allergan, Inc.	$	249.4	$	249.8	$	774.6	$	654.7	$	359.9	$	295.4		$	372.4		$	525.2

Weighted average number of shares outstanding	300.1		304.2		302.1		304.4		296.0		302.4			296.9			303.2
Net shares assumed issued using the treasury stock method for options and non-vested equity shares and share units outstanding during each period based on average market price	5.2		5.6		5.6		5.5		5.3		5.8			5.6			5.7
Dilutive effect of assumed conversion of convertible notes outstanding	—		—		—		0.4
Diluted shares	305.3		309.8		307.7		310.3		301.3		308.2			302.5			308.9

Earnings per share attributable to Allergan, Inc. stockholders:
Basic	$	0.83	$	0.82	$	2.56	$	2.15
Diluted	$	0.82	$	0.81	$	2.52	$	2.11
Basic earnings per share attributable to Allergan, Inc. stockholders:
Continuing operations									$	1.19	$	0.98		$	2.10		$	1.73
Discontinued operations									0.03		—			(0.85		)	—
Net basic earnings per share attributable to Allergan, Inc. stockholders									$	1.22	$	0.98		$	1.25		$	1.73

Diluted earnings per share attributable to Allergan, Inc. stockholders:
Continuing operations									$	1.17	$	0.96		$	2.06		$	1.70
Discontinued operations									0.02		—			(0.83		)	—
Net diluted earnings per share attributable to Allergan, Inc. stockholders									$	1.19	$	0.96		$	1.23		$	1.70

For the three and ~~nine~~six month periods ended ~~September~~June 30, 2013, options to purchase 4.4 million and 4.3 million shares of common stock at exercise prices ranging from $90.78 to $105.87 per share, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect from the assumed exercise of these options calculated under the treasury stock method would be anti-dilutive.

For the three and six month periods ended June 30, 2012, options to purchase 4.5 million and ~~5.9~~6.6 million shares of common stock at exercise prices ranging from $76.98 to $92.90 and $75.58 to $92.90 per share, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect from the assumed exercise of these options calculated under the treasury stock method would be anti-dilutive.

~~For the three and nine month periods ended September 30, 2011, options to purchase~~ ~~4.8 million~~ ~~shares of common stock at exercise prices ranging from~~ ~~$73.04~~ to ~~$81.06~~ ~~and~~ ~~$62.71~~ to ~~$81.06~~ per share, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect from the assumed exercise of these options calculated under the treasury stock method would be anti-dilutive.

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Note ~~14:~~15: Financial Instruments

In the normal course of business, operations of the Company are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company addresses these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes.

The Company has not experienced any losses to date on its derivative financial instruments due to counterparty credit risk.

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

To ensure the adequacy and effectiveness of its interest rate and foreign exchange hedge positions, the Company continually monitors its interest rate swap positions and foreign exchange forward and option positions both on a stand-alone basis and in conjunction with its underlying interest rate and foreign currency exposures, from an accounting and economic perspective.

However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, the Company cannot assure that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s consolidated operating results and financial position.

Interest Rate Risk Management

The Company’s interest income and expense are more sensitive to fluctuations in the general level of U.S. interest rates than to changes in rates in other markets. Changes in U.S. interest rates affect the interest earned on cash and equivalents and short-term investments and interest expense on debt, as well as costs associated with foreign currency contracts.

On January 31, 2007, the Company entered into a nine-year, two month interest rate swap with a $300.0 million notional ~~amount with semi-annual settlements and quarterly interest rate reset dates.~~amount. The swap received interest at a fixed rate of 5.75% and paid interest at a variable interest rate equal to 3-month LIBOR plus 0.368%, and effectively converted $300.0 million of the Company’s $800.0 million in aggregate principal amount of 5.75% Senior Notes due 2016 (2016 Notes) to a variable interest rate. Based on the structure of the hedging relationship, the hedge met the criteria for using the short-cut method for a fair value hedge. The investment in the derivative and the related long-term debt were recorded at fair value. The differential to be paid or received as interest rates change was accrued and recognized as an adjustment to interest expense related to the 2016 Notes. In September 2012, the Company terminated the interest rate swap and received $54.7 million, which included accrued interest of $3.7 million. Upon termination of the interest rate swap, the Company added the net fair value received of $51.0 million to the carrying value of the 2016 Notes. The amount received for the termination of the interest rate swap ~~will be~~is being amortized as a reduction to interest expense over the remaining life of the debt, which effectively fixes the interest rate for the remaining term of the 2016 Notes at 3.94%. At December 31, 2011, the Company recognized in its consolidated balance sheet an asset reported in “Investments and other assets” and a corresponding increase in “Long-term debt” associated with the fair value of the derivative of ~~$48.1 million~~. During the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012,~~2013, the Company recognized $~~3.2~~3.3 million and $~~10.6~~6.5 million, respectively, as a reduction of interest expense due to the effect of the interest rate swap. During the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2011,~~2012, the Company recognized $3.7 million and $~~11.4~~7.4 million, respectively, as a reduction of interest expense due to the effect of the interest rate swap.

In February 2006, the Company entered into interest rate swap contracts based on 3-month LIBOR with an aggregate notional amount of $800.0 million, a swap period of 10 years and a starting swap rate of 5.198%. The Company entered into these swap contracts as a cash flow hedge to effectively fix the future interest rate for the 2016 Notes. In April 2006, the Company terminated the interest rate swap contracts and received approximately $13.0 million. The total gain was recorded to accumulated other comprehensive loss and is being amortized as a reduction to interest expense over a 10 year period to match the term of the 2016 Notes. During the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012 and 2011,~~2013, the Company recognized $0.3 million and $~~1.0~~0.7 million, respectively, as a reduction of interest expense due to the amortization of deferred holding gains on derivatives designated as cash flow hedges. During the three and six month periods ended June 30, 2012, the Company recognized $0.4 million and $0.7 million, respectively, as a reduction of interest expense due to the amortization of deferred holding gains on derivatives designated as cash flow hedges. These amounts were reclassified from accumulated other comprehensive loss. As of ~~September~~June 30, ~~2012,~~2013, the remaining unrecognized gain of $~~4.6~~3.6 million ($~~2.7~~2.2 million, net of tax) is recorded as a component of accumulated other comprehensive loss. The Company expects to reclassify an estimated pre-tax amount of $1.3 million from accumulated other comprehensive loss as a reduction in interest expense during fiscal year ~~2012~~2013 due to the amortization of deferred holding gains on derivatives designated as cash flow hedges.

~~No portion of amounts recognized from contracts designated as cash flow hedges was considered to be ineffective during~~

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~the three and nine month periods ended September 30, 2012 and 2011, respectively.~~

Foreign Exchange Risk Management

Overall, the Company is a net recipient of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company’s consolidated revenues or operating costs and expenses as expressed in U.S. dollars.

From time to time, the Company enters into foreign currency option and forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues. Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to economically offset the effect of changes in the value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign currency option and forward contracts in amounts

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed 18 months. The Company does not designate these derivative instruments as accounting hedges.

The Company uses foreign currency option contracts, which provide for the sale or purchase of foreign currencies, to economically hedge the currency exchange risks associated with probable but not firmly committed transactions that arise in the normal course of the Company’s business. Probable but not firmly committed transactions are comprised primarily of sales of products and purchases of raw material in currencies other than the U.S. dollar. The foreign currency option contracts are entered into to reduce the volatility of earnings generated in currencies other than the U.S. ~~dollar, primarily earnings denominated in the Canadian dollar, Mexican peso, Australian dollar, Brazilian real, euro, Korean won, Turkish lira, Polish zloty and Swiss franc.~~dollar. While these instruments are subject to fluctuations in value, such fluctuations are anticipated to offset changes in the value of the underlying exposures.

Changes in the fair value of open foreign currency option contracts and any realized gains (losses) on settled contracts are recorded through earnings as “Other, net” in the accompanying unaudited condensed consolidated statements of earnings. During the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012,~~2013, the Company recognized realized gains on settled foreign currency option contracts of $~~3.8~~0.6 million and $~~10.8 million, respectively, and net unrealized losses on open foreign currency option contracts of~~ ~~$7.1 million~~ ~~and~~ ~~$15.2 million, respectively. During the three and nine month periods ended September 30, 2011, the Company recognized realized gains on settled foreign currency option contracts of~~ ~~$0.5 million~~ ~~and~~ ~~$1.2~~1.6 million, respectively, and net unrealized gains on open foreign currency option contracts of $~~16.8~~10.6 million and $~~12.0~~11.9 million, respectively. During the three and six month periods ended June 30, 2012, the Company recognized realized gains on settled foreign currency option contracts of $4.7 million and $7.0 million, respectively, and net unrealized gains (losses) on open foreign currency option contracts of $4.4 million and $(8.1) million, respectively. The premium costs of purchased foreign exchange option contracts are recorded in “Other current assets” and amortized to “Other, net” over the life of the options.

All of the Company’s outstanding foreign exchange forward contracts are entered into to offset the change in value of certain intercompany receivables or payables that are subject to fluctuations in foreign currency exchange rates. The realized and unrealized gains and losses from foreign currency forward contracts and the revaluation of the foreign denominated intercompany receivables or payables are recorded through “Other, net” in the accompanying unaudited condensed consolidated statements of earnings. During the three and ~~nine~~six month periods ended ~~September~~June 30, 2013, the Company recognized total realized and unrealized gains from foreign exchange forward contracts of $3.8 million and $3.2 million, respectively. During the three and six month periods ended June 30, 2012, the Company recognized total realized and unrealized losses from foreign exchange forward contracts of $~~0.7~~1.2 million ~~and~~ ~~$1.9 million, respectively. During the three and nine month periods ended September 30, 2011, the Company recognized total realized and unrealized (losses) gains from foreign exchange forward contracts of~~ ~~$(1.0) million~~ ~~and~~ ~~$0.1 million, respectively.~~.

The fair value of outstanding foreign exchange option and forward contracts, collectively referred to as foreign currency derivative financial instruments, are recorded in “Other current assets” and “Accounts payable.” At ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, foreign currency derivative assets associated with the foreign exchange option contracts of $~~11.4~~18.5 million and $~~26.3~~9.9 million, respectively, were included in “Other current assets.” At ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, net foreign currency derivative ~~liabilities~~assets associated with the foreign exchange forward contracts of $~~0.4~~0.3 million were included in “Other current assets.”

At June 30, 2013 and ~~$0.7 million, respectively, were included in “Accounts payable.”~~

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~At September 30, 2012 and~~ December 31, ~~2011,~~2012, the notional principal and fair value of the Company’s outstanding foreign currency derivative financial instruments were as follows:


	September 30, 2012					December 31, 2011					June 30, 2013					December 31, 2012
	Notional Principal		Fair Value			Notional Principal		Fair Value			Notional Principal		Fair Value			Notional Principal		Fair Value
	(in millions)										(in millions)
Foreign currency forward exchange contracts (Receive U.S. dollar/pay foreign currency)	$	47.2	$	0.2		$	35.4	$	(0.4	)	$	49.8	$	1.4		$	44.6	$	0.3
Foreign currency forward exchange contracts (Pay U.S. dollar/receive foreign currency)	39.2		(0.6		)	39.1		(0.3		)	40.1		(1.1		)	39.6		—
Foreign currency sold — put options	396.1		11.4			404.7		26.3			394.9		18.5			501.6		9.9

The notional principal amounts provide one measure of the transaction volume outstanding as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, and do not represent the amount of the Company’s exposure to market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011.~~2012. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

Other Financial Instruments

At ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, the Company’s other financial instruments included cash and equivalents, short-term investments, trade receivables, non-marketable equity investments, accounts payable and borrowings. The carrying amount of cash and equivalents, short-term investments, trade receivables and accounts payable approximates fair value due to the ~~short-term~~short-

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

term maturities of these instruments. The fair value of non-marketable equity investments, which represent investments in start-up technology companies, are estimated based on information provided by these companies. The fair value of notes payable and long-term debt are estimated based on quoted market prices and interest rates.

The carrying amount and estimated fair value of the Company’s other financial instruments at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011~~2012 were as follows:


	September 30, 2012				December 31, 2011				June 30, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in millions)								(in millions)
Cash and equivalents	$	2,655.0	$	2,655.0	$	2,406.1	$	2,406.1	$	2,484.0	$	2,484.0	$	2,701.8	$	2,701.8
Short-term investments	279.9		279.9		179.9		179.9		184.8		184.8		260.6		260.6
Non-current non-marketable equity investments	9.0		9.0		9.0		9.0		6.1		6.1		9.0		9.0
Notes payable	40.7		40.7		83.9		84.3		51.6		51.6		48.8		48.8
Long-term debt	1,515.5		1,694.2		1,515.4		1,689.9		2,104.6		2,201.6		1,512.4		1,673.0

In the first quarter of 2013, the Company recorded an impairment charge of $3.7 million due to the other than temporary decline in value of a non-marketable equity investment.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. Wholesale distributors, major retail chains and managed care organizations account for a substantial portion of trade receivables. This risk is limited due to the number of customers comprising the Company’s customer base, and their geographic dispersion. At ~~September~~June 30, ~~2012,~~2013, no single customer represented more than 10% of trade receivables, net. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. The Company has purchased an insurance policy intended to reduce the Company’s exposure to potential credit risks associated with certain U.S. customers. To date, no claims have been made against the insurance policy. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management’s estimates.

Note ~~15:~~16: Fair Value Measurements

The Company measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, the Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These include cash equivalents, short-term investments, foreign exchange derivatives, deferred executive compensation investments and liabilities and contingent consideration liabilities. ~~As of December 31, 2011, the Company also had a~~ ~~$300.0 million~~ ~~notional amount interest rate swap that was required to be measured at fair value. In September 2012, the Company terminated the interest rate swap.~~ These assets and liabilities are classified in the table below in one of the three categories of the fair value hierarchy described above.

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


	September 30, 2012								June 30, 2013
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(in millions)								(in millions)
Assets
Commercial paper	$	1,975.9	$	—	$	1,975.9	$	—	$	1,166.1	$	—	$	1,166.1	$	—
Foreign time deposits	257.2		—		257.2		—		287.0		—		287.0		—
Other cash equivalents	475.7		—		475.7		—		988.6		—		988.6		—
Foreign exchange derivative assets	11.4		—		11.4		—		18.8		—		18.8		—
Deferred executive compensation investments	79.9		65.6		14.3		—		92.5		76.6		15.9		—
	$	2,800.1	$	65.6	$	2,734.5	$	—	$	2,553.0	$	76.6	$	2,476.4	$	—
Liabilities
Foreign exchange derivative liabilities	$	0.4	$	—	$	0.4	$	—
Deferred executive compensation liabilities	71.6		57.3		14.3		—		$	84.6	$	68.7	$	15.9	$	—
Contingent consideration liabilities	232.0		—		—		232.0		212.9		—		—		212.9
	$	304.0	$	57.3	$	14.7	$	232.0	$	297.5	$	68.7	$	15.9	$	212.9

	December 31, 2011								December 31, 2012
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(in millions)								(in millions)
Assets
Commercial paper	$	1,171.9	$	—	$	1,171.9	$	—	$	1,709.0	$	—	$	1,709.0	$	—
Foreign time deposits	189.1		—		189.1		—		341.7		—		341.7		—
Other cash equivalents	1,078.9		—		1,078.9		—		685.0		—		685.0		—
Foreign exchange derivative assets	26.3		—		26.3		—		10.2		—		10.2		—
Interest rate swap derivative asset	48.1		—		48.1		—
Deferred executive compensation investments	70.9		58.0		12.9		—		81.7		66.8		14.9		—
	$	2,585.2	$	58.0	$	2,527.2	$	—	$	2,827.6	$	66.8	$	2,760.8	$	—
Liabilities
Foreign exchange derivative liabilities	$	0.7	$	—	$	0.7	$	—
Interest rate swap derivative liability	48.1		—		48.1		—
Deferred executive compensation liabilities	62.3		49.4		12.9		—		$	73.5	$	58.6	$	14.9	$	—
Contingent consideration liabilities	214.6		—		—		214.6		224.3		—		—		224.3
	$	325.7	$	49.4	$	61.7	$	214.6	$	297.8	$	58.6	$	14.9	$	224.3

Cash equivalents consist of commercial paper, foreign time deposits and other cash equivalents. Other cash equivalents consist primarily of money-market fund investments. Short-term investments consist of commercial paper. Cash equivalents and

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

short-term investments are valued at cost, which approximates fair value due to the short-term maturities of these instruments. Foreign currency derivative assets and liabilities are valued using quoted forward foreign exchange prices and option volatility at the reporting date. The ~~interest rate swap derivative asset and liability were valued using LIBOR yield curves at December 31, 2011. The~~ Company believes the fair values assigned to its derivative instruments as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011~~2012 are based upon reasonable estimates and assumptions. Assets and liabilities related to deferred executive compensation consist of actively traded mutual funds classified as Level 1 and money-market funds classified as Level 2.

Contingent consideration liabilities represent future amounts the Company may be required to pay in conjunction with various business combinations. The ultimate amount of future payments is based on specified future criteria, such as sales performance and the achievement of certain future development, regulatory and sales milestones and other contractual performance conditions. The Company evaluates its estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are recorded as SG&A expense.

The Company estimates the fair value of the contingent consideration liabilities related to sales performance using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return. The Company estimates the fair value of the contingent consideration liabilities related to the achievement of future development and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. The Company estimates the fair value of the contingent consideration liabilities associated with sales milestones by employing Monte Carlo

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

simulations to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. The fair value of other contractual performance conditions is measured by assigning an achievement probability to each payment and discounting the payment to its present value using the Company's estimated cost of borrowing. The unobservable inputs to the valuation models that have the most significant effect on the fair value of the Company's contingent consideration liabilities are the probabilities that certain in-process development projects will meet specified development milestones, including ultimate approval by the FDA. The Company currently estimates that the probabilities of success in meeting the specified development milestones are between 40% and 75%.

The following table provides a reconciliation of the change in the contingent consideration liabilities through ~~September~~June 30, ~~2012:~~2013:


	(in millions)			(in millions)
Balance at December 31, 2011	$	214.6
Additions during the period related to a business combination	4.7
Balance at December 31, 2012				$	224.3
Change in the estimated fair value of the contingent consideration liabilities	15.8			3.3
Payments made during the period	(5.1		)	(11.1		)
Foreign exchange translation effects	2.0			(3.6		)
Balance at September 30, 2012	$	232.0
Balance at June 30, 2013				$	212.9

Note ~~16:~~17: Business Segment Information

The Company operates its business on the basis of two reportable segments — specialty pharmaceuticals and medical devices. The specialty pharmaceuticals segment produces a broad range of pharmaceutical products, including: ophthalmic products for dry eye, glaucoma, inflammation, infection, allergy and retinal disease; Botox^® for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth and other prescription and ~~over-the-counter~~physician-dispensed skin care products; and urologics products. The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery and tissue expanders; ~~obesity intervention products;~~ and facial aesthetics products. The Company provides global marketing strategy teams to ensure development and execution of a consistent marketing strategy for its products in all geographic regions that share similar distribution channels and customers.

The Company evaluates segment performance on a product net sales and operating income basis exclusive of general and administrative expenses and other indirect costs, legal settlement expenses, impairment of intangible assets and related costs, restructuring charges, amortization of certain identifiable intangible assets related to business combinations, ~~and~~ asset acquisitions and related capitalized licensing costs and certain other adjustments, which are not allocated to the Company’s segments for performance assessment by the Company’s chief operating decision maker. Other adjustments excluded from the Company’s segments for performance assessment represent income or expenses that do not reflect, according to established Company-defined criteria, operating income

~~Table of Contents~~

~~ALLERGAN, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

or expenses associated with the Company’s core business activities. Because operating segments are generally defined by the products they design and sell, they do not make sales to each other. The Company does not discretely allocate assets to its operating segments, nor does the Company’s chief operating decision maker evaluate operating segments using discrete asset information.

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Operating Segments


	Three Months Ended					Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011			September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)					(in millions)				(in millions)
Product net sales:
Specialty pharmaceuticals	$	1,178.5	$	1,089.7		$	3,530.6	$	3,273.4	$	1,347.7	$	1,212.6	$	2,579.5	$	2,352.1
Medical devices	212.6		221.4			693.6		690.9		229.3		213.5		430.0		395.7
Total product net sales	1,391.1		1,311.1			4,224.2		3,964.3		1,577.0		1,426.1		3,009.5		2,747.8
Other revenues	22.8		17.3			73.0		52.5		20.7		24.0		47.8		50.2
Total revenues	$	1,413.9	$	1,328.4		$	4,297.2	$	4,016.8	$	1,597.7	$	1,450.1	$	3,057.3	$	2,798.0

Operating income:
Specialty pharmaceuticals	$	503.4	$	433.5		$	1,449.8	$	1,286.3	$	569.4	$	506.3	$	1,059.4	$	946.4
Medical devices	59.8		68.8			203.0		214.2		75.1		68.1		129.7		119.8
Total segments	563.2		502.3			1,652.8		1,500.5		644.5		574.4		1,189.1		1,066.2
General and administrative expenses, other indirect costs and other adjustments	178.0		127.7			420.4		439.2		123.7		116.4		267.8		241.0
Amortization of acquired intangible assets (a)	27.4		26.0			80.4		77.9
Impairment of intangible assets and related costs	—		4.3			—		23.7
Restructuring charges (reversal)	3.8		(0.1		)	4.7		4.6
Amortization of intangible assets (a)										27.6		17.1		52.7		32.5
Restructuring charges										—		0.9		4.3		0.9
Total operating income	$	354.0	$	344.4		$	1,147.3	$	955.1	$	493.2	$	440.0	$	864.3	$	791.8

——————————


(a)	Represents amortization of certain identifiable intangible assets related to business combinations, ~~and~~ asset acquisitions and related capitalized licensing costs, as applicable.

Product net sales for the Company’s various global product portfolios are presented below. The Company’s principal geographic markets are the United States, Europe, Latin America and Asia Pacific. The U.S. information is presented separately as it is the Company’s headquarters country. U.S. sales represented ~~62.1%~~61.1% and ~~59.3%~~60.0% of the Company’s total consolidated product net sales for the three month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011,~~2012, respectively. U.S. sales represented ~~60.9%~~61.0% and ~~59.6%~~60.2% of the Company’s total consolidated product net sales for the ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011,~~2012, respectively.

Sales to two customers in the Company’s specialty pharmaceuticals segment each generated over 10% of the Company’s total consolidated product net sales. Sales to McKesson Drug Company for the three month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011~~2012 were ~~13.7%~~14.0% and ~~13.1%~~14.5%, respectively, of the Company’s total consolidated product net sales, and ~~14.5%~~14.1% and ~~13.1%~~15.4%, respectively, of the Company’s total consolidated product net sales for the ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011.~~2012. Sales to Cardinal Health, Inc. for the three month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011~~2012 were ~~15.9%~~14.2% and ~~13.5%~~14.5%, respectively, of the Company’s total consolidated product net sales, and ~~14.4%~~14.3% and ~~13.6%~~14.1%, respectively, of the Company’s total consolidated product net sales for the ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011.~~2012. No other country or single customer generates over 10% of the Company’s total consolidated product net sales. Net sales for the Europe region also include sales to customers in Africa and the Middle East, and net sales in the Asia Pacific region include sales to customers in Australia and New Zealand.

2326

Table of Contents

ALLERGAN, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Product Net Sales by Product Line


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)				(in millions)				(in millions)
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals	$	663.2	$	611.6	$	1,986.1	$	1,861.1	$	722.4	$	670.4	$	1,391.0	$	1,322.9
Botox^®/Neuromodulators	431.6		396.7		1,291.7		1,179.6		513.0		461.2		970.9		860.1
Skin Care	74.0		66.4		221.0		190.4
Urologics	9.7		15.0		31.8		42.3
Skin Care and Other									112.3		81.0		217.6		169.1
Total Specialty Pharmaceuticals	1,178.5		1,089.7		3,530.6		3,273.4		1,347.7		1,212.6		2,579.5		2,352.1

Medical Devices:
Breast Aesthetics	86.1		83.3		285.7		262.9		106.8		101.2		196.4		199.6
Obesity Intervention	37.4		49.7		122.7		156.2
Facial Aesthetics	89.1		88.4		285.2		271.8		122.5		112.3		233.6		196.1
Total Medical Devices	212.6		221.4		693.6		690.9		229.3		213.5		430.0		395.7

Total product net sales	$	1,391.1	$	1,311.1	$	4,224.2	$	3,964.3	$	1,577.0	$	1,426.1	$	3,009.5	$	2,747.8

Geographic Information


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)				(in millions)				(in millions)
Product net sales:
United States	$	863.2	$	777.6	$	2,571.5	$	2,362.7	$	963.3	$	855.5	$	1,836.3	$	1,654.1
Europe	252.0		261.0		836.3		825.9		323.7		293.0		626.9		570.0
Latin America	97.0		106.9		292.1		293.2		100.7		98.4		181.9		189.1
Asia Pacific	113.7		109.1		330.9		306.0		118.5		110.2		230.9		208.9
Other	65.2		56.5		193.4		176.5		70.8		69.0		133.5		125.7
Total product net sales	$	1,391.1	$	1,311.1	$	4,224.2	$	3,964.3	$	1,577.0	$	1,426.1	$	3,009.5	$	2,747.8


	September 30, 2012		December 31, 2011		June 30, 2013		December 31, 2012
	(in millions)				(in millions)
Long-lived assets:
United States	$	3,406.6	$	3,500.9	$	4,312.8	$	3,242.9
Europe	524.3		502.0		534.5		538.6
Latin America	55.9		59.4		51.3		55.2
Asia Pacific	53.5		53.3		49.9		53.8
Other	2.4		2.8		1.7		2.2
Total long-lived assets	$	4,042.7	$	4,118.4	$	4,950.2	$	3,892.7

The increase in long-lived assets located in the United States at June 30, 2013 compared to December 31, 2012 is primarily due to an increase in intangible assets and goodwill related to the acquisitions of MAP completed in the first quarter of 2013 and Exemplar completed in the second quarter of 2013.

2427

Table of Contents

ALLERGAN, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This financial review presents our operating results for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011,~~2012, and our financial condition at ~~September~~June 30, ~~2012.~~2013. The following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption “Risk Factors” in Part II, Item 1A below. The following review should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, ~~2011~~2012 included in our ~~2011~~2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

Critical Accounting Policies, Estimates and Assumptions

The preparation and presentation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to establish policies and to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. In our judgment, the accounting policies, estimates and assumptions described below have the greatest potential impact on our consolidated financial statements. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates.

Revenue Recognition

We recognize revenue from product sales when goods are shipped and title and risk of loss transfer to our customers. A substantial portion of our revenue is generated by the sale of specialty pharmaceutical products (primarily eye care pharmaceuticals and skin care and ~~urologics~~other products) to wholesalers within the United States, and we have a policy to attempt to maintain average U.S. wholesaler inventory levels at an amount less than eight weeks of our net sales. A portion of our revenue is generated from consigned inventory of breast implants maintained at physician, hospital and clinic locations. These customers are contractually obligated to maintain a specific level of inventory and to notify us upon the use of consigned inventory. Revenue for consigned inventory is recognized at the time we are notified by the customer that the product has been used. Notification is usually through the replenishing of the inventory, and we periodically review consignment inventories to confirm the accuracy of customer reporting.

We generally offer cash discounts to customers for the early payment of receivables. Those discounts are recorded as a reduction of revenue and accounts receivable in the same period that the related sale is recorded. The amounts reserved for cash discounts were ~~$6.6~~$6.0 million and ~~$4.5~~$4.2 million at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively. Provisions for cash discounts deducted from consolidated sales in the ~~third~~second quarter of 2013 and 2012 ~~and 2011~~ were ~~$17.6~~$18.7 million and ~~$15.4~~$17.0 million, respectively. Provisions for cash discounts deducted from consolidated sales in the first ~~nine~~six months of 2013 and 2012 ~~and 2011~~ were ~~$51.4~~$36.3 million and ~~$45.6~~$33.8 million, respectively.

We permit returns of product from most product lines by any class of customer if such product is returned in a timely manner, in good condition and from normal distribution channels. Return policies in certain international markets and for certain medical device products, primarily breast implants, provide for more stringent guidelines in accordance with the terms of contractual agreements with customers. Our estimates for sales returns are based upon the historical patterns of product returns matched against sales, and management’s evaluation of specific factors that may increase the risk of product returns. The amount of allowances for sales returns recognized in our consolidated balance sheets at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011~~2012 were ~~$69.6~~$80.0 million and ~~$68.5~~$77.9 million, respectively, and are recorded in “Other accrued expenses” and “Trade receivables, net” in our consolidated balance sheets. Provisions for sales returns deducted from consolidated sales were ~~$92.9~~$114.7 million and ~~$95.1~~$110.4 million in the ~~third~~second quarter of ~~2012~~2013 and ~~2011,~~2012, respectively. Provisions for sales returns deducted from consolidated sales were ~~$304.1~~$216.9 million and ~~$307.8~~$209.0 million in the first ~~nine~~six months of ~~2012~~2013 and ~~2011,~~2012, respectively. The ~~small increase~~increases in the amount of allowances for sales returns at ~~September~~June 30, ~~2012~~2013 compared to December 31, ~~2011 is~~2012 and the provisions for sales returns in the second quarter and the first six months of 2013 compared to the second quarter and the first six months of 2012 are primarily due to increased overall product sales volume partially offset by a decrease in estimated product sales return rates. The decrease in the provisions for sales returns in the third quarter of 2012 compared to the third quarter of 2011 is primarily due to a decreaseand an increase in estimated product sales return rates for our breast aesthetics ~~products. The decrease in the provisions for sales returns in the first nine months of 2012 compared to the first nine months of 2011 is primarily due to~~products, partially offset by a slight decrease in estimated product sales return rates for our skin care ~~products~~ and ~~breast aesthetics~~other products. ~~Historical~~Actual historical allowances for cash discounts and product returns have been consistent with the amounts reserved or accrued.

We participate in various ~~managed care sales~~U.S. federal and state government rebate ~~and other incentive~~ programs, the largest of which ~~relates to~~are Medicaid, Medicare and the U.S. Department of Veterans Affairs. ~~Sales~~We also have contracts with various managed care and group purchasing organizations that provide for sales rebates and other contractual discounts. In the United States, we also incur chargebacks, which are reimbursements to wholesalers for honoring contracted prices to third parties. Outside of the Unites States we incur sales allowances based on contractual provisions and legislative mandates. We also offer rebate and other incentive programs ~~also include contractual volume rebate programs and chargebacks, which are contractual discounts given primarily~~directly to ~~federal government agencies, health~~our customers

2528

Table of Contents

~~maintenance organizations, pharmacy benefits managers and group purchasing organizations. We also offer rebate and other incentive programs~~ for our aesthetic products and certain therapeutic products, including Botox^® Cosmetic, Juvéderm^®, Latisse^®, Natrelle^®, Acuvail^®, Aczone^®, Sanctura XR^® and Restasis^®, and for certain other skin care products. Sales rebates and incentive accruals reduce revenue in the same period that the related sale is recorded and are included in “Other accrued expenses” in our consolidated balance sheets. The amounts accrued for sales rebates and other incentive programs were ~~$297.3~~$259.3 million and ~~$249.1~~$269.6 million at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively.

Provisions for sales rebates and other incentive programs deducted from consolidated sales were ~~$242.0 million and $199.0~~$267.6 million in the ~~third~~second quarter of ~~2012~~2013 compared to $230.1 million in the second quarter of 2012. The $37.5 million increase in the provisions for sales rebates and ~~2011, respectively.~~other incentive programs in the second quarter of 2013 is due to a $17.2 million increase in provisions for rebates associated with U.S. federal and state government programs, a $7.0 million increase in managed health care rebates and other contractual discounts, a $6.6 million increase in chargebacks, a $3.4 million increase in sales allowances outside of the United States and a $3.3 million increase in provisions for consumer coupons and other customer incentives. Provisions for sales rebates and other incentive programs deducted from consolidated sales were ~~$710.2~~$538.9 million ~~and $555.7 million in~~for the first ~~nine~~six months of ~~2012 and 2011, respectively. The increases in the amounts accrued at September 30, 2012~~2013 compared to ~~December 31, 2011 and~~$467.0 million for the first six months of 2012. The $71.9 million increase in the provisions for sales rebates and other incentive programs in the ~~third quarter and the~~ first ~~nine~~six months of ~~2012~~2013 is due to a $27.6 million increase in provisions for rebates associated with U.S. federal and state government programs, a $13.0 million increase in managed health care rebates and other contractual discounts, a $4.0 million increase in chargebacks, a $10.9 million increase in sales allowances outside of the United States and a $16.4 million increase in provisions for consumer coupons and other customer incentives. The increase in provisions for sales rebates and other incentive programs in the three and six month periods ended June 30, 2013 compared to the ~~third quarter and the first nine months of 2011 are~~respective periods in 2012 is primarily due to increased eye care pharmaceutical sales in the United States and a shift in U.S. patient populations to government reimbursed programs, which typically have higher rebate percentages than other managed care programs, an increase in ~~activity under previously established rebate and incentive programs, principally~~government rebates in Europe related to ~~our eye care pharmaceuticals,~~ ~~Botox~~^® ~~Cosmetic, urology, skin care~~austerity measures, and ~~facial aesthetics products, an increase~~increased incentives offered directly to customers in the ~~number of incentive programs offered and increased overall product sales volume.~~United States. In addition, an increase in our published list prices in the United States for pharmaceutical products, which occurred for several of our products in each of ~~2012~~2013 and ~~2011,~~2012, generally results in higher provisions for sales rebates and other incentive programs deducted from consolidated sales.

Our procedures for estimating amounts accrued for sales rebates and other incentive programs at the end of any period are based on available quantitative data and are supplemented by management’s judgment with respect to many factors, including but not limited to, current market dynamics, changes in contract terms, changes in sales trends, an evaluation of current laws and regulations and product pricing. Quantitatively, we use historical sales, product utilization and rebate data and apply forecasting techniques in order to estimate our liability amounts. Qualitatively, management’s judgment is applied to these items to modify, if appropriate, the estimated liability amounts. There are inherent risks in this process. For example, customers may not achieve assumed utilization levels; customers may misreport their utilization to us; actual utilization and reimbursement rates under government rebate programs may differ from those estimated; and actual movements of the U.S. Consumer Price Index for All Urban Consumers, or CPI-U, which affect our rebate programs with U.S. federal and state government agencies, may differ from those estimated. On a quarterly basis, adjustments to our estimated liabilities for sales rebates and other incentive programs related to sales made in prior periods have not been material and have generally been less than 0.5% of consolidated product net sales. An adjustment to our estimated liabilities of 0.5% of consolidated product net sales on a quarterly basis would result in an increase or decrease to net sales and earnings before income taxes of approximately $7.0 million to $8.0 million. The sensitivity of our estimates can vary by program and type of customer. Additionally, there is a significant time lag between the date we determine the estimated liability and when we actually pay the liability. Due to this time lag, we record adjustments to our estimated liabilities over several periods, which can result in a net increase to earnings or a net decrease to earnings in those periods. Material differences may result in the amount of revenue we recognize from product sales if the actual amount of rebates and incentives differ materially from the amounts estimated by management.

We recognize license fees, royalties and reimbursement income for services provided as other revenues based on the facts and circumstances of each contractual agreement. In general, we recognize income upon the signing of a contractual agreement that grants rights to products or technology to a third party if we have no further obligation to provide products or services to the third party after entering into the contract. We recognize contingent consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. We defer income under contractual agreements when we have further obligations that indicate that a separate earnings process has not been completed.

Contingent Consideration

Contingent consideration liabilities represent future amounts we may be required to pay in conjunction with various business combinations. The ultimate amount of future payments is based on specified future criteria, such as sales performance and the achievement of certain future development, regulatory and sales milestones and other contractual performance conditions. We estimate the fair value of the contingent consideration liabilities related to sales performance using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liabilities related to the achievement of future development

Table of Contents

and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liabilities associated with sales milestones by employing Monte Carlo simulations to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. The fair value of other contractual performance conditions is measured by assigning an achievement probability to each payment and discounting the payment to its present value using our estimated cost of borrowing. We evaluate our estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are recorded through earnings as “Selling, general and administrative” in the accompanying unaudited condensed consolidated statements of earnings. The total estimated fair value of contingent consideration liabilities was

~~Table of Contents~~

$~~232.0~~212.9 million and ~~$214.6~~$224.3 million at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively, and was included in “Other accrued expenses” and “Other liabilities” in our consolidated balance sheets.

Pensions

We sponsor various pension plans in the United States and abroad in accordance with local laws and regulations. Our U.S. pension plans account for a large majority of our aggregate pension plans' net periodic benefit costs and projected benefit obligations. In connection with these plans, we use certain actuarial assumptions to determine the plans' net periodic benefit costs and projected benefit obligations, the most significant of which are the expected long-term rate of return on assets and the discount rate.

Our assumption for the weighted average expected long-term rate of return on assets in our U.S. funded pension plan for determining the net periodic benefit cost is 6.25% and 6.75% for 2013 and ~~7.25% for~~ 2012, ~~and 2011,~~ respectively. Our assumptions for the weighted average expected long-term rate of return on assets in our non-U.S. funded pension plans are 4.36% and 4.80% for 2013 and ~~5.70% for~~ 2012, ~~and 2011,~~ respectively. For our U.S. funded pension plan, we determine, based upon recommendations from our pension plan's investment advisors, the expected rate of return using a building block approach that considers diversification and rebalancing for a long-term portfolio of invested assets. Our investment advisors study historical market returns and preserve long-term historical relationships between equities and fixed income in a manner consistent with the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long run. They also evaluate market factors such as inflation and interest rates before long-term capital market assumptions are determined. For our non-U.S. funded pension plans, the expected rate of return was determined based on asset distribution and assumed long-term rates of return on fixed income instruments and equities. Market conditions and other factors can vary over time and could significantly affect our estimates of the weighted average expected long-term rate of return on plan assets. The expected rate of return is applied to the market-related value of plan assets. As a sensitivity measure, the effect of a 0.25% decline in our rate of return on assets assumptions for our U.S. and non-U.S. funded pension plans would increase our expected ~~2012~~2013 pre-tax pension benefit cost by approximately ~~$1.8~~$2.0 million.

The weighted average discount rates used to calculate our U.S. and non-U.S. pension benefit obligations at December 31, ~~2011~~2012 were ~~4.63%~~4.23% and ~~5.14%~~4.55%, respectively. The weighted average discount rates used to calculate our U.S. and non-U.S. net periodic benefit costs for ~~2012~~2013 were ~~4.63%~~4.23% and ~~5.14%~~4.55%, respectively, and for ~~2011, 5.51%~~2012, 4.63% and ~~5.57%~~5.14%, respectively. We determine the discount rate based upon a hypothetical portfolio of high quality fixed income investments with maturities that mirror the pension benefit obligations at the plans' measurement date. Market conditions and other factors can vary over time and could significantly affect our estimates for the discount rates used to calculate our pension benefit obligations and net periodic benefit costs for future years. As a sensitivity measure, the effect of a 0.25% decline in the discount rate assumption for our U.S. and non-U.S. pension plans would increase our expected ~~2012~~2013 pre-tax pension benefit costs by approximately ~~$4.6~~$5.2 million and increase our pension plans' projected benefit obligations at December 31, ~~2011~~2012 by approximately ~~$42.8~~$50.6 million.

Share-Based Compensation

We recognize compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated at the grant date and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period.

The fair value of stock option awards that vest based on a service condition is estimated using the Black-Scholes option-pricing model. The fair value of share-based awards that contain a market condition is generally estimated using a Monte Carlo simulation model, and the fair value of modifications to share-based awards is generally estimated using a lattice model.

The determination of fair value using the Black-Scholes, Monte Carlo simulation and lattice models is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We currently estimate stock price volatility based upon an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.

Table of Contents

Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. Compensation expense for share-based awards based on a service condition is recognized using the straight-line single option method.

~~Table of Contents~~

Product Liability Self-Insurance

As of June 1, 2012, we are largely self-insured for future product liability losses related to all of our products. We have historically been and continue to be self-insured for any product liability losses related to our breast implant products. We maintain third party insurance coverage that we believe is adequate to cover potential product liability losses for injuries alleged to have occurred prior to June 1, 2011 related to Botox^® and Botox^® Cosmetic and prior to June 1, 2012 related to all of our other products. In addition, as a part of our current self-insurance product liability practice, we maintain a layer of insurance coverage for potential product liability losses, excluding breast implant products, above a minimum self-insured amount. Future product liability losses are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors to consider in developing product liability reserves include the merits and jurisdiction of each claim, the nature and the number of other similar current and past claims, the nature of the product use and the likelihood of settlement. In addition, we accrue for certain potential product liability losses estimated to be incurred, but not reported, to the extent they can be reasonably estimated. We estimate these accruals for potential losses based primarily on historical claims experience and data regarding product usage. The total value of self-insured product liability claims settled in the ~~third~~second quarter and the first ~~nine~~six months of ~~2012~~2013 and ~~2011,~~2012, respectively, and the value of known and reasonably estimable incurred but unreported self-insured product liability claims pending as of ~~September~~June 30, ~~2012~~2013 are not expected to have a material effect on our results of operations or liquidity.

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions, research and development, or R&D, tax credits available in the United States, California, and other foreign jurisdictions and deductions available in the United States for domestic production activities. We currently expect the U.S. R&D tax credit to be renewed in the fourth quarter of 2012, with retroactive effect to January 1, 2012; however, until appropriate legislation is enacted in the United States to renew the R&D tax credit, our estimated annual effective tax rate for fiscal year 2012 must exclude any potential benefit for this credit. Our effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and acquired net operating losses and changes in or the interpretation of tax laws in jurisdictions where we conduct business. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and retroactively reinstated the U.S. R&D tax credit to January 1, 2012. The retroactive benefit of the U.S. R&D tax credit for fiscal year 2012 is estimated to be approximately $17.4 million, which we recognized in fiscal year 2013. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers.

We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was ~~$14.9~~$22.6 million at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011.~~ 2012.

We have not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because we have currently reinvested these earnings indefinitely in these foreign operations. At December 31, ~~2011,~~2012, we had approximately ~~$2,505.1~~$3,083.5 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Income tax expense would be incurred if these earnings were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against our U.S. tax liability, if any. We annually update our estimate of unremitted earnings outside the United States after the completion of each fiscal year.

Acquisitions

The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value of the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed. Additionally, we must determine whether an acquired entity is considered to be a business or a set of net assets, because the excess of the purchase price over the fair value of net assets acquired can only be recognized as goodwill in a business combination.

On June 17, 2011, we acquired Alacer Biomedical, Inc., or Alacer, for an aggregate purchase price of approximately $7.0 million, net of cash acquired. On July 1, 2011, we purchased the commercial assets related to the selling and distribution of our products from our distributor in South Africa for $8.6 million, net of a $2.2 million pre-existing receivable from the distributor. On July 22, 2011, we acquired Vicept Therapeutics, Inc., or Vicept, for $74.1 million in cash and estimated contingent consideration of $163.0 million as of the acquisition date. On August 8, 2011, we acquired Precision Light, Inc., or Precision Light, for $11.7 million in cash and estimated contingent consideration of $6.2 million as of the acquisition date. On February 1, 2012, we purchased the commercial assets related to the selling and distribution of our products from our distributor in Russia for $3.1 million in cash, net of a $6.6 million pre-existing net receivable from the distributor, and estimated contingent consideration of $4.7 million as of the acquisition date. On December 19, 2012, we acquired SkinMedica, Inc., or SkinMedica, for $348.9 million in cash and contingent consideration with an estimated fair value of $2.2 million as of the acquisition date. On March 1, 2013, we acquired MAP Pharmaceuticals, Inc., or MAP, for an aggregate purchase price of approximately

Table of Contents

$871.7 million, net of cash acquired. On April 12, 2013, we acquired Exemplar Pharma, LLC, or Exemplar, for an aggregate purchase price of approximately $16.1 million, net of cash acquired. We accounted for these acquisitions as business combinations. The tangible and intangible assets acquired

~~Table of Contents~~

and liabilities assumed in connection with these acquisitions were recognized based on their estimated fair values at the acquisition dates. The determination of estimated fair values requires significant estimates and assumptions including, but not limited to, determining the timing and estimated costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows and developing appropriate discount rates. We believe the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions.

Impairment Evaluations for Goodwill and Intangible Assets

We evaluate goodwill for impairment on an annual basis, or more frequently if we believe indicators of impairment exist. We have identified two reporting units, specialty pharmaceuticals and medical devices, and perform our annual evaluation as of October 1 each year.

For our specialty pharmaceuticals reporting unit, we performed ~~the~~a qualitative assessment to determine whether it is more likely than not that its fair value is less than its carrying amount. For our medical devices reporting unit, we evaluated goodwill for impairment by comparing its carrying value to its estimated fair value. We primarily use the income approach and the market approach to valuation that include the discounted cash flow method, the guideline company method, as well as other generally accepted valuation methodologies to determine the fair value.

Upon completion of the October ~~2011~~2012 annual impairment assessment, we determined that no impairment was indicated.

On February 1, 2013, we completed our previously announced review of strategic options for maximizing the value of our obesity intervention business, and formally committed to pursue a sale of that business unit. The obesity intervention business was included in our medical devices reporting unit for the annual goodwill impairment evaluation. In the first quarter of 2013, we reported our obesity intervention business as a discontinued operation, and accordingly reduced the value of the net assets held for sale to fair value less costs to sell. The net assets held for sale include a portion of the medical devices reporting unit's goodwill allocated to the obesity intervention business based on the relative fair value of that business to the portion of the medical devices reporting unit that we will retain. During the first quarter of 2013, we tested the remaining goodwill of the medical devices reporting unit for impairment and concluded that no impairment was indicated.

As of ~~September~~June 30, ~~2012,~~2013, we are not aware of any significant indicators of impairment that exist for our goodwill that would require additional analysis.

We also review intangible assets for impairment when events or changes in circumstances indicate that the carrying value of our intangible assets may not be recoverable. An impairment in the carrying value of an intangible asset is recognized whenever anticipated future undiscounted cash flows from an intangible asset are estimated to be less than its carrying value.

~~In March 2011, we decided to discontinue development of the~~ ~~EasyBand~~^™ ~~Remote Adjustable Gastric Band System, or~~ ~~EasyBand~~^™, a technology that we acquired in connection with our 2007 acquisition of EndoArt SA, or EndoArt. As a result, in the first quarter of 2011 we recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the ~~EasyBand~~^™ ~~technology.~~

In the third quarter of 2011, we recorded a pre-tax charge of $4.3 million related to the impairment of an in-process research and development asset associated with a tissue reinforcement technology that has not yet achieved regulatory approval acquired in connection with our 2010 acquisition of Serica Technologies, Inc., or Serica. The impairment charge was recognized because estimates of the anticipated future undiscounted cash flows of the asset were not sufficient to recover its carrying amount.

Significant management judgment is required in the forecasts of future operating results that are used in our impairment evaluations. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur future impairment charges.

Continuing Operations

Headquartered in Irvine, California, we are a multi-specialty health care company focused on developing and commercializing innovative pharmaceuticals, biologics, medical devices and over-the-counter products that enable people to live life to its full potential — to see more clearly, move more freely and express themselves more fully. We discover, develop and commercialize a diverse range of products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, ~~obesity intervention,~~ urological and other specialty markets in more than 100 countries around the world.

We are also a pioneer in specialty pharmaceutical, biologic and medical device research and development. Our research and development efforts are focused on products and technologies related to the many specialty areas in which we currently operate as well as new specialty areas where unmet medical needs are significant. We supplement our own research and development activities with our commitment to identify and obtain new technologies through in-licensing, research collaborations, joint ventures and acquisitions. At ~~September~~June 30, ~~2012,~~2013, we employed approximately ~~10,500~~11,200 persons around the world. Our principal geographic markets are the United States, Europe, Latin America and Asia Pacific.

Table of Contents

Results of Continuing Operations

We operate our business on the basis of two reportable segments — specialty pharmaceuticals and medical devices. The specialty pharmaceuticals segment produces a broad range of pharmaceutical products, including: ophthalmic products for dry eye, glaucoma, inflammation, infection, allergy and retinal disease; Botox^® for certain therapeutic and aesthetic indications; skin

~~Table of Contents~~

care products for acne, psoriasis, eyelash growth and other prescription and ~~over-the-counter~~physician-dispensed skin care products; and urologics products. The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery and tissue expanders; ~~obesity intervention products;~~ and facial aesthetics products. We provide global marketing strategy teams to coordinate the development and execution of a consistent marketing strategy for our products in all geographic regions that share similar distribution channels and customers.

Management evaluates our business segments and various global product portfolios on a net sales basis, which is presented below in accordance with GAAP. We also report sales performance using the non-GAAP financial measure of constant currency sales. Constant currency sales represent current period reported sales, adjusted for the translation effect of changes in average foreign exchange rates between the current period and the corresponding period in the prior year. We calculate the currency effect by comparing adjusted current period reported sales, calculated using the monthly average foreign exchange rates for the corresponding period in the prior year, to the actual current period reported sales. We routinely evaluate our net sales performance at constant currency so that sales results can be viewed without the impact of changing foreign currency exchange rates, thereby facilitating period-to-period comparisons of our sales. Generally, when the U.S. dollar either strengthens or weakens against other currencies, the growth at constant currency rates will be higher or lower, respectively, than growth reported at actual exchange rates.

The following tables compare net sales by product line within each reportable segment and certain selected pharmaceutical products for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011:~~2012:

Three Months Ended
September 30, September 30,
Change in Product Net Sales

Percent Change in Product Net Sales
2012 2011
Total

Performance

Currency

Total

Performance

Currency
(in millions)
Net Sales by Product Line:
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals $ 663.2
$ 611.6
$ 51.6
$ 76.2
$ (24.6 ) 8.4 % 12.5 % (4.1 )%
Botox^®/Neuromodulator
431.6
396.7
34.9
45.8
(10.9 ) 8.8 % 11.5 % (2.7 )%
Skin Care 74.0
66.4
7.6
7.8
(0.2 ) 11.4 % 11.7 % (0.3 )%
Urologics 9.7
15.0
(5.3 ) (5.3 ) —
(35.3 )% (35.3 )% — %
Total Specialty
Pharmaceuticals
1,178.5
1,089.7
88.8
124.5
(35.7 ) 8.1 % 11.4 % (3.3 )%
Medical Devices:

Breast Aesthetics 86.1
83.3
2.8
5.9
(3.1 ) 3.4 % 7.1 % (3.7 )%
Obesity Intervention 37.4
49.7
(12.3 ) (11.0 ) (1.3 ) (24.7 )% (22.1 )% (2.6 )%
Facial Aesthetics 89.1
88.4
0.7
4.4
(3.7 ) 0.8 % 5.0 % (4.2 )%
Total Medical Devices 212.6
221.4
(8.8 ) (0.7 ) (8.1 ) (4.0 )% (0.3 )% (3.7 )%

Total product net sales $ 1,391.1
$ 1,311.1
$ 80.0
$ 123.8
$ (43.8 ) 6.1 % 9.4 % (3.3 )%

Domestic product net sales 62.1 % 59.3 %

International product net sales 37.9 % 40.7 %

Selected Product Net Sales (a):

Alphagan^® P, Alphagan^® and Combigan^®
$ 111.3
$ 100.5
$ 10.8
$ 14.3
$ (3.5 ) 10.8 % 14.3 % (3.5 )%
Lumigan^® Franchise
152.0
147.0
5.0
12.0
(7.0 ) 3.4 % 8.2 % (4.8 )%
Restasis^®
198.3
166.1
32.2
32.7
(0.5 ) 19.4 % 19.7 % (0.3 )%
Latisse^®
23.4
21.8
1.6
1.8
(0.2 ) 7.2 % 7.9 % (0.7 )%



	Three Months Ended
	June 30,			June 30,			Change in Product Net Sales							Percent Change in Product Net Sales
	2013			2012			Total		Performance		Currency			Total		Performance		Currency
	(in millions)
Net Sales by Product Line:
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals	$	722.4		$	670.4		$	52.0	$	53.8	$	(1.8	)	7.8	%	8.0	%	(0.2	)%
Botox^®/Neuromodulator	513.0			461.2			51.8		54.5		(2.7		)	11.2	%	11.8	%	(0.6	)%
Skin Care and Other	112.3			81.0			31.3		31.3		—			38.6	%	38.6	%	—	%
Total Specialty Pharmaceuticals	1,347.7			1,212.6			135.1		139.6		(4.5		)	11.1	%	11.5	%	(0.4	)%
Medical Devices:
Breast Aesthetics	106.8			101.2			5.6		5.8		(0.2		)	5.5	%	5.7	%	(0.2	)%
Facial Aesthetics	122.5			112.3			10.2		10.6		(0.4		)	9.1	%	9.4	%	(0.3	)%
Total Medical Devices	229.3			213.5			15.8		16.4		(0.6		)	7.4	%	7.7	%	(0.3	)%

Total product net sales	$	1,577.0		$	1,426.1		$	150.9	$	156.0	$	(5.1	)	10.6	%	10.9	%	(0.3	)%

Domestic product net sales	61.1		%	60.0		%
International product net sales	38.9		%	40.0		%

Selected Product Net Sales (a):
Alphagan^® P, Alphagan^® and Combigan^®	$	120.1		$	111.2		$	8.9	$	9.0	$	(0.1	)	7.9	%	8.1	%	(0.2	)%
Lumigan^® Franchise	158.0			150.2			7.8		7.7		0.1			5.2	%	5.1	%	0.1	%
Total Glaucoma Products	280.4			264.2			16.2		16.3		(0.1		)	6.1	%	6.2	%	(0.1	)%
Restasis^®	216.4			196.0			20.4		20.6		(0.2		)	10.4	%	10.5	%	(0.1	)%
Latisse^®	27.6			26.0			1.6		1.6		—			6.1	%	6.1	%	—	%

3033

Table of Contents


	Nine Months Ended																					Six Months Ended
	September 30,			September 30,			Change in Product Net Sales									Percent Change in Product Net Sales						June 30,			June 30,			Change in Product Net Sales									Percent Change in Product Net Sales
	2012			2011			Total			Performance			Currency			Total		Performance		Currency		2013			2012			Total			Performance			Currency			Total		Performance		Currency
	(in millions)																					(in millions)
Net Sales by Product Line:
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals	$	1,986.1		$	1,861.1		$	125.0		$	190.2		$	(65.2	)	6.7	%	10.2	%	(3.5	)%	$	1,391.0		$	1,322.9		$	68.1		$	74.4		$	(6.3	)	5.1	%	5.6	%	(0.5	)%
Botox^®/Neuromodulator	1,291.7			1,179.6			112.1			140.9			(28.8		)	9.5	%	11.9	%	(2.4	)%	970.9			860.1			110.8			115.8			(5.0		)	12.9	%	13.5	%	(0.6	)%
Skin Care	221.0			190.4			30.6			31.1			(0.5		)	16.1	%	16.3	%	(0.2	)%
Urologics	31.8			42.3			(10.5		)	(10.5		)	—			(24.8	)%	(24.8	)%	—	%
Skin Care and Other																						217.6			169.1			48.5			48.6			(0.1		)	28.7	%	28.7	%	—	%
Total Specialty Pharmaceuticals	3,530.6			3,273.4			257.2			351.7			(94.5		)	7.9	%	10.7	%	(2.8	)%	2,579.5			2,352.1			227.4			238.8			(11.4		)	9.7	%	10.2	%	(0.5	)%
Medical Devices:
Breast Aesthetics	285.7			262.9			22.8			31.1			(8.3		)	8.7	%	11.8	%	(3.1	)%	196.4			199.6			(3.2		)	(2.6		)	(0.6		)	(1.6	)%	(1.3	)%	(0.3	)%
Obesity Intervention	122.7			156.2			(33.5		)	(30.5		)	(3.0		)	(21.4	)%	(19.5	)%	(1.9	)%
Facial Aesthetics	285.2			271.8			13.4			23.7			(10.3		)	4.9	%	8.7	%	(3.8	)%	233.6			196.1			37.5			38.2			(0.7		)	19.1	%	19.5	%	(0.4	)%
Total Medical Devices	693.6			690.9			2.7			24.3			(21.6		)	0.4	%	3.5	%	(3.1	)%	430.0			395.7			34.3			35.6			(1.3		)	8.7	%	9.0	%	(0.3	)%

Total product net sales	$	4,224.2		$	3,964.3		$	259.9		$	376.0		$	(116.1	)	6.6	%	9.5	%	(2.9	)%	$	3,009.5		$	2,747.8		$	261.7		$	274.4		$	(12.7	)	9.5	%	10.0	%	(0.5	)%

Domestic product net sales	60.9		%	59.6		%																61.0		%	60.2		%
International product net sales	39.1		%	40.4		%																39.0		%	39.8		%

Selected Product Net Sales (a):
Alphagan^® P, Alphagan^® and Combigan^®	$	334.7		$	309.2		$	25.5		$	35.1		$	(9.6	)	8.3	%	11.4	%	(3.1	)%	$	236.8		$	223.4		$	13.4		$	14.1		$	(0.7	)	6.0	%	6.3	%	(0.3	)%
Lumigan^® Franchise	452.4			452.9			(0.5		)	17.5			(18.0		)	(0.1	)%	3.9	%	(4.0	)%	299.2			300.4			(1.2		)	(0.8		)	(0.4		)	(0.4	)%	(0.3	)%	(0.1	)%
Total Glaucoma Products																						540.8			529.1			11.7			12.9			(1.2		)	2.2	%	2.4	%	(0.2	)%
Restasis^®	580.0			501.1			78.9			81.3			(2.4		)	15.7	%	16.2	%	(0.5	)%	423.1			381.7			41.4			41.5			(0.1		)	10.8	%	10.9	%	(0.1	)%
Latisse^®	72.4			69.0			3.4			3.9			(0.5		)	5.0	%	5.6	%	(0.6	)%	52.2			49.0			3.2			3.3			(0.1		)	6.5	%	6.8	%	(0.3	)%

——————————


(a)	Percentage change in selected product net sales is calculated on amounts reported to the nearest whole dollar. Total glaucoma products include the Alphagan^® and Lumigan^® franchises.

Product Net Sales

Product net sales increased by ~~$80.0~~$150.9 million in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011~~2012 due to an increase of ~~$88.8~~$135.1 million in our specialty pharmaceuticals product net sales ~~partially offset by a decrease~~and an increase of ~~$8.8~~$15.8 million in our medical devices product net sales. The increase in specialty pharmaceuticals product net sales is due to increases in product net sales of our eye care pharmaceuticals, Botox^® and skin care and other product ~~lines, partially offset by a decrease in product net sales of our urologics product line.~~lines. The ~~decrease~~increase in medical devices product net sales reflects ~~a decrease in product net sales of our obesity intervention product line, partially offset by~~ an increase in product net sales of our ~~breast~~facial aesthetics and ~~facial~~breast aesthetics product lines.

Several of our products, including Botox^® Cosmetic, Latisse^® ~~and our~~, over-the-counter artificial tears, non-prescription aesthetics skin care products, facial aesthetics ~~obesity intervention~~ and breast implant products, as well as, in emerging markets, Botox^®for therapeutic use and eye care products, are purchased based on consumer choice and have limited reimbursement or are not reimbursable by government or other health care plans and are, therefore, partially or wholly paid for directly by the consumer. As such, the general economic environment and level of consumer spending have a significant effect on our sales of these products.

In the United States, sales of our products that are reimbursable by government health care plans continue to be significantly impacted by the provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, which extended Medicaid and Medicare benefits to new patient populations and increased Medicaid and Medicare rebates. Additionally, sales of our products in the United States that are reimbursed by managed care programs continue to be impacted by competitive pricing pressures. In Europe and some other international markets, sales of our products that are reimbursable by government health care plans continue to be impacted by mandatory price reductions, tenders and rebate increases. During the first six months of 2013, our sales in Latin America were

3134

Table of Contents

~~mandatory price reductions, tenders~~negatively impacted by a delay in orders from our distributor in Venezuela due to the February 2013 currency devaluation and ~~rebate increases.~~the political transition in that country.

Certain of our products face generic competition. In May 2011, a generic version of our older-generation topical allergy medication Elestat^® was launched in the United States. In June 2011, the U.S. patent for Tazorac^®cream, indicated for psoriasis and acne, expired. The U.S. patents for Tazorac^® gel expire in June 2014. The U.S. Food and Drug Administration, or FDA, has posted guidance regarding requirements for clinical bioequivalence for a generic of tazarotene cream, separately for both psoriasis and acne. We believe that this will require generic manufacturers to conduct a trial, at risk, for both indications. In ~~April 2012, the U.S. District Court for the District of Delaware ruled that our U.S. patents for~~ ~~Sanctura XR~~^® ~~are invalid, a decision that was upheld by the U.S. Court of Appeals for the Federal Circuit in June 2012. In~~ October 2012, a competitive generic version of Sanctura XR^® was launched in the United States. Additionally, a generic version of Zymar^®, our older-generation fluoroquinolone indicated for the treatment of bacterial conjunctivitis, may be launched in the United States in the near future. The U.S. Patent covering Restasis^® will expire in May 2014. In June 2013, the FDA issued draft bioequivalence guidance that would potentially allow for a generic version of Restasis^® to be approved in the future without a human clinical trial. We plan to provide comments to the FDA on the draft guidance during the sixty day public comment period. Our comments are expected to challenge the legal scientific basis for the FDA's proposed guidance, raise potential patient safety concerns and argue that the proposed non-clinical criteria are inadequate to prove bioequivalence to Restasis^®.We will also consider other legal and regulatory actions to advocate our positions. Our products also compete with generic versions of some branded pharmaceutical products sold by our competitors. Although generic competition in the United States negatively affected our aggregate product net sales in the ~~third quarter~~first six months of ~~2012,~~2013, the impact was not material. We do not currently believe that our aggregate product net sales will be materially impacted in ~~2012~~2013 by generic competition, but we could experience a rapid and significant decline in net sales of certain products if we are unable to successfully maintain or defend our patents and patent applications relating to such products.

Eye care pharmaceuticals product net sales increased in the ~~third~~second quarter of 2013 compared to the second quarter of 2012 ~~compared to the third quarter~~in all of 2011 in the United States, Canada and Asia Pacific. Net sales of eye care pharmaceutical products in Europe and Latin America decreased in the third quarter of 2012 compared to the third quarter of 2011 due to the negative translation effect of average foreign currency exchange rates in effect during the third quarter of 2012 compared to the third quarter of 2011. When measured at constant currency, net sales of eye care pharmaceutical products in Europe and Latin America increased in the third quarter of 2012 compared to the third quarter of 2011. Theour principal geographic markets.The overall increase in total sales in dollars of our eye care pharmaceutical products is primarily due to an increase in sales of Restasis^®, our therapeutic treatment for chronic dry eye disease, an increase in sales of our glaucoma drug Lumigan^® 0.01%, an increase in sales of Ozurdex^®, our biodegradable, sustained-release steroid implant for the treatment of certain retinal diseases, an increase in sales of Combigan^®, our Alphagan^® and timolol combination for the treatment of glaucoma, an increase in sales of ~~Alphagan~~Ganfort^™, our Lumigan^®P ~~0.1%~~ and ~~Alphagan~~^®P ~~0.15%, and~~timolol combination for the treatment of glaucoma, an increase in sales of our glaucoma drug Alphagan^®P 0.1%, an increase in sales of Lastacaft^®, our topical allergy medication for the treatment and prevention of itching associated with allergic conjunctivitis, and an increase of $2.5 million in sales of our artificial tears products, primarily consisting of Refresh^® and Optive^™~~artificial tears products,~~ lubricant eye drops, partially offset by ~~decreases~~a decrease in sales of our older-generation products, including our glaucoma ~~drugs~~ ~~Alphagan~~^® ~~and~~drug Lumigan^® 0.03% ~~and~~, our topical allergy medication Elestat^®, and ~~decreases in sales of~~ our fluoroquinolone products Zymar^® and Zymaxid^®. Due to the strong acceptance of Lumigan^® 0.1% in the United States market, we ceased manufacturing Lumigan^® 0.3% for the U.S. market in the fourth quarter of 2012.

We increased prices on certain eye care pharmaceutical products in the United States in the ~~fourth quarter~~last nine months of ~~2011~~2012 and the first ~~nine~~six months of ~~2012.~~2013. Effective January ~~7, 2012,~~5, 2013, we increased the published U.S. list price for Restasis^®, Lastacaft^® and Zymaxid^® by five percent, Combigan^® and Alphagan^®P 0.1% by seven percent, Lumigan^® 0.1% and Alphagan^® P 0.15% by ~~three~~eight percent, and Acular^®, Acular LS^® and Acuvail^® by ~~four percent,~~ ~~Lumigan~~^® ~~0.1% and~~ ~~Lumigan~~^® ~~0.3% by five percent,~~ ~~Alphagan~~^®P ~~0.1%,~~ ~~Combigan~~^® ~~and~~ ~~Zymaxid~~^® ~~by eight percent and~~ ~~Lastacaft~~^® ~~by ten~~eighteen percent. Effective ~~April 7, 2012,~~May 18, 2013, we increased the published U.S. list price for Restasis^® ~~by five percent. Effective May 12, 2012, we increased the published U.S. list price for~~, Alphagan^®P 0.1%, Alphagan^®P 0.15% and Lastacaft^® by an additional five percent and ~~Alphagan~~^®P ~~0.15%,~~ ~~Alphagan~~^®P ~~0.1%,~~ ~~Lumigan~~Zymaxid^® ~~0.1%~~,~~Lumigan~~^® ~~0.3% and~~ ~~Combigan~~^® ~~by an additional eight percent, and~~ Acular^®, Acular LS^®, and Acuvail^®~~and~~ ~~Zymaxid~~^®by an additional ~~ten~~six percent. These price increases had a positive net effect on our U.S. sales in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011,~~2012, but the actual net effect is difficult to determine due to the various managed care sales rebate and other incentive programs in which we participate. Wholesaler buying patterns and the change in dollar value of the prescription product mix also affected our reported net sales dollars, although we are unable to determine the impact of these effects. ~~Due to the strong acceptance of~~ ~~Lumigan~~^® ~~0.1% in the United States market, we plan to cease manufacturing~~ ~~Lumigan~~^® ~~0.3% for the U.S. market by the end of fiscal year 2012.~~

Total sales of Botox^® increased in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011~~2012 due to strong growth in sales for both therapeutic and cosmetic uses. Sales of Botox^® for therapeutic use increased in ~~the United States~~all of our principal geographic markets, primarily due to strong growth in sales for the prophylactic treatment of ~~headaches in adults with~~ chronic migraine and an increase in sales for the treatment of urinary incontinence ~~in adults with neurological conditions,~~ and ~~upper limb spasticity. Sales of~~ ~~Botox~~^® ~~for therapeutic use also increased in Asia Pacific.~~hyperhidrosis. Sales of Botox^® for cosmetic use increased the United States, Europe, Asia Pacific and Latin America, partially offset by a decline in ~~all of our principal geographic markets. Sales of~~ ~~Botox~~^®sales in ~~international markets were negatively affected by the translation effect of average foreign currency exchange rates in effect during the third quarter of 2012 compared~~Canada due primarily to the ~~third quarter~~timing of ~~2011. When measured at constant currency, total sales of~~ ~~Botox~~^® ~~increased~~promotional programs in ~~Latin America and Europe in the third quarter of 2012 compared to the third quarter of 2011.~~that market. We believe our worldwide market share for neuromodulators, including Botox^®, was approximately 76% in the ~~second~~first quarter of ~~2012,~~2013, the last quarter for which market data is available.

In March 2012, a U.S. District Court, after conducting a full trial, ruled that Merz Pharmaceuticals and Merz Aesthetics, or, jointly, Merz, violated California's Uniform Trade Secrets Act and issued an injunction ~~enjoining~~prohibiting Merz from providing, selling or soliciting purchases of Xeomin^® or its Radiesse^® dermal filler products, provided that Merz may sell Xeomin^® in the therapeutic market to customers not identified on court mandated exclusion lists and may sell dermal filler products to certain pre-existing customers. On October 1, 2012, the Company announced that the U.S. District Court had entered an order providing that the

Table of Contents

injunction related to Xeomin^® for the facial aesthetics market ~~will~~would remain in place until January 9, 2013. The injunction related to Xeomin^® for therapeutic use and Radiesse^® was in effect until November 1, 2012. ~~The District Court injunction positively affected~~

~~Table of Contents~~

~~net sales of~~ ~~Botox~~^® ~~and provided a small benefit to net sales of~~ ~~Juvéderm~~^® ~~in the third quarter of 2012. We expect the injunction to provide a benefit to net sales of~~ ~~Botox~~^® ~~during the remainder of 2012.~~

Skin care and other product net sales increased in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011~~2012 primarily due to an increase of $8.1 million in sales of Aczone^®, our topical dapsone treatment for acne vulgaris, new product sales of $22.1 million from a variety of physician dispensed aesthetic skin care products acquired in our recent acquisition of SkinMedica, an increase of $6.2 million in sales of our topical tazarotene products Tazorac^®, Zorac^®and anAvage^®, and a $1.6 million increase in sales of Latisse^®, our treatment for inadequate or insufficient eyelashes, partially offset by a ~~small~~ decrease of $7.1 million in ~~total~~ sales of ~~Tazorac~~^®, ~~Zorac~~^® ~~and~~ ~~Avage~~^®~~, our topical tazarotene products. Effective January 7, 2012, we increased the published U.S. list price for~~ ~~Aczone~~^®, ~~Tazorac~~^® ~~and~~ ~~Avage~~^® ~~by five percent. Effective May 12, 2012, we increased the published U.S. list price for~~ ~~Aczone~~^®~~by an additional three percent.~~

~~Urologics sales, which are presently concentrated in the United States and consist~~ of our Sanctura^® franchise products for the treatment of overactive bladder, or OAB, ~~decreased~~due to a decline in ~~the third quarter of 2012 compared~~unit volume related to the ~~third quarter~~launch of ~~2011, primarily due to lower sales of~~ ~~Sanctura XR~~^®, our second-generation, once-daily anticholinergic for the treatment of OAB, which was negatively impacted by a decrease in promotional activity. Effective January 7, 2012, we increased the published U.S. list price for ~~Sanctura XR~~^® ~~by nine percent and~~ ~~Sanctura~~^® ~~by ten percent. Effective May 12, 2012, we increased the published U.S. list price for~~ ~~Sanctura XR~~^® ~~by an additional fifteen percent. In October 2012,~~ a competitive generic version of Sanctura XR^® ~~was launched~~ in the United ~~States.~~States in October 2012. The increases in sales of Aczone^® and our topical tazarotene products Tazorac^®, Zorac^® and Avage are primarily attributable to an increase in sales volume and an increase in the U.S. list price for these products of five percent that was effective May 18, 2013. The increase in sales of Latisse^®is primarily attributable to an increase in product sales volume.

We have a policy to attempt to maintain average U.S. wholesaler inventory levels of our specialty ~~pharmaceutical~~pharmaceuticals products at an amount less than eight weeks of our net sales. At ~~September~~June 30, ~~2012,~~2013, based on available external and internal information, we believe the amount of average U.S. wholesaler inventories of our specialty pharmaceutical products was near the lower end of our stated policy levels.

Breast aesthetics product net sales, which consist primarily of sales of silicone gel and saline breast implants and tissue expanders, increased in the ~~third~~second quarter of 2013 compared to the second quarter of 2012 ~~compared to the third quarter of 2011~~ due ~~primarily~~ to increases in sales in the United States ~~Canada~~and Asia, partially offset by decreases in sales in Europe and Latin America. The sales of breast aesthetics products in international markets were negatively affected by the translation effect of average foreign currency exchange rates in effect during the third quarter of 2012 compared to the third quarter of 2011. The increase in sales of breast ~~aesthetic~~aesthetics products in the United States was primarily due to a beneficial change in implant product mix and higher tissue expander ~~and~~unit volume, partially offset by a small decline in implant unit ~~volume~~volume. The overall decrease in sales of breast aesthetics products in Europe and ~~favorable product mix~~Latin America was primarily due to the ~~continued transition of the U.S. market to higher priced tissue expanders~~extraordinarily high sales and ~~silicone gel products from lower priced saline products.~~

~~Obesity intervention product net~~ sales ~~which consist primarily of sales of devices used for minimally invasive long-term treatments of obesity such as our~~ ~~Lap-Band~~^® ~~and~~ ~~Lap-Band AP~~^® ~~Systems and~~ ~~Orbera~~^™ ~~System, decreased~~growth in the ~~third~~second quarter of 2012, following regulatory action by the French Government to shut down a manufacturer using industrial grade silicone in their breast implants. Many of the resultant revision surgeries occurred with our implants. Sales of tissue expanders increased $3.2 million and total sales of silicone gel and saline breast implants and accessories increased $2.4 million in the second quarter of 2013 compared to the ~~third~~second quarter of 2011 in all of our principal geographic markets. We believe sales of obesity intervention products in the United States and other principal geographic markets continued to be negatively impacted by general economic conditions given the substantial patient co-pays associated with these products, government spending restrictions and access restrictions imposed by insurance plans. In addition, net sales of our obesity intervention products continued to be negatively impacted by a general increase in the market share of other competitive bariatric surgery procedures, especially in the United States and Australia. In October 2012, we announced that we are exploring strategic options for maximizing the value of our obesity intervention business, including among other things, a potential sale of the business unit.2012.

Facial aesthetics product net sales, which consist primarily of sales of hyaluronic acid-based dermal fillers used to correct facial wrinkles, increased in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011 primarily~~2012 due to strong growth in sales in ~~Asia Pacific,~~ Europe, Latin America and, ~~Canada,~~to a lesser degree, the United States, partially offset by a decrease in sales in ~~the United States.~~Asia Pacific. The increase in ~~international~~ sales of facial aesthetics products in the United States was due primarily to an overall increase in unit volume due to an expansion of the dermal filler market and an increase in market share. The increase in sales of facial aesthetics products in Europe and Latin America was due primarily to recent ~~launch~~launches of Juvéderm^® Voluma^™ with lidocaine, Juvéderm^®Volift^™ and Juvéderm^®Volbella^™in a number of countries in Europe and Asia, partially offset by the negative translation effect of average foreign currency exchange rates in effect during the third quarter of 2012 compared to the third quarter of 2011.those markets. The decrease in sales ~~of facial aesthetics products~~ in ~~the United States~~Asia Pacific is primarily due to ~~the effect~~timing of ~~a consumer promotional program that was in place in the third quarter of 2011 that was not in place during the third quarter of 2012, and a small decline in market share related~~shipments to ~~the introduction of a competitive product.~~distributors.

Foreign currency changes decreased product net sales by ~~$43.8~~$5.1 million in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011,~~2012, primarily due to the weakening of the ~~euro,~~ Brazilian real, U.K. pound, Indian rupee ~~Mexican peso~~ and ~~Canadian~~Australian dollar compared to the U.S. ~~dollar. We currently expect foreign currency changes to continue to negatively impact our consolidated product net sales in~~dollar, partially offset by the ~~fourth quarter~~strengthening of ~~2012~~the euro and Mexican peso compared to the ~~fourth quarter in 2011, but to a lesser degree than was experienced in the third quarter of 2012.~~U.S. dollar.

U.S. product net sales as a percentage of total product net sales increased by ~~2.8~~1.1 percentage points to ~~62.1%~~61.1% in the ~~third~~second quarter of ~~2012~~2013 compared to U.S. sales of ~~59.3%~~60.0% in the ~~third~~second quarter of ~~2011,~~2012, due primarily to higher sales growth in the U.S. market compared to our international markets for our Botox^®~~and eye care pharmaceuticals product lines, an increase in sales of our~~, skin care ~~products, which are highly concentrated in the United States,~~ and the negative overall translation impact on international sales due to a general weakening of foreign currencies compared to the U.S. dollar in markets where we sold products in the third quarter of 2012 compared to the third quarter of 2011,other and breast aesthetics product lines, partially offset by higher sales growth in international markets

~~Table of Contents~~

compared to the U.S. market for our ~~facial aesthetics~~dermal filler product ~~line and a greater percentage decline in sales in the U.S. market compared to our total international markets for our obesity intervention product~~ line.

The ~~$259.9~~$261.7 million increase in product net sales in the first ~~nine~~six months of ~~2012~~2013 compared to the first ~~nine~~six months of ~~2011~~2012 was the combined result of an increase of ~~$257.2~~$227.4 million in our specialty pharmaceuticals product net sales and an increase of ~~$2.7~~$34.3 million in our medical devices product net sales.

The increase in specialty pharmaceuticals product net sales in the first ~~nine~~six months of ~~2012~~2013 compared to the first ~~nine~~six months of ~~2011~~2012 was primarily due to the same factors discussed above with respect to the increase in specialty pharmaceuticals product net sales for the ~~third~~second quarter of ~~2012.~~2013. In addition, net sales of eye care pharmaceuticals ~~products in Europe~~ and ~~net sales of~~ Botox^® ~~for therapeutic use~~products decreased in Latin America ~~increased~~ in the first ~~nine~~six months of ~~2012~~2013 compared to the first ~~nine~~six months of ~~2011 despite the negative translation impact~~2012, primarily due to a ~~general weakening~~delay in orders from our distributor in Venezuela due to the February 2013 currency devaluation and the political transition in that country. The increase in eye care pharmaceuticals in the first six months of ~~foreign currencies~~2013 compared to the ~~U.S. dollar. Additionally, net~~first six months of 2012 includes an increase of $3.0 million in sales of our ~~fluoroquinolone~~artificial tears products. The increase in skin care and other product net sales in the first six months of 2013 compared to the first six months of 2012 primarily includes an increase of $14.7 million in sales of ~~Zymaxid~~Aczone^®~~and~~, new product sales of $39.8 million due to our ~~topical acne drug~~recent acquisition of SkinMedica, an increase of $11.6 million in sales of Tazorac^® ~~increased in the first nine months of 2012 compared to the first nine months of 2011, and net sales of our non-steroidal anti-inflammatory drugs~~, ~~Acular~~^®~~, Acular LS~~Zorac^® and ~~Acuvail~~Avage^®,

Table of Contents

and a $3.2 million increase in sales of Latisse^®, partially offset by a decrease of $19.4 million in sales of our Sanctura^® ~~decreased in the first nine months of 2012 compared to the first nine months of 2011.~~franchise products.

The increase in medical devices product net sales in the first ~~nine~~six months of ~~2012~~2013 compared to the first ~~nine~~six months of ~~2011~~2012 was primarily due to the same factors discussed above with respect to the increase in medical devices product net sales for the ~~third~~second quarter of ~~2012.~~2013. In addition, sales of ~~breast aesthetics products in Europe increased in the first nine months of 2012 compared to the first nine months of 2011. The decrease in~~ facial aesthetics products in the United States grew at a higher rate in the first ~~nine~~six months of ~~2012~~2013 compared to sales growth in the second quarter of 2013 due to the timing of promotional programs. Additionally, sales of facial aesthetics products in Asia Pacific increased in the first six months of 2013 compared to the first ~~nine~~six months of ~~2011~~2012. The decrease in breast aesthetics sales in the first six months of 2013 compared to the first six months of 2012 was primarily due to ~~increased rebate activity,~~decreases in Latin America and Europe, partially offset by ~~growth~~an increase in sales in China. Sales of tissue expanders increased $3.0 million in the ~~dermal filler market.~~first six months of 2013 compared to the first six months of 2012, and sales of total silicone gel and saline breast implants and accessories decreased $6.2 million during the same period.

Foreign currency changes decreased product net sales by ~~$116.1~~$12.7 million in the first ~~nine~~six months of ~~2012~~2013 compared to the first ~~nine~~six months of ~~2011,~~2012, primarily due to the weakening of the ~~euro,~~ Brazilian real, U.K. pound, Indian rupee and Australian dollar compared to the U.S. dollar, partially offset by the strengthening of the euro and Mexican peso ~~Canadian dollar, Turkish lira and Indian rupee~~ compared to the U.S. dollar.

U.S. sales as a percentage of total product net sales increased by ~~1.3~~0.8 percentage points to ~~60.9%~~61.0% in the first ~~nine~~six months of ~~2012~~2013 compared to U.S. sales of ~~59.6%~~60.2% in the first ~~nine~~six months of ~~2011,~~2012, due primarily to ~~the same factors described above with respect to the increase in percentage of U.S.~~higher sales growth in the ~~third quarter of 2012~~U.S. market compared to our international markets for our Botox^® and skin care and other product lines, partially offset by higher sales growth in international markets compared to the ~~third quarter of 2011.~~U.S. market for our eye care pharmaceuticals and facial aesthetics product lines.

Other Revenues

Other revenues ~~increased $5.5~~decreased $3.3 million to ~~$22.8~~$20.7 million in the ~~third~~second quarter of ~~2012~~2013 compared to ~~$17.3~~$24.0 million in the ~~third~~second quarter of ~~2011.~~2012. The ~~increase~~decrease in other revenues is primarily due to ~~increased~~a decline in substantive milestone event revenue, partially offset by an increase in royalty ~~income from~~income. No substantive milestone event revenue was recorded in the second quarter of 2013. In the second quarter of 2012, other revenues included the achievement of a substantive sales milestone related to sales of Lumigan^® ~~and~~ ~~Aiphagan~~^®P ~~0.1%~~ in Japan under a license agreement with Senju Pharmaceutical Co., Ltd., or ~~Senju, an~~Senju. The increase in royalty income ~~from sales of~~ ~~Botox~~^®~~for therapeutic use in Japan and China under a licensing agreement with GlaxoSmithKline and an increase in royalty income from sales of brimonidine products by Alcon, Inc., or Alcon,~~ in the ~~United States under a licensing agreement.~~

~~Other revenues increased $20.5 million to $73.0 million in the first nine months~~second quarter of ~~2012~~2013 compared to ~~$52.5 million in~~ the ~~first nine months~~second quarter of ~~2011. The increase in other revenues~~2012 is primarily due to ~~the achievement of substantive milestone events~~an increase in ~~the first nine months of 2012 related to the approval~~sales of Aiphagan^®P ~~0.1% in Japan and the achievement of two sales milestones related to sales of~~ ~~Lumigan~~^® in Japan. Both products are under license agreements to Senju in that market. In addition, royalty income increased in the first nine months of 2012 compared to the first nine months of 2011, primarily related to increased royalty income from sales of ~~Lumigan~~^® ~~and~~ ~~Aiphagan~~^®P ~~0.1%~~ in Japan under a license agreement with Senju and an increase in ~~royalty income from~~ sales of Botox^® for therapeutic use in Japan and China under a licensing agreement with GlaxoSmithKline, partially offset by a decrease in ~~royalty income~~royalties from sales of ~~brimonidine products~~Lumigan^® in Japan under a license agreement with Senju, which were negatively impacted by ~~Alcon~~the weakening of the Japanese yen compared to the U.S. dollar during the current reporting period compared to the prior year.

Other revenues decreased $2.4 million to $47.8 million in the ~~United States~~first six months of 2013 compared to $50.2 million in the first six months of 2012. The decrease in other revenues is primarily due to a decline in substantive milestone event revenue, partially offset by an increase in royalty income. No substantive milestone event revenue was recorded in the first six months of 2013. In the first six months of 2012, other revenues included the achievement of substantive milestones related to the approval of Aiphagan^® in Japan and the achievement of two sales milestones related to sales of Lumigan^® in Japan. The increase in royalty income in the first six months of 2013 compared to the first six months of 2012 is primarily due to an increase in sales of Aiphagan^® in Japan under a license agreement with Senju and an increase in sales of Botox^®for therapeutic use in Japan and China under a licensing ~~agreement.~~agreement with GlaxoSmithKline, partially offset by a decrease in royalties from sales of Lumigan^® in Japan under a license agreement with Senju.

Cost of Sales

Cost of sales increased ~~$0.7~~$3.8 million, or ~~0.4%~~1.9%, in the ~~third~~second quarter of ~~2012~~2013 to ~~$188.8~~$199.1 million, or ~~13.6%~~12.6% of product net sales, compared to ~~$188.1~~$195.3 million, or ~~14.3%~~13.7% of product net sales in the ~~third~~second quarter of ~~2011. This~~2012. The increase in cost of sales primarily resulted from the ~~6.1%~~10.6% increase in total product net sales, ~~and an increase in provisions for inventory reserves,~~ partially offset by a decrease in cost of sales as a percentage of product net sales primarily ~~related~~due to lower royalty expenses and a ~~positive~~beneficial change in ~~geographic~~standard costs and product mix. Specialty pharmaceutical products, which generally have a lower cost of sales as a percentage of product net sales than our medical device products, increased as a percentage of our total product net sales in the third quarter of 2012 compared to the third quarter of 2011.

Cost of sales increased ~~$19.6~~$13.7 million, or ~~3.5%~~3.6%, in the first ~~nine~~six months of ~~2012~~2013 to ~~$586.3~~$399.0 million, or ~~13.9%~~13.3% of product net sales, compared to ~~$566.7~~$385.3 million, or ~~14.3%~~14.0% of product net sales in the first ~~nine~~six months of ~~2011. The~~2012. Cost of sales in the first six months of 2013 includes $8.9 million for the purchase accounting fair market value inventory adjustment rollout related to our acquisition of SkinMedica. Cost of sales in the first six months of 2012 includes $0.3 million for the purchase accounting fair market value inventory adjustment rollout related to the purchase of our distributor's business in Russia. Excluding the effect of the charges described above, cost of sales increased $5.1 million, or 1.3%, to $390.1 million, or 13.0% of product net sales in the first six months of 2013 compared to $385.0 million, or 14.0% of product net sales, in the first six months of 2012. This increase in cost of sales primarily resulted from the ~~6.6%~~9.5% increase in total product net sales, ~~and an increase in provisions for inventory reserves,~~ partially

~~Table of Contents~~

offset by a decrease in cost of sales as a

Table of Contents

percentage of product net sales primarily ~~related~~due to lower royalty expenses, lower provisions for inventory reserves, and a ~~positive~~beneficial change in product ~~and geographic~~ mix. Specialty pharmaceutical products, which generally have a lower cost of sales as a percentage of product net sales than our medical device products, increased as a percentage of our total product net sales in the first nine months of 2012 compared to the first nine months of 2011.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expenses increased ~~$2.3~~$46.8 million, or ~~0.4%~~8.3%, to ~~$540.8~~$609.9 million, or ~~38.9%~~38.7% of product net sales, in the ~~third~~second quarter of ~~2012~~2013 compared to ~~$538.5~~$563.1 million, or ~~41.1%~~39.5% of product net sales, in the ~~third~~second quarter of ~~2011.~~2012. SG&A expenses in the ~~third~~second quarter of ~~2012~~2013 include $3.7 million of transaction and integration costs related to business combinations, $2.5 million of income related to the change in fair value of contingent consideration liabilities associated with certain business combinations and expenses of ~~$0.5~~$2.9 million for external costs of stockholder derivative litigation associated with the 2010 global settlement with the U.S. Department of Justice, or DOJ, regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox^® and other legal contingency expenses. SG&A expenses in the second quarter of 2012 include an aggregate expense reversal of $1.0 million for external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ discussed above and other legal contingency expenses and a ~~$2.4~~$12.8 million charge related to the change in fair value of contingent consideration liabilities associated with certain business combinations. Excluding the effect of the items described above, SG&A expenses increased $54.5 million, or 9.9%, to $605.8 million, or 38.4% of product net sales, in the second quarter of 2013 compared to $551.3 million, or 38.7% of product net sales in the second quarter of 2012. The increase in SG&A expenses in dollars, excluding the charges described above, primarily relates to increases in selling expenses and general and administrative expenses. The increase in selling expenses in the second quarter of 2013 compared to the second quarter of 2012 principally relates to increased personnel and related incentive compensation costs that support the 10.6% increase in product net sales, including the acquisition of the SkinMedica sales force and other sales force expansions in the United States, Europe and Asia. The increase in general and administrative expenses is primarily due to the new medical device excise tax in the United States, an increase in our estimated share of the annual non-deductible fee on entities that sell branded prescription drugs to specified government programs in the United States, an increase in personnel and related incentive compensation costs, an increase in legal costs and an increase in bad debt expense.

SG&A expenses increased $86.8 million, or 7.7%, to $1,214.7 million, or 40.4% of product net sales, in the first six months of 2013 compared to $1,127.9 million, or 41.0% of product net sales, in the first six months of 2012. SG&A expenses in the ~~third quarter~~first six months of ~~2011~~2013 include ~~$0.8~~$15.1 million of transaction and integration costs related to business combinations, a $3.3 million charge related to the change in fair value of contingent consideration liabilities associated with certain business combinations and expenses of $3.5 million for external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ discussed above and other legal contingency expenses. SG&A expenses in the first six months of 2012 include $8.4 million of stockholder derivative litigation costs associated with the 2010 global settlement with the DOJ discussed above and other legal contingency expenses and a ~~$20.0~~$13.4 million ~~milestone payment~~charge related to ~~MAP Pharmaceuticals, Inc., or MAP, for~~ the ~~achievement~~change in fair value of ~~a regulatory milestone in connection~~contingent consideration liabilities associated with ~~our collaboration and co-promotion agreement for~~ ~~Levadex~~^®~~, a self-administered, orally inhaled therapy for the acute treatment of migraine in adults that has not yet achieved regulatory approval.~~certain business combinations. Excluding the effect of the items described above, SG&A expenses increased ~~$20.2~~$86.7 million, or ~~3.9%~~7.8%, to ~~$537.9~~$1,192.8 million, or ~~38.7%~~39.6% of product net sales, in the ~~third quarter~~first six months of ~~2012~~2013 compared to ~~$517.7~~$1,106.1 million, or ~~39.5%~~40.3% of product net sales in the ~~third quarter~~first six months of ~~2011.~~2012. The increase in SG&A expenses in dollars, excluding the charges described above, primarily relates to increases in selling expenses and ~~marketing~~general and administrative expenses. The increase in selling expenses and general and administrative expenses ~~partially offset by a reduction~~ in ~~promotion expenses. The~~the first six months of 2013 was primarily due to the same factors discussed with regard to the increase in ~~selling and marketing~~these expenses in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011 principally relates to increased personnel and related incentive compensation costs that support the 6.1% increase in product net sales. The increase in general and administrative~~2012. Additionally, legal expenses is primarily due to an increase in legal fees, compliance costs, compensation costs, general insurance expenses and losses from the disposal of fixed assets, partially offset by a reduction in bad debt expenses.

~~SG&A expenses increased $15.8 million, or 0.9%, to $1,710.5 million, or 40.5% of product net sales,~~declined in the first ~~nine~~six months of 2012 compared to $1,694.7 million, or 42.7% of product net sales, in the first nine months of 2011. SG&A expenses in the first nine months of 2012 include aggregate expenses of $8.9 million for external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of ~~Botox~~^® and other legal contingency expenses, and a $15.8 million charge related to the change in fair value of contingent consideration liabilities associated with certain business combinations. SG&A expenses in the first nine months of 2011 include an upfront payment of $60.0 million and a regulatory milestone payment of $20.0 million related to the ~~Levadex~~^® collaboration and co-promotion agreement with MAP, a gain of $9.4 million from the substantially complete liquidation of a foreign subsidiary and fixed asset impairment charges of $2.2 million related to the discontinued development of ~~EasyBand~~^™, $3.1 million of stockholder derivative litigation costs associated with the 2010 global settlement with the DOJ discussed above, and a $2.3 million charge related to the change in fair value of a contingent consideration liability associated with our purchase of a distributor's business in Turkey. Excluding the effect of the items described above, SG&A expenses increased $69.3 million, or 4.3%, to $1,685.8 million, or 39.9% of product net sales, in the first nine months of 2012 compared to $1,616.5 million, or 40.8% of product net sales in the first nine months of 2011. The increase in SG&A expenses in dollars, excluding the charges described above, primarily relates to increases in selling and marketing expenses and general and administrative expenses, partially offset by a reduction in promotion expenses. The increase in selling and marketing expenses in the first nine months of 20122013 compared to the first ~~nine~~six months of 2011 principally relates to increased personnel and related incentive compensation costs that support the 6.6% increase in product net sales, and additional costs supporting the expansion of our sales forces, including the addition of several new direct operations in emerging markets. The increase in general and administrative expenses is primarily due to increased compliance costs, an increase in compensation costs, including an increase in regional management costs related to the expansion of our direct selling operations in emerging markets, and an increase in legal expenses and general insurance costs, partially offset by a decrease in bad debt expenses. The decrease in promotion expenses is primarily due to an overall net reduction in promotion programs, including a decrease in direct-to-consumer advertising for ~~Latisse~~^® ~~and promotion spending for obesity intervention products, partially offset by an increase in direct-to-consumer advertising for~~ ~~Botox~~^®~~for the treatment of chronic migraine in the United States.~~2012.

Under the provisions of the PPACA, companies that sell branded prescription drugs or biologics to specified government programs in the United States are subject to an annual non-deductible fee based on the company's relative market share of branded prescription drugs or biologics sold to the specified government programs. The non-deductible fee is recorded in SG&A expenses, and the related full year ~~2012~~2013 expense is expected to be approximately ~~$27~~$29 million to ~~$30~~$32 million. Also under the provisions of the PPACA, the Company ~~will be~~is required to pay a tax deductible excise tax of 2.3% on the sale of certain medical devices beginning January 1, 2013. The excise tax is recorded in SG&A expenses, and the related full year 2013 expense is expected to be approximately $7 million to $10 million.

~~Table of Contents~~

Research and Development

We believe that our future medium- and long-term revenue and cash flows are most likely to be affected by the successful development and approval of our significant late-stage research and development candidates. As of ~~September~~June 30, ~~2012,~~2013, we ~~or our collaboration partners~~ have the following significant R&D projects in late-stage development:

~~Apaziquone (U.S. - Phase III) for bladder cancer~~


•	~~Botox~~^® ~~(U.S., Europe, Canada - Filed) for idiopathic overactive bladder~~


•	Botox^® (U.S. - ~~Phase III)~~Filed) for crow's feet lines


•	Juvéderm Voluma^™ (U.S. - Filed) for volumizing the mid-face


•	Latisse^® ~~(Europe~~(U.S - ~~Pending refiling)~~Phase III) for ~~eyelash growth~~brow


•	Levadex^® (U.S. - ~~Filed)~~Filed/Allergan addressing FDA Complete Response Letter) for migraine

Table of Contents


•	Ozurdex^® (U.S., and Europe ~~- Phase III)~~-Filed) for diabetic macular edema


•	Restasis^® (Europe - Phase III) for ocular surface disease

Ser-120 (U.S. - Phase III) for nocturia

~~Silicone Breast - Style 410 Cohesive Gel (U.S. - Filed) for breast reconstruction and augmentation~~ (in collaboration with Serenity)

In ~~March~~December 2012, ~~MAP~~we announced that Botox^® received a positive opinion from the Irish Medicines Board for the treatment of idiopathic overactive bladder with symptoms of urinary incontinence, urgency and frequency in adult patients who have an inadequate response to, or are intolerant of, anticholinergic medications. This is an important step towards securing national licenses in the 14 European countries involved in the Mutual Recognition Procedure.

In January 2013, we announced that the FDA ~~issued~~approved Botox^® for the treatment of overactive bladder with symptoms of urge urinary incontinence, urgency and frequency in adults who have had an inadequate response to or are intolerant of an anticholinergic medication.

In January 2013, we restructured our collaboration agreement with Spectrum Pharmaceuticals, Inc., or Spectrum, for the development of apaziquone, pursuant to which Spectrum reacquired all rights from us under the collaboration agreement in exchange for agreeing to pay us a ~~Complete Response letter related~~royalty on future net sales of licensed products. We have no further obligation under the agreement to ~~its filing~~share development costs or perform any development, regulatory or other activities.

In February 2013, we announced that the FDA approved our Natrelle^®410 Highly Cohesive Anatomically Shaped Silicone-Filled Breast Implants for use in breast reconstruction, augmentation and revision surgery.

In March 2013, we completed the acquisition of MAP (previously, our collaboration partner for Levadex^®). In ~~the~~April 2013, we announced that we received a Complete Response ~~letter~~Letter from the FDA ~~requested that MAP address issues~~ related to ~~chemistry, manufacturing and controls, or CMC, and observations from a recent facility inspection of a third party manufacturer. The FDA also indicated that it had not been able to complete~~ the review of inhaler usability information requested late in the review cycle. The FDA did not cite any clinical safety or efficacy issues, nor did the FDA request that any additional clinical studies be conducted prior to approval. In October 2012, MAP announced that it had resubmitted its filing for Levadex^®filing that noted concerns with the ~~FDA.~~

third-party canister filling unit manufacturer, Exemplar Pharma, LLC, or Exemplar. In April ~~2012, Spectrum Pharmaceuticals, Inc., or Spectrum, announced that the Phase III trials~~2013, in order to secure our supply chain, we acquired Exemplar for ~~apaziquone did not meet their primary endpoint, but analysis of pooled data from the trials showed~~approximately $16.1 million. Subsequent to a ~~statistically significant treatment effect in favor of apaziquone in their primary endpoint and a key secondary endpoint. Spectrum has requested~~ meeting with the FDA in mid-June 2013, we received input regarding stability metrics for our optimized manufacturing process in our newly acquired facility. We have full agreement with the FDA on all of these requirements, and we plan to ~~discuss future steps, which is anticipated to occur before~~submit our stability data by the end of ~~2012.~~2013, which should lead to an approval in the second quarter of 2014.

In May 2013, we announced that the FDA General and Plastic Surgery Devices Panel of the Medical Devices Advisory Committee voted unanimously that the benefits of Juvéderm^® Voluma^™ XC, an injectable hyaluronic acid dermal filler for cheek augmentation to correct age-related volume deficit in the mid-face, outweigh the risks. This recommendation is an important step in the FDA review process for Juvéderm^® Voluma^™ XC.

In addition to the significant R&D projects in late stage development described above, in May 2013, we provided an update on certain important Phase II projects — namely, the development of therapeutic DARPin^® products and bimatoprost for scalp hair growth. Regarding development efforts of therapeutic DARPin^® products, we have completed the initial analysis of data from the randomized controlled Phase II trial comparing two doses of the anti-VEGF DARPin^® and Lucentis^® (ranibizumab), which suggest some product differentiation between DARPin^® and Lucentis^® but do not support directly moving to Phase III. During the second quarter of 2013, we started to recruit patients into an additional Phase II study to more completely assess safety and efficacy and to guide the Phase III study design. In this Phase II study, patients are randomized to one of two doses of the anti-VEGF DARPin^® or ranibizumab. This study employs the conventional use of three loading doses to eliminate existing retinal fluid and then assesses the duration of this treatment effect. Regarding bimatoprost for scalp hair growth, the results of the Phase II trial in male and female hair loss indicated that the formulation was well tolerated but did not provide sufficient efficacy to proceed directly to Phase III. We expect to begin enrolling patients in the third quarter of 2013 in the first of two additional planned Phase II studies that include trials using a substantially higher concentration of bimatoprost.

For management purposes, we accumulate direct costs for R&D projects, but do not allocate all indirect project costs, such as R&D administration, infrastructure and regulatory affairs costs, to specific R&D projects. Additionally, R&D expense includes upfront payments to license or purchase in-process R&D assets that have not achieved regulatory approval. Our overall R&D expenses are not materially concentrated in any specific project or stage of development. The following table sets forth direct costs for our late-stage projects (which include candidates in Phase III clinical trials) and other R&D projects, upfront payments to license or purchase in-process R&D assets and all other R&D expenses for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011:~~2012:

Table of Contents


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)								(in millions)
Direct costs for:
Late-stage projects	$	43.5	$	50.0	$	137.5	$	147.9	$	59.1	$	45.7	$	114.2	$	94.0
Other R&D projects	161.1		143.7		472.2		403.4		177.2		156.1		345.0		302.3
Upfront payments to license or purchase in-process R&D assets	62.5		—		62.5		45.0		—		—		—		—
Other R&D expenses	26.2		27.6		78.1		80.1		30.2		25.9		56.1		51.4
Total	$	293.3	$	221.3	$	750.3	$	676.4	$	266.5	$	227.7	$	515.3	$	447.7

R&D expenses increased ~~$72.0~~$38.8 million, or ~~32.5%~~17.0%, to ~~$293.3~~$266.5 million in the ~~third~~second quarter of ~~2012,~~2013, or ~~21.1%~~16.9% of product net sales, compared to ~~$221.3~~$227.7 million, or ~~16.9%~~16.0% of product net sales in the ~~third~~second quarter of 2011. R&D expenses in the third quarter of 2012 include an aggregate charge of $62.5 million for upfront payments associated with two agreements for the in-licensing of technologies for the treatment of serious ophthalmic diseases, including age-related macular degeneration, from Molecular Partners AG that have not yet achieved regulatory approval. Excluding the effect of these upfront payments, R&D expenses increased $9.5 million, or 4.3%, in the third quarter of 2012 compared to the third quarter of 2011.2012. The increase in R&D expenses ~~excluding the charge described above,~~in dollars and as a percentage of product net sales was primarily due to increased spending on next generation eye care pharmaceuticals products for the treatment of glaucoma and retinal diseases, including the DARPin^®development programs, the development of technology for the treatment of rosacea acquired in the Vicept acquisition, ~~the development of tissue reinforcement technology acquired in the Serica acquisition,~~ increased spending on Botox^® for the treatment of movement disorders, including juvenile cerebral palsy, ~~and~~ increased spending on ~~hyaluronic-acid based dermal filler products,~~potential new treatment applications for Latisse^®, increased spending on the development of tissue reinforcement technonology acquired in the Serica Technologies, Inc. acquisition, and new expenses for the development of Levadex^®for the acute treatment of migraine acquired in the MAP acquisition, partially offset by a decrease in expenses associated with our restructured collaboration with Spectrum related to the development of apaziquone

~~Table of Contents~~

~~for the treatment of non-muscle invasive bladder cancer, a decrease in expenses related to obesity intervention products and~~ ~~Botox~~^® ~~for the treatment of OAB and crow's feet lines~~ and a small decrease in expenses for new technology discovery programs.

R&D expenses increased ~~$73.9~~$67.6 million, or ~~10.9%~~15.1%, to ~~$750.3~~$515.3 million in the first ~~nine~~six months of ~~2012,~~2013, or ~~17.8%~~17.1% of product net sales, compared to ~~$676.4~~$447.7 million, or ~~17.1%~~16.3% of product net sales in the first ~~nine~~six months of ~~2011.~~2012. The increase in R&D expenses in the first ~~nine~~six months of 2012 include an aggregate charge of $62.5 million for upfront payments associated with two agreements for the in-licensing of technologies for the treatment of serious ophthalmic diseases, including age-related macular degeneration, from Molecular Partners AG that have not yet achieved regulatory approval. R&D expenses in the first nine months of 2011 included a charge of $45.0 million for an upfront payment for the in-licensing of technology for the treatment of retinal diseases from Molecular Partners AG that has not yet achieved regulatory approval. Excluding the effect of these upfront payments, R&D expenses increased $56.4 million, or 8.9%, in the first nine months of 2012 compared to the first nine months of 2011. The increase in R&D expenses, excluding the charges described above, in the first nine months of 20122013 was primarily due to the same factors described above related to the increase in R&D expenses in the ~~third~~second quarter of ~~2012~~2013 compared to the ~~third~~second quarter of ~~2011. Additionally, spending on potential new treatment applications for~~ ~~Latisse~~^®and expenses associated with our collaboration with Spectrum related to the development of apaziquone for the treatment of non-muscle invasive bladder cancer increased in the first nine months of 2012 compared to the first nine months of 2011.2012.

Amortization of ~~Acquired~~ Intangible Assets

Amortization of ~~acquired~~ intangible assets increased ~~$1.3~~$5.9 million to ~~$33.2~~$29.0 million in the ~~third~~second quarter of ~~2012,~~2013, or ~~2.4%~~1.8% of product net sales, compared to ~~$31.9~~$23.1 million, or ~~2.4%~~1.6% of product net sales, in the ~~third~~second quarter of ~~2011.~~2012. The increase in amortization expense is primarily due to an increase in the balance of intangible assets subject to amortization, including intangible assets that we acquired in connection with our ~~August 2011~~March 2013 acquisition of ~~Precision Light~~MAP and our ~~February~~December 2012 ~~purchase~~acquisition of ~~our distributor’s business related to our products~~SkinMedica, partially offset by a decline in ~~Russia,~~amortization expense associated with certain licensing assets that became fully amortized at the end of the first quarter of 2013, and ~~the accelerated amortization of~~ intangible assets associated with Sanctura XR^®, ~~partially offset by a decline in amortization expense associated with developed technology acquired in connection with our 2007 acquisition of Groupe Cornéal Laboratoires, some of~~ which became fully amortized at the end of ~~2011.~~2012.

Amortization of ~~acquired~~ intangible assets increased ~~$2.5~~$15.3 million to ~~$98.1~~$59.7 million in the first ~~nine~~six months of ~~2012,~~2013, or ~~2.3%~~2.0% of product net sales, compared to ~~$95.6~~$44.4 million, or ~~2.4%~~1.6% of product net sales, in the first ~~nine~~six months of ~~2011.~~2012. The increase in amortization expense is primarily due to the same factors described above with respect to the increase in amortization expense in the ~~third~~second quarter of ~~2012~~2013 compared to the third quarter of 2011. In addition, amortization of acquired intangible assets in the first nine months of 2011 include amortization expense associated with trademarks acquired in connection with our 2006 acquisition of Inamed Corporation, which became fully amortized at the end of the first quarter of 2011.

~~Impairment of Intangible Assets and Related Costs~~

~~In March 2011, we decided to discontinue development of~~ ~~EasyBand~~^™, a technology that we acquired in connection with our 2007 acquisition of EndoArt. As a result, in the first quarter of 2011 we recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the ~~EasyBand~~^™ ~~technology.~~

In the second quarter of ~~2011, we recorded additional costs of $3.3 million for the termination of a third-party agreement primarily related to the promotion of~~ ~~Sanctura XR~~^® ~~to general practitioners in the United States associated with the impairment of the~~ ~~Sanctura~~^® ~~assets in the third quarter of 2010.~~

In the third quarter of 2011, we recorded a pre-tax charge of $4.3 million related to the impairment of an in-process research and development asset associated with a tissue reinforcement technology that has not yet achieved regulatory approval acquired in connection with our 2010 acquisition of Serica. The impairment charge was recognized because estimates of the anticipated future undiscounted cash flows of the asset were not sufficient to recover its carrying amount.2012.

Restructuring Charges and Integration Costs

In connection with our March 2013 acquisition of MAP and our December 2012 ~~Restructuring and Realignment Plan~~

~~In 2012,~~acquisition of SkinMedica, we initiated a restructuring activities to integrate the operations of the two acquired businesses with our operations and ~~realignment plan~~ to ~~streamline~~capture synergies through the ~~obesity intervention business~~centralization of certain research and ~~promote organizational efficiency. Specifically, the initiatives primarily involve eliminating a number of positions in the U.S. sales, R&D~~development, general and ~~support staff functions associated with the obesity intervention business, integrating several customer service departments into a single new call center in Austin, Texas~~administrative and ~~relocating certain other back-office functions to the Austin facility. As a result, in the third quarter of 2012, we recorded $4.0 million of~~commercial functions. The restructuring charges ~~consisting of $3.9 million~~primarily consist of employee severance and other one-time termination benefits for approximately 66 people affected by the workforce reduction and $0.1 million of other related costs. In addition, we recorded $0.6 million of SG&A expenses in the third quarter of 2012 and $1.1 million of SG&A expenses and $0.3 million of R&D expenses in the first nine months of 2012 related to the restructuring and realignment initiatives.

~~Table of Contents~~

~~Discontinued Development of~~ ~~EasyBand~~^™

~~In March 2011, we decided to discontinue development of~~ ~~EasyBand~~^™98 ~~and close the related research and development facility in Switzerland. As a result, in~~people. In the first quarter of ~~2011~~2013, we recorded ~~$4.6~~$4.3 million of restructuring charges. In the second quarter of 2013, we recorded a $0.9 million restructuring charge reversal.

Included in the three and six month periods ended June 30, 2013 are $0.9 million of restructuring charges ~~consisting of $3.0 million of~~for employee severance and other one-time termination benefits for approximately 30 people affected by the facility closure, $1.5 million of contract termination costs and $0.1 million of other related costs. In the second quarter of 2011, we recorded an additional $0.1 million of restructuring charges primarily related to ~~contract termination costs. In~~ the ~~third quarter~~realignment of ~~2012, we recorded a $0.1 million restructuring charge reversal primarily related to employee severance and other one-time termination benefits.~~

~~Other Restructuring Activities and Integration Costs~~

various business functions initiated in 2013. Included in the three and ~~nine~~six month periods ended ~~September~~June 30, 2012 are ~~a $0.1~~$0.9 million ~~restructuring charge reversal and $0.8 million~~ of additional restructuring charges ~~respectively,~~for the refurbishment of facilities related to ~~restructuring activities initiated~~the closure of our leased collagen manufacturing facility in ~~prior years. Included in the three and nine month periods ended September 30, 2011 are a $0.1 million restructuring charge reversal related to restructuring activities initiated in prior years.~~Fremont, California.

Included in the three month period ended ~~September~~June 30, ~~2012~~2013 are ~~$0.1~~$0.1 million of cost of sales and $3.7 million of SG&A expenses and ~~included~~ in the ~~nine~~six month period ended ~~September~~June 30, ~~2012 are $0.1~~2013 $0.1 million of cost of sales and ~~$0.6~~$15.1 million of SG&A expenses related to transaction and integration costs associated with the purchase of various ~~businesses and licensing and collaboration agreements~~. businesses. Included in the three month period ended June 30, 2012 are $0.1 million of SG&A expenses and ~~nine~~in the six month ~~periods~~period ended ~~September~~June 30, ~~2011 are $0.6~~2012 $0.1 million of cost of sales

Table of Contents

and ~~$2.2~~$0.5 million ~~respectively,~~ of SG&A expenses related to transaction and integration costs associated with the purchase of various businesses. For the six month period ended June 30, 2013, these costs primarily consist of investment banking and ~~licensing, collaboration and co-promotion agreements~~.legal fees.

Operating Income

Management evaluates business segment performance on an operating income basis exclusive of general and administrative expenses and other indirect costs, legal settlement expenses, impairment of intangible assets and related costs, restructuring charges, in-process research and development expenses, amortization of certain identifiable intangible assets related to business combinations, ~~and~~ asset acquisitions and related capitalized licensing costs and certain other adjustments, which are not allocated to our business segments for performance assessment by our chief operating decision maker. Other adjustments excluded from our business segments for purposes of performance assessment represent income or expenses that do not reflect, according to established Company-defined criteria, operating income or expenses associated with our core business activities.

For the ~~third~~second quarter of 2013, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $111.7 million, aggregate charges of $2.9 million for stockholder derivative litigation costs in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox^® and other legal contingency expenses, income of $2.5 million for changes in the fair value of contingent consideration liabilities, integration and transaction costs of $3.8 million associated with the purchase of various businesses, expenses of $0.8 million related to the realignment of various business functions initiated in 2013 and other net indirect costs of $7.0 million.

For the second quarter of 2012, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of ~~$104.8~~$100.5 million, ~~upfront licensing fees~~an aggregate expense reversal of $62.5 million paid to Molecular Partners AG for technology that has not achieved regulatory approval and related transaction costs of $0.1 million, stockholder derivative litigation costs of $0.5 million in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to ~~Botox~~^®, charges of $2.4 million for changes in the fair value of contingent consideration liabilities, expenses related to the 2012 restructuring and realignment initiatives of $0.6 million and other net indirect costs of $7.1 million.

For the third quarter of 2011, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $102.0 million, a milestone payment of $20.0 million paid to MAP for the FDA acceptance of a New Drug Application, or NDA, filing for technology that has not achieved regulatory approval, stockholder derivative litigation costs of $0.8 million in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to ~~Botox~~^®, a purchase accounting fair market value inventory adjustment of $0.4 million associated with the purchase of our distributor's business related to our products in South Africa, transaction costs of $0.6 million associated with the purchase of various businesses and other net indirect costs of $3.9 million.

For the first nine months of 2012, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $315.2 million, upfront licensing fees of $62.5 million paid to Molecular Partners AG for technology that has not achieved regulatory approval and related transaction costs of $0.1 million, aggregate charges of $8.9$1.0 million for stockholder derivative litigation costs in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox^® and other legal contingency expenses, charges of ~~$15.8~~$12.8 million for changes in the fair value of contingent consideration liabilities, integration and transaction costs of $0.1 million associated with the purchase of our distributor's business related to our products in Russia and other net indirect costs of $4.0 million.

For the first six months of 2013, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $221.1 million, aggregate charges of $3.5 million for stockholder derivative litigation costs in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox^® and other legal contingency expenses, charges of $3.3 million for changes in the fair value of contingent consideration liabilities, a purchase accounting fair market value inventory adjustment of $8.9 million associated with the acquisition of SkinMedica, integration and transaction costs of $15.2 million associated with the purchase of various businesses, expenses of $0.9 million related to the realignment of various business functions initiated in 2013 and other net indirect costs of $14.9 million.

For the first six months of 2012, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $209.0 million, aggregate charges of $8.4 million for stockholder derivative litigation costs in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox^® and other legal contingency expenses, charges of $13.4 million for changes in the fair value of contingent consideration liabilities, a purchase accounting fair market value inventory adjustment of $0.3 million and integration and transaction costs of $0.6 million associated with the purchase of our distributor's business related to our products in Russia ~~expenses related to the 2012 restructuring and realignment initiatives of $1.4 million~~ and other net indirect costs of ~~$15.6~~$9.3 million.

3841

Table of Contents

For the first nine months of 2011, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $292.1 million, an upfront payment of $60.0 million and subsequent milestone payment of $20.0 million paid to MAP for the FDA acceptance of an NDA filing for technology that has not achieved regulatory approval and related transaction costs of $0.6 million, an upfront licensing fee of $45.0 million paid to Molecular Partners AG for technology that has not achieved regulatory approval and related transaction costs of $0.1 million, fixed asset impairment charges of $2.2 million, a gain of $9.4 million from the substantially complete liquidation of the Company's investment in a foreign subsidiary, stockholder derivative litigation costs of $3.1 million in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to ~~Botox~~^®, a charge of $2.3 million for the change in the fair value of a contingent consideration liability, a purchase accounting fair market value inventory adjustment of $0.4 million associated with the purchase of our distributor's business related to our products in South Africa, integration and transaction costs of $1.5 million associated with the purchase of various businesses and other net indirect costs of $21.3 million.

The following table presents operating income for each reportable segment for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2011~~2012 and a reconciliation of our segments’ operating income to consolidated operating income:


	Three Months Ended					Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2012		September 30, 2011			September 30, 2012		September 30, 2011		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(in millions)					(in millions)				(in millions)
Operating income:
Specialty pharmaceuticals	$	503.4	$	433.5		$	1,449.8	$	1,286.3	$	569.4	$	506.3	$	1,059.4	$	946.4
Medical devices	59.8		68.8			203.0		214.2		75.1		68.1		129.7		119.8
Total segments	563.2		502.3			1,652.8		1,500.5		644.5		574.4		1,189.1		1,066.2
General and administrative expenses, other indirect costs and other adjustments	178.0		127.7			420.4		439.2		123.7		116.4		267.8		241.0
Amortization of acquired intangible assets (a)	27.4		26.0			80.4		77.9
Impairment of intangible assets and related costs	—		4.3			—		23.7
Restructuring charges (reversal)	3.8		(0.1		)	4.7		4.6
Amortization of intangible assets (a)										27.6		17.1		52.7		32.5
Restructuring charges										—		0.9		4.3		0.9
Total operating income	$	354.0	$	344.4		$	1,147.3	$	955.1	$	493.2	$	440.0	$	864.3	$	791.8

——————————


(a)	Represents amortization of certain identifiable intangible assets related to business combinations, ~~and~~ asset acquisitions and related capitalized licensing costs, as applicable.

Our consolidated operating income in the ~~third~~second quarter of ~~2012~~2013 was ~~$354.0~~$493.2 million, or ~~25.4%~~31.3% of product net sales, compared to consolidated operating income of ~~$344.4~~$440.0 million, or ~~26.3%~~30.9% of product net sales in the ~~third~~second quarter of ~~2011.~~2012. The ~~$9.6~~$53.2 million increase in consolidated operating income was due to ~~an $80.0~~a $150.9 million increase in product net sales ~~a $5.5 million increase in other revenues~~ and a ~~$4.3~~$0.9 million ~~charge for the impairment of intangible assets and related costs~~decrease in ~~the third quarter of 2011 that did not recur in the third quarter of 2012,~~restructuring charges, partially offset by a ~~$0.7~~$3.3 million decrease in other revenues, a $3.8 million increase in cost of sales, a ~~$2.3~~$46.8 million increase in SG&A expenses, a ~~$72.0~~$38.8 million increase in R&D expenses and a ~~$1.3~~$5.9 million increase in amortization of ~~acquired~~ intangible ~~assets and a $3.9 million increase in restructuring charges.~~assets.

Our specialty pharmaceuticals segment operating income in the ~~third~~second quarter of ~~2012~~2013 was ~~$503.4~~$569.4 million, compared to operating income of ~~$433.5~~$506.3 million in the ~~third~~second quarter of ~~2011.~~2012. The ~~$69.9~~$63.1 million increase in our specialty pharmaceuticals segment operating income was due primarily to an increase in product net sales ~~of our eye care pharmaceuticals,~~ ~~Botox~~^® ~~and skin care~~across all product lines, partially offset by ~~a decrease in net sales of our urologics product line and~~ an increase in ~~marketing~~selling, promotion and R&D expenses.

Our medical devices segment operating income in the ~~third~~second quarter of ~~2012~~2013 was ~~$59.8~~$75.1 million, compared to operating income of ~~$68.8~~$68.1 million in the ~~third~~second quarter of ~~2011.~~2012. The ~~$9.0~~$7.0 million ~~decrease~~increase in our medical devices segment operating income was due primarily to ~~a decrease in product net sales of our obesity intervention product line and an increase in overall selling and marketing expenses, partially offset by~~ an increase in product net sales of our ~~breast~~facial aesthetics and ~~facial~~breast aesthetics product lines, partially offset by an increase in selling and ~~a decrease in~~ R&D expenses.

Our consolidated operating income in the first ~~nine~~six months of ~~2012~~2013 was ~~$1,147.3~~$864.3 million, or ~~27.2%~~28.7% of product net sales, compared to consolidated operating income of ~~$955.1~~$791.8 million, or ~~24.1%~~28.8% of product net sales in the first ~~nine~~six months of ~~2011.~~2012. The ~~$192.2~~$72.5 million increase in consolidated operating income was due to a ~~$259.9~~$261.7 million increase in product net sales, ~~a $20.5 million increase in other revenues and a charge of $23.7 million for the impairment of intangible assets and related costs in the first nine~~

~~Table of Contents~~

~~months of 2011 that did not recur in the first nine months of 2012,~~ partially offset by a ~~$19.6~~$2.4 million decrease in other revenues, a $13.7 million increase in cost of sales, ~~a $15.8~~an $86.8 million increase in SG&A expenses, a ~~$73.9~~$67.6 million increase in R&D expenses, a ~~$2.5~~$15.3 million increase in amortization of ~~acquired~~ intangible assets and a ~~$0.1~~$3.4 million increase in restructuring charges.

Our specialty pharmaceuticals segment operating income in the first ~~nine~~six months of ~~2012~~2013 was ~~$1,449.8~~$1,059.4 million, compared to operating income of ~~$1,286.3~~$946.4 million in the first ~~nine~~six months of ~~2011.~~2012. The ~~$163.5~~$113.0 million increase in our specialtypharmaceuticals segment operating income was due primarily to ~~the same reasons discussed~~an increase in ~~the analysis of the third quarter of 2012. In addition,~~product net sales across all product lines, partially offset by an increase in selling ~~expenses increased in the first nine months of 2012 compared to the first nine months of 2011.~~and R&D expenses.

Our medical devices segment operating income in the first ~~nine~~six months of ~~2012~~2013 was ~~$203.0~~$129.7 million, compared to operating income of ~~$214.2~~$119.8 million in the first ~~nine~~six months of ~~2011.~~2012. The ~~$11.2~~$9.9 million ~~decrease~~increase in our medical devices segment operating income was due primarily to an increase in product net sales of our facial aesthetics product line, partially offset by a decrease in product net sales of our ~~obesity intervention~~breast aesthetics product line ~~an increase in overall selling and marketing expenses~~ and an increase in selling and R&D ~~expenses, partially offset by an increase in product net sales of our breast aesthetics and facial aesthetics product lines and a decrease in total promotion~~ expenses.

Non-Operating Income and Expense

Total net non-operating expense in the ~~third~~second quarter of ~~2012~~2013 was ~~$23.2~~$6.8 million compared to total net non-operating ~~income~~expense of ~~$12.4~~$10.5 million in the ~~third~~second quarter of ~~2011.~~2012. Interest income increased $0.3 million to $2.0 million in the second quarter of 2013 compared to $1.7 million in the second quarter of 2012. Interest expense increased $2.9 million to $20.0 million in the second

Table of Contents

quarter of 2013 compared to $17.1 million in the second quarter of 2012. Interest expense increased primarily due to the issuance in March 2013 of our 1.35% Senior Notes due 2018, or 2018 Notes, and our 2.80% Senior Notes due 2023, or 2023 Notes. Other, net income was $11.2 million in the second quarter of 2013, consisting primarily of $10.4 million in net gains on foreign currency derivative instruments and other foreign currency transactions and a gain of $0.7 million on the sale of a third party equity investment. Other, net income was $4.9 million in the second quarter of 2012, consisting primarily of net gains on foreign currency derivative instruments and other foreign currency transactions.

Total net non-operating expense in the first six months of 2013 was ~~$1.9~~$31.3 million compared to ~~interest income~~total net non-operating expense of ~~$1.8~~$40.1 million in the ~~third quarter~~first six months of ~~2011.~~2012. Interest ~~expense~~income increased $0.7 million to ~~$15.9~~$3.6 million in the ~~third quarter~~first six months of ~~2012~~2013 compared to ~~$15.2~~$2.9 million in the ~~third quarter~~first six months of ~~2011.~~2012. Interest expense increased $4.5 million to $37.4 million in the first six months of 2013 compared to $32.9 million in the first six months of 2012. Interest expense increased primarily due to an increase in accrued statutory interest resulting from a change in estimate related to uncertain tax ~~positions. Other, net~~positions and an increase in interest expense ~~was $9.2 million~~due to the issuance in ~~the third quarter~~March 2013 of ~~2012, consisting primarily of net losses on foreign currency derivative instruments~~our 2018 Notes and ~~other foreign currency transactions.~~our 2023 Notes. Other, net income was ~~$25.8~~$2.5 million in the ~~third quarter~~first six months of ~~2011,~~2013, consisting primarily of ~~$25.2~~$5.4 million in net gains on foreign currency derivative instruments and other foreign currency transactions and a gain of ~~$0.5~~$0.7 million on the sale of a third party equity investment, partially offset by a loss of $3.7 million related to the impairment of a non-marketable third party equity investment.

~~Total~~ Other, net ~~non-operating~~ expense ~~in the first nine months of 2012~~ was ~~$63.3 million compared to $39.1~~$10.1 million in the first nine months of 2011. Interest income in the first nine months of 2012 was $4.8 million compared to interest income of $5.6 million in the first nine months of 2011. Interest expense decreased $6.3 million to $48.8 million in the first nine months of 2012 compared to $55.1 million in the first nine months of 2011. Interest expense decreased primarily due to the conversion of our 1.50% Convertible Senior Notes due 2026, or 2026 Convertible Notes, in the second quarter of 2011, partially offset by an increase in accrued statutory interest resulting from a change in estimate related to uncertain tax positions. Other, net expense was $19.3 million in the first ninesix months of 2012, consisting primarily of net losses on foreign currency derivative instruments and other foreign currency transactions. Other, net income was $10.4 million in the first nine months of 2011, consisting primarily of $8.4 million in net gains on foreign currency derivative instruments and other foreign currency transactions and a gain of $1.4 million on the sale of a third party equity investment.

Income Taxes

Our effective tax rate for the ~~third~~second quarter of ~~2012~~2013 was ~~24.2%~~27.2%. Our effective tax rate for the first ~~nine~~six months of ~~2012~~2013 was ~~28.3%~~24.7%. Included in our earnings before income taxes for the first ~~nine~~six months of 2013 are charges related to changes in the fair value of contingent consideration associated with certain business combination agreements of $3.3 million, the fair market value inventory adjustment rollout related to the acquisition of SkinMedica of $8.9 million, external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox^® and other legal contingency expenses of $3.5 million, transaction and integration costs associated with business combinations of $15.2 million, a loss of $3.7 million related to the impairment of a non-marketable third party equity investment and restructuring charges of $4.3 million. In the first six months of 2013 we recorded no income tax benefit related to the changes in the fair value of contingent consideration liabilities, $3.3 million of income tax benefits related to the fair market value inventory adjustment rollout related to the acquisition of SkinMedica, $0.2 million of income tax benefits related to external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox^® and other legal contingency expenses, $3.2 million of income tax benefits related to transaction and integration costs associated with business combinations, $1.3 million of income tax benefits related to the impairment of a non-marketable third party equity investment and $1.3 million of income tax benefits related to the restructuring charges. In the first six months of 2013, we also recorded an income tax benefit of $17.4 million for the retroactive benefit of the U.S. federal research and development tax credit for the 2012 fiscal year that was signed into law on January 2, 2013. Excluding the impact of the pre-tax charges of $38.9 million and the income tax benefits of $26.7 million for the items discussed above, our adjusted effective tax rate for the first six months of 2013 was 26.7%. We believe that the use of an adjusted effective tax rate provides a more meaningful measure of the impact of income taxes on our results of operations because it excludes the effect of certain items that are not included as part of our core business activities. This allows investors to better determine the effective tax rate associated with our core business activities.

Table of Contents

The calculation of our adjusted effective tax rate for the first six months of 2013 is summarized below:



	(in millions)
Earnings from continuing operations before income taxes, as reported	$	833.0
Changes in the fair value of contingent consideration liabilities related to business combinations	3.3
Fair market value inventory adjustment rollout related to the acquisition of SkinMedica	8.9
External costs for stockholder derivative litigation and other legal contingency expenses	3.5
Transaction and integration costs associated with business combinations	15.2
Impairment of a non-marketable third party equity investment	3.7
Restructuring charges	4.3
	$	871.9

Provision for income taxes, as reported	$	206.0
Income tax benefit (provision) for:
Changes in the fair value of contingent consideration liabilities related to business combinations	—
Fair market value inventory adjustment rollout related to the acquisition of SkinMedica	3.3
External costs for stockholder derivative litigation and legal contingency expenses	0.2
Transaction and integration costs associated with business combinations	3.2
Impairment of a non-marketable third party equity investment	1.3
Restructuring charges	1.3
2012 retroactive U.S. federal research and development tax credit	17.4
	$	232.7
Adjusted effective tax rate	26.7		%

Our effective tax rates for the second quarter and first six months of 2012 were 30.8% and 30.1%, respectively. Our effective tax rate for the year ended December 31, 2012 was 28.1%. Included in our earnings before income taxes for the fiscal year 2012 are charges related to changes in the fair value of contingent consideration associated with certain business combination agreements of ~~$15.8~~$5.4 million, upfront payments of $62.5 million associated with two agreements for the in-licensing of technologies from Molecular Partners AG, the fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia of $0.9 million, external costs of stockholder derivative litigation and other legal costs associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox^® and other legal contingency expenses of ~~$8.9~~$9.7 million, ~~$0.8~~$0.9 million of interest expense associated with changes in estimated taxes related to uncertain tax positions included in prior year filings, ~~and~~ restructuring charges of ~~$4.7~~$1.5 million and impairment of intangible assets and related costs of $22.3 million. In ~~the first nine months of~~ 2012 we recorded no income tax benefits related to the changes in the fair value of contingent consideration liabilities, ~~$15.8~~$15.7 million of income tax benefits related to the upfront payments associated with the two agreements for the in-licensing of technologies from Molecular Partners AG, $0.1 million of income tax benefits related to the fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia, ~~$1.1~~$1.3 million of income tax benefits related to external costs of stockholder derivative litigation and other legal costs associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox^® and other legal contingency expenses, income tax benefits of $0.3 million related to interest expense associated with changes in estimated taxes related to uncertain tax positions included in prior year filings, ~~and $1.5~~$0.6 million of income tax benefits related to the restructuring ~~charges.~~charges and $8.2 million of income tax benefits related to the impairment of intangible assets and related costs. In ~~the first nine months of~~ 2012 we also recorded an income tax provision of ~~$6.7~~$7.7 million for changes in estimated taxes related to uncertain tax positions included in prior year filings. Excluding the impact of the ~~pretax~~pre-tax charges of ~~$93.6~~$103.2 million and the net income tax ~~benefit~~benefits of ~~$12.1~~$18.5 million for the items discussed above, our adjusted effective tax rate for ~~the first nine months of~~ 2012 was ~~27.1%. We believe that the use of an adjusted effective tax rate provides a~~

~~Table of Contents~~

more meaningful measure of the impact of income taxes on our results of operations because it excludes the effect of certain items that are not included as part of our core business activities. This allows investors to better determine the effective tax rate associated with our core business activities.

~~The calculation of our adjusted effective tax rate for the first nine months of 2012 is summarized below:~~

(in millions)
Earnings before income taxes, as reported $ 1,084.0
Changes in the fair value of contingent consideration liabilities related to business combinations 15.8
Upfront payments associated with two agreements for the in-licensing of technologies from Molecular
Partners AG
62.5
Fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia 0.9
External costs for stockholder derivative litigation and other legal contingency expenses 8.9
Interest expense associated with changes in estimated taxes related to uncertain tax positions in prior year filings 0.8
Restructuring charges 4.7
$ 1,177.6

Provision for income taxes, as reported $ 306.7
Income tax benefit (provision) for:
Changes in the fair value of contingent consideration liabilities related to business combinations —
Upfront payments associated with two agreements for the in-licensing of technologies from Molecular
Partners AG
15.8
Fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia 0.1
External costs for stockholder derivative litigation and other legal contingency expenses 1.1
Interest expense associated with changes in estimated taxes related to uncertain tax positions in prior year filings 0.3
Restructuring charges 1.5
Changes in estimated taxes related to uncertain tax positions in prior year filings (6.7 )
$ 318.8
Adjusted effective tax rate 27.1 %

Our effective tax rate for the third quarter and first nine months of 2011 was 29.7% and 28.1%, respectively. Our effective tax rate for the year ended December 31, 2011 was 27.8%. Included in our earnings before income taxes for 2011 are a $60.0 million upfront payment and a $20.0 million regulatory milestone payment related to a collaboration and co-promotion agreement with MAP, a $45.0 million upfront payment related to a collaboration and license agreement with Molecular Partners AG, intangible asset impairment charges of $20.4 million, restructuring charges of $4.6 million, fixed asset impairment charges of $2.2 million and a gain of $9.4 million from the substantially complete liquidation of a foreign subsidiary resulting from the discontinued development of ~~EasyBand~~^™. In 2011, we recorded income tax benefits of $22.2 million and $7.4 million, respectively, associated with the upfront payment and regulatory milestone payment related to the collaboration and co-promotion agreement with MAP and income tax benefits of $4.6 million associated with the upfront payment related to the collaboration and license agreement with Molecular Partners AG. In 2011, we did not record any tax benefits related to the intangible asset impairment charges, restructuring charges, fixed asset impairment charges and the gain from the substantially complete liquidation of our investment in a foreign subsidiary resulting from the discontinued development of ~~EasyBand~~^™ since a portion of these charges are not tax deductible and we do not expect to be able to utilize the deductions for the tax deductible portion of these charges in the jurisdiction where the costs were incurred. Excluding the impact of the net pre-tax charges of $142.8 million and the net income tax benefits of $34.2 million for the items discussed above, our adjusted effective tax rate for 2011 was 27.4%27.5%.

4144

Table of Contents

The calculation of our adjusted effective tax rate for ~~the year ended December 31, 2011~~2012 is summarized below:

(in millions)
Earnings before income taxes, as reported $ 1,299.7
Upfront payment for a collaboration and co-promotion agreement with MAP 60.0
Regulatory milestone payment for a collaboration and co-promotion agreement with MAP 20.0
Upfront payment for a collaboration and license agreement with Molecular Partners AG 45.0
Restructuring charges 4.6
Impairment of intangible assets 20.4
Aggregate net gain for the fixed asset impairment and gain from the substantially complete liquidation of a foreign subsidiary resulting from the discontinued development of EasyBand™
(7.2 )
$ 1,442.5

Provision for income taxes, as reported $ 361.6
Income tax benefit for:
Upfront payment for a collaboration and co-promotion agreement with MAP 22.2
Regulatory milestone payment for a collaboration and co-promotion agreement with MAP 7.4
Upfront payment for a collaboration and license agreement with Molecular Partners AG 4.6
$ 395.8
Adjusted effective tax rate 27.4 %



	2012
	(in millions)
Earnings from continuing operations before income taxes	$	1,531.0
Changes in the fair value of contingent consideration liabilities related to business combinations	5.4
Upfront payments associated with two agreements for the in-licensing of technologies from Molecular Partners AG	62.5
Fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia	0.9
External costs for stockholder derivative litigation and other legal contingency expenses	9.7
Interest expense associated with changes in estimated taxes related to uncertain tax positions in prior year filings	0.9
Restructuring charges	1.5
Impairment of intangible assets and related costs	22.3
	$	1,634.2

Provision for income taxes	$	430.3
Income tax benefit (provision) for:
Changes in the fair value of contingent consideration liabilities related to business combinations	—
Upfront payments associated with two agreements for the in-licensing of technologies from Molecular Partners AG	15.7
Fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia	0.1
External costs for stockholder derivative litigation and other legal contingency expenses	1.3
Interest expense associated with changes in estimated taxes related to uncertain tax positions in prior year filings	0.3
Restructuring charges	0.6
Impairment of intangible assets and related costs	8.2
Changes in estimated taxes related to uncertain tax positions in prior year filings	(7.7		)
	$	448.8
Adjusted effective tax rate	27.5		%

The decrease in the adjusted effective tax rate to ~~27.1%~~26.7% in the first ~~nine~~six months of ~~2012~~2013 compared to the adjusted effective tax rate for the year ended December 31, ~~2011~~2012 of ~~27.4%~~27.5% is primarily attributable to ~~an increase in~~ the ~~mix of earnings in lower tax rate jurisdictions and higher deductions for U.S. production activities, partially offset by the negative~~beneficial impact ~~of the expiration~~ of the U.S. federal research and development tax credit, atwhich is included in our estimated annual effective tax rate for 2013, but was not available in 2012, partially offset by a small negative change in other tax positions affecting unrecognized tax benefits.

Earnings from Continuing Operations

Our earnings from continuing operations in the ~~end~~second quarter of ~~2011.~~2013 were $354.0 million compared to earnings from continuing operations of $297.1 million in the second quarter of 2012. The $56.9 million increase in earnings from continuing operations was primarily the result of the increase in operating income of $53.2 million and the decrease in net non-operating expense of $3.7 million.

Our earnings from continuing operations in the first six months of 2013 were $627.0 million compared to earnings from continuing operations of $525.5 million in the first six months of 2012. The $101.5 million increase in earnings from continuing operations was primarily the result of the increase in operating income of $72.5 million, the decrease in net non-operating expense of $8.8 million and the decrease in the provision for income taxes of $20.2 million.

Net Earnings Attributable to Noncontrolling Interest

Our net earnings attributable to noncontrolling interest for our majority-owned subsidiaries were ~~$1.2~~$1.3 million and $1.0 million in the ~~third~~second quarter of ~~2012~~2013 and ~~2011,~~2012, respectively, and ~~$2.7~~$3.2 million and ~~$3.7~~$1.5 million in the first ~~nine~~six months of 2013 and 2012, respectively.

Table of Contents

Discontinued Operations

On February 1, 2013, we completed our previously announced review of strategic options for maximizing the value of our obesity intervention business, and ~~2011, respectively.~~

~~Net Earnings Attributable~~formally committed to ~~Allergan, Inc.~~

~~Our net earnings attributable to Allergan, Inc. in~~pursue a sale of that business unit. We are currently considering offers for the ~~third quarter~~sale of 2012 were $249.4 million compared to net earnings attributable to Allergan, Inc. of $249.8 million in the third quarter of 2011. The $0.4 million decrease in net earnings attributable to Allergan, Inc. was primarily thethat business unit. As a result of our approved plan to pursue a sale of the ~~increase in net non-operating expense of $35.6 million, partially offset by the increase in operating income of $9.6 million and the decrease in the provision for income taxes of $25.6 million.~~

~~Our net earnings attributable to Allergan, Inc.~~obesity intervention business unit, beginning in the first ~~nine months~~quarter of ~~2012 were $774.6 million compared to net earnings attributable to Allergan, Inc. of $654.7 million~~2013, we have reported the financial results from that business unit in discontinued operations in the ~~first nine months~~consolidated statements of ~~2011.~~earnings and have classified the related assets and liabilities as held for sale in the consolidated balance sheet. The ~~$119.9 million increase in~~prior period consolidated statements of earnings and consolidated balance sheet as of December 31, 2012 have been retrospectively revised to reflect the obesity intervention business unit as discontinued operations and the related assets and liabilities as held for sale. The net ~~earnings attributable to Allergan, Inc. was primarily the result~~assets held for sale include a portion of the ~~increase in operating income~~medical devices reporting unit's goodwill allocated to the obesity intervention business based on the relative fair value of ~~$192.2~~that business to the portion of the medical devices reporting unit that we will retain.

The following table summarizes the results of operations from discontinued operations:



	Three Months Ended					Six Months Ended
	June 30, 2013		June 30, 2012			June 30, 2013		June 30, 2012
	(in millions)
Product net sales	$	31.9	$	41.3		$	65.2	$	85.3

Operating costs and expenses:
Cost of sales (excludes amortization of intangible assets)	5.2		6.5			10.5		12.3
Selling, general and administrative	14.6		21.5			30.4		41.8
Research and development	1.2		4.3			2.7		9.3
Amortization of intangible assets	—		10.2			10.3		20.5

Earnings (loss) from discontinued operations before income taxes	$	10.9	$	(1.2	)	$	11.3	$	1.4

Earnings (loss) from discontinued operations, net of income taxes	$	7.2	$	(0.7	)	$	7.6	$	1.2

In the first quarter of 2013, we also reported a separate estimated pre-tax disposal loss of $346.2 million ~~and~~ ($259.0 million after tax) related to the ~~decrease in~~obesity intervention business unit from the write-down of the net ~~earnings attributable~~assets held for sale to ~~noncontrolling interest of $1.0 million, partially offset by the increase in net non-operating expense of $24.2 million and the increase~~their estimated fair value less costs to sell. There has been no change in the ~~provision~~estimated fair value during the second quarter of 2013. The estimated fair value is subject to change based on continuing negotiations between the prospective buyers and us.

Table of Contents

The following table summarizes the assets and liabilities held for ~~income taxes~~sale related to the obesity intervention business unit as of ~~$49.1 million.~~June 30, 2013 and December 31, 2012:



	June 30, 2013			December 31, 2012
	(in millions)
Assets:
Trade receivables, net	$	23.2		$	25.2
Inventories	10.6			10.6
Property, plant and equipment, net	1.2			1.4
Goodwill	105.7			105.7
Intangibles, net	358.7			369.0
Other assets	0.4			0.7
Valuation allowance	(346.2		)	—
Total assets held for sale	$	153.6		$	512.6

Liabilities:
Accounts payable	$	0.8		$	0.9
Accrued expenses	2.6			4.1
Other liabilities	0.2			0.3
Total liabilities held for sale	$	3.6		$	5.3

Liquidity and Capital Resources

We assess our liquidity by our ability to generate cash to fund our operations. Significant factors in the management of liquidity are: funds generated by operations; levels of accounts receivable, inventories, accounts payable and capital expenditures; the extent of our stock repurchase program; funds required for acquisitions and other transactions; funds available under our credit facilities; and financial flexibility to attract long-term capital on satisfactory terms.

Historically, we have generated cash from operations in excess of working capital requirements. The net cash provided by operating activities for the first ~~nine~~six months of ~~2012~~2013 was ~~$1,100.0~~$601.1 million compared to ~~$701.5~~$638.3 million for the first ~~nine~~six months of ~~2011.~~2012. Cash flow from operating activities ~~increased~~decreased in the first ~~nine~~six months of ~~2012~~2013 compared to the first ~~nine~~six months of ~~2011~~2012 primarily as a result of an increase in cash required to fund changes in trade receivables, inventories, accounts payable, accrued expenses and income taxes, partially offset by an increase in cash from net earnings from operations, including the effect of adjusting for non-cash items, and a decrease in cash ~~required to fund changes in accounts payable, accrued expenses, income taxes, other liabilities and other non-current assets, partially offset by an increase in cash~~ used to fund changes in ~~trade receivables. In September 2012, we~~

~~Table of Contents~~

~~terminated the $300.0 million notional amount interest rate swap~~other current assets and ~~received $54.7 million, which included accrued interest of $3.7 million.~~other liabilities. In the first ~~nine~~six months of ~~2012, we made upfront~~2013 and milestone payments of $62.5 million for various licensing and collaboration agreements compared to $125.0 million in the first nine months of 2011, which were included in our net earnings for the respective periods. In the first nine months of 2011, we paid $15.2 million in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices related to certain therapeutic uses of ~~Botox~~^®~~. In the first nine months of~~ 2012, ~~and 2011,~~ we paid pension contributions of ~~$23.1~~$13.8 million and ~~$17.7~~$14.3 million, respectively, to our U.S. defined benefit pension plan.

Net cash used in investing activities was ~~$211.4~~$884.5 million in the first ~~nine~~six months of ~~2012~~2013 compared to net cash ~~provided by~~used in investing activities of ~~$502.7~~$191.9 million in the first ~~nine~~six months of ~~2011.~~2012. In the first ~~nine~~six months of 2013, we received $260.6 million from the maturities of short-term investments. In the first six months of 2013, we purchased $184.8 million of short-term investments and paid $889.7 million, net of cash acquired, for the acquisitions of MAP and Exemplar, and $2.4 million for purchase price adjustments related to prior acquisitions. Additionally, we invested $62.4 million in new facilities and equipment and $5.6 million in capitalized software. In the first six months of 2012, we received ~~$604.7~~$379.8 million from the maturities of short-term investments and ~~$1.3~~$0.6 million from the sale of property, plant and equipment. In the first ~~nine~~six months of 2012, we purchased ~~$704.6~~$504.7 million of short-term investments, paid $3.1 million for the purchase of our ~~distributor’s~~distributor's business related to our products in Russia and paid ~~$4.1~~$3.5 million for ~~trademarks and~~ developed technology intangible assets. Additionally, we invested ~~$98.1~~$57.3 million in new facilities and equipment and $7.5 million in capitalized software. In the first nine months of 2011, we received $1,073.9 million from the maturities of short-term investments and $2.5 million from the sale of equity investments and property, plant and equipment. In the first nine months of 2011, we purchased $391.2 million of short-term investments and paid $98.9 million, net of cash acquired, for the acquisitions of Vicept, Alacer and Precision Light and the purchase of our distributor's business related to our products in South Africa. Additionally, we invested $75.4 million in new facilities and equipment and $7.9$3.7 million in capitalized software. We currently expect to invest between approximately ~~$150.0~~$200 million and ~~$200.0~~$250 million in capital expenditures for manufacturing and administrative facilities, manufacturing equipment and other property, plant and equipment during ~~2012.~~2013.

Net cash ~~used in~~provided by financing activities was ~~$638.5~~$79.0 million in the first ~~nine~~six months of ~~2012~~2013 compared to net cash used in financing activities of ~~$979.5~~$477.9 million in the first ~~nine~~six months of ~~2011. In~~2012. On March 12, 2013, we issued concurrently in a registered offering $250.0 million in aggregate principal amount of our 2018 Notes and $350.0 million in aggregate principal amount of our 2023 Notes, and received total proceeds of $598.5 million, net of original discounts. Additionally, in the first ~~nine~~six months of ~~2012,~~2013, we ~~repurchased~~received $2.8 million in net borrowings of notes payable, $140.6 million from the sale of stock to employees and $31.8 million in excess tax benefits from share-based compensation. These amounts were partially reduced by the repurchase of approximately ~~8.0~~

Table of Contents

6.1 million shares of our common stock for ~~$723.3~~$649.1 million, a cash payment of $4.8 million for offering fees related to the issuance of the 2018 Notes and the 2023 Notes, $29.7 million in dividends paid to stockholders and payments of contingent consideration of $11.1 million. In the first six months of 2012, we repurchased approximately 6.0 million shares of our common stock for $549.0 million, paid ~~$45.4~~$30.4 million in dividends to stockholders, ~~made~~had net repayments of notes payable of ~~$43.1~~$41.5 million and paid contingent consideration of $5.1 million. This use of cash was partially offset by ~~$153.9~~$127.1 million received from the sale of stock to employees and $24.5 million in excess tax benefits from share-based compensation. In the first nine months of 2011, we paid $808.9 million for the repayment and conversion of our 2026 Convertible Notes ($649.7 million principal amount and $159.2 million equity repurchase), repurchased approximately 5.0 million shares of our common stock for $374.0 million, paid $45.8 million in dividends to stockholders and paid contingent consideration of $3.0 million. This use of cash was partially offset by $25.7 million in net borrowings of notes payable, $205.7 million received from the sale of stock to employees and $20.8$21.0 million in excess tax benefits from share-based compensation.

Effective ~~October 26, 2012,~~July 30, 2013, our Board of Directors declared a cash dividend of $0.05 per share, payable ~~December~~September 12, ~~2012~~2013 to stockholders of record on ~~November 21, 2012.~~August 22, 2013.

We maintain an evergreen stock repurchase program. Our evergreen stock repurchase program authorizes us to repurchase our common stock for the primary purpose of funding our stock-based benefit plans. Under the stock repurchase program, we may maintain up to 18.4 million repurchased shares in our treasury account at any one time. At ~~September~~June 30, ~~2012,~~2013, we held approximately ~~7.2~~10.7 million treasury shares under this program. ~~Effective July 1, 2012,~~In the first quarter of 2013, we completed the repurchase of 6.0 million shares under our ~~current~~previously disclosed Rule 10b5-1 ~~plan authorizes our broker~~plan. We are uncertain as to ~~purchase our common~~the level of stock ~~traded~~repurchases, if any, to be made in the open market pursuant to our evergreen stock repurchase program. The terms of the plan set forth a maximum limit of 4.0 million shares to be repurchased through December 31, 2012, certain quarterly maximum and minimum volume limits, and the plan is cancellable at any time in our sole discretion and in accordance with applicable insider trading laws.

Our 3.375% Senior Notes due 2020, or 2020 Notes, which were sold at 99.697% of par value with an effective interest rate of 3.41%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 3.375% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2020 Notes will be due and payable on September 15, 2020, unless earlier redeemed by us.future.

Our 5.75% Senior Notes due 2016, or 2016 Notes, were sold at 99.717% of par value with an effective interest rate of 5.79%, pay interest semi-annually on the principal amount of the notes at a rate of 5.75% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2016 Notes will be due and payable on April 1, 2016, unless earlier redeemed by us. In September 2012, we terminated the $300.0 million notional amount interest rate swap related to the 2016 Notes and received $54.7 million, which included accrued interest of $3.7 million. Upon termination of the interest rate swap, we added the net fair value received of $51.0 million to the carrying value of the 2016 Notes. The amount received for the termination of the interest rate swap ~~will be~~is being amortized as a reduction to interest expense over the remaining life of the debt, which effectively fixes the interest rate for the remaining term of the 2016 Notes at 3.94%.

~~Table~~Our 2018 Notes, which were sold at 99.793% of ~~Contents~~par value with an effective interest rate of 1.39%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 1.35% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2018 Notes will be due and payable on March 15, 2018, unless earlier redeemed by us.

Our 2023 Notes, which were sold at 99.714% of par value with an effective interest rate of 2.83%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 2.80% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption, if the redemption occurs prior to December 15, 2022 (three months prior to the maturity of the 2023 Notes). If the redemption occurs after December 15, 2022, then such redemption is not subject to the make-whole provision.The aggregate outstanding principal amount of the 2023 Notes will be due and payable on March 15, 2023, unless earlier redeemed by us.

At ~~September~~June 30, ~~2012,~~2013, we had a committed long-term credit facility, a commercial paper program, a shelf registration statement that allows us to issue additional securities, including debt securities, in one or more offerings from time to time, a real estate mortgage and various foreign bank facilities. Our committed long-term credit facility will expire in October 2016. The termination date can be further extended from time to time upon our request and acceptance by the issuer of the facility for a period of one year from the last scheduled termination date for each request accepted. The committed long-term credit facility allows for borrowings of up to $800.0 million. The commercial paper program also provides for up to ~~$600.0~~$800.0 million in borrowings. However, our combined borrowings under our committed long-term credit facility and our commercial paper program may not exceed $800.0 million in the aggregate. Borrowings under the committed long-term credit facility are subject to certain financial and operating covenants that include, among other provisions, maximum leverage ratios. Certain covenants also limit subsidiary debt. We believe we were in compliance with these covenants at ~~September~~June 30, ~~2012.~~2013. At ~~September~~June 30, ~~2012,~~2013, we had no borrowings under our committed long-term credit facility, $20.0 million in borrowings outstanding under the real estate mortgage, ~~$40.7~~$51.6 million in borrowings outstanding under various foreign bank facilities and no borrowings under the commercial paper program. Commercial paper, when outstanding, is issued at current short-term interest rates. Additionally, any future borrowings that are outstanding

Table of Contents

under the long-term credit facility may be subject to a floating interest rate. We may from time to time seek to retire or purchase our outstanding debt.

On ~~August 21, 2012,~~February 1, 2013, we completed our previously announced review of strategic options for maximizing the value of our obesity intervention business, and have formally committed to pursue a sale of that ~~we entered into two separate agreements with Molecular Partners AG to discover, develop, and commercialize proprietary therapeutic~~ ~~DARPin~~^® ~~products~~business unit. We are currently considering offers for the ~~treatment~~sale of serious ophthalmic diseases. Under the terms of the agreements, we made combined upfront payments of $62.5 million to Molecular Partners AG in August 2012. The terms of the agreements also include potential future development, regulatory and sales milestone payments to Molecular Partners AG of up to $1.4 billion, as well as potential future royalty payments.that business unit.

At December 31, ~~2011,~~2012, we had net pension and postretirement benefit obligations totaling ~~$245.8~~$263.2 million. Future funding requirements are subject to change depending on the actual return on net assets in our funded pension plans and changes in actuarial assumptions. In ~~2012,~~2013, we expect to pay pension contributions of between ~~$45.0~~$40.0 million and ~~$55.0~~$50.0 million for our U.S. and non-U.S. pension plans and between $1.0 million and $2.0 million for our other postretirement plan.

Generic versions of Elestat^® and Sanctura XR^®were launched in the United States in May 2011 and October 2012, respectively, and a generic version of Zymar^® may be launched in the United States in the near future. In addition, our products compete with generic versions of some branded pharmaceutical products sold by our competitors. We do not believe that our liquidity will be materially impacted in ~~2012~~2013 by generic competition.

As of ~~September~~June 30, ~~2012, $1,623.8~~2013, $2,046.3 million of our existing cash and equivalents and short-term investments are held by non-U.S. subsidiaries. We currently plan to use these funds indefinitely in our operations outside the United States. Withholding and U.S. taxes have not been provided for unremitted earnings of certain non-U.S. subsidiaries because we have reinvested these earnings indefinitely in such operations. At December 31, ~~2011,~~2012, we had approximately ~~$2,505.1~~$3,083.5 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Tax costs would be incurred if these earnings were remitted to the United States.

We sell products to public and semi-public hospitals in Italy and Spain, which are wholly or partially funded by their respective sovereign governments. The following table provides information related to trade receivables outstanding as of ~~September~~June 30, ~~2012~~2013 from product net sales in Italy and Spain:


	Italy		Spain		Italy		Spain
	(in millions)				(in millions)
Trade receivables from public and semi-public hospitals primarily funded by the sovereign government	$	24.3	$	12.8	$	23.6	$	16.5
Trade receivables from other customers	9.6		16.5		9.8		16.3
Total trade receivables	$	33.9	$	29.3	$	33.4	$	32.8

Amount of trade receivables that is past due	$	22.0	$	14.8	$	17.5	$	14.9
Allowance for doubtful accounts	$	9.4	$	3.2	$	6.3	$	4.1

We believe the reserves established against these trade receivables are sufficient to cover the amounts that will ultimately be uncollectible. However, the economic stability in these countries is unpredictable and we cannot provide assurance that additional allowances will not be necessary if current economic conditions in these countries continue to decline. Negative changes in the amount of allowances for doubtful accounts could adversely affect our future results of operations.

As of ~~September~~June 30, ~~2012,~~2013, we have no significant trade accounts receivable from customers in Greece or Portugal that are

~~Table of Contents~~

primarily funded by their respective sovereign governments.

We believe that the net cash provided by operating activities, supplemented as necessary with borrowings available under our existing credit facilities and existing cash and equivalents and short-term investments, will provide us with sufficient resources to meet our current expected obligations, working capital requirements, debt service and other cash needs over the next year.

4549

Table of Contents

ALLERGAN, INC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. We address these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into derivative financial instruments for trading or speculative purposes.

To ensure the adequacy and effectiveness of our interest rate and foreign exchange hedge positions, we continually monitor our interest rate swap positions and foreign exchange forward and option positions both on a stand-alone basis and in conjunction with our underlying interest rate and foreign currency exposures, from an accounting and economic perspective.

However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, we cannot assure you that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our consolidated operating results and financial position.

As of June 30, 2013, we had no interest rate swap contracts outstanding. However, we may from time to time seek to enter into interest rate hedge transactions in the future.

Interest Rate Risk

Our interest income and expense are more sensitive to fluctuations in the general level of U.S. interest rates than to changes in rates in other markets. Changes in U.S. interest rates affect the interest earned on our cash and equivalents and short-term investments and interest expense on our debt, as well as costs associated with foreign currency contracts.

On January 31, 2007, we entered into a nine-year, two-month interest rate swap with a $300.0 million notional ~~amount with semi-annual settlements and quarterly interest rate reset dates.~~amount. The swap received interest at a fixed rate of 5.75% and paid interest at a variable interest rate equal to 3-month LIBOR plus 0.368%, and effectively converted $300.0 million of the $800.0 million aggregate principal amount of our 2016 Notes to a variable interest rate. Based on the structure of the hedging relationship, the hedge met the criteria for using the short-cut method for a fair value hedge. The investment in the derivative and the related long-term debt were recorded at fair value. The differential to be paid or received as interest rates change was accrued and recognized as an adjustment to interest expense related to the 2016 Notes. In September 2012, we terminated the interest rate swap and received $54.7 million, which included accrued interest of $3.7 million. Upon termination of the interest rate swap, we added the net fair value received of $51.0 million to the carrying value of the 2016 Notes. The amount received for the termination of the interest rate swap ~~will be~~is being amortized as a reduction to interest expense over the remaining life of the debt, which effectively fixes the interest rate for the remaining term of the 2016 Notes at 3.94%. At December 31, 2011, we recognized in our consolidated balance sheet an asset reported in “Investments and other assets” and a corresponding increase in “Long-term debt” associated with the fair value of the derivative of $48.1 million. During the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2012,~~2013, we recognized ~~$3.2~~$3.3 million and ~~$10.6~~$6.5 million, respectively, as a reduction of interest expense due to the effect of the interest rate swap. During the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2011,~~2012, we recognized ~~$3.7~~$3.7 million and ~~$11.4~~$7.4 million, respectively, as a reduction of interest expense due to the effect of the interest rate swap.

In February 2006, we entered into interest rate swap contracts based on 3-month LIBOR with an aggregate notional amount of $800.0 million, a swap period of 10 years and a starting swap rate of 5.198%. We entered into these swap contracts as a cash flow hedge to effectively fix the future interest rate for our 2016 Notes. In April 2006, we terminated the interest rate swap contracts and received approximately $13.0 million. The total gain is being amortized as a reduction to interest expense over a 10 year period to match the term of the 2016 Notes. As of ~~September~~June 30, ~~2012,~~2013, the remaining unrecognized gain, net of tax, of ~~$2.7~~$2.2 million is recorded as a component of accumulated other comprehensive loss.

At ~~September~~June 30, ~~2012,~~2013, we had approximately ~~$40.7~~$51.6 million of variable rate debt. If interest rates were to increase or decrease by 1% for the year, annual interest expense would increase or decrease by approximately ~~$0.4~~$0.5 million. Commercial paper, when outstanding, is issued at current short-term interest rates. Additionally, any future borrowings that are outstanding under the long-term credit facility may be subject to a floating interest rate. Therefore, higher interest costs could occur if interest rates increase in the future.

4650

Table of Contents

The following tables present information about certain of our investment portfolio and our debt obligations at ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011.~~ 2012.


	September 30, 2012																				June 30, 2013
	Maturing in																		Fair Market Value		Maturing in																			Fair Market Value
	2012			2013		2014		2015		2016			Thereafter			Total			Fair Market Value		2013			2014		2015		2016			2017			Thereafter			Total			Fair Market Value
	(in millions, except interest rates)																				(in millions, except interest rates)
ASSETS
Cash Equivalents and Short-Term Investments:
Commercial Paper	$	1,975.9		$	—	$	—	$	—	$	—		$	—		$	1,975.9		$	1,975.9	$	1,166.1		$	—	$	—	$	—		$	—		$	—		$	1,166.1		$	1,166.1
Weighted Average Interest Rate	0.14		%	—		—		—		—			—			0.14		%			0.10		%	—		—		—			—			—			0.10		%
Foreign Time Deposits	257.2			—		—		—		—			—			257.2			257.2		287.0			—		—		—			—			—			287.0			287.0
Weighted Average Interest Rate	0.19		%	—		—		—		—			—			0.19		%			0.23		%	—		—		—			—			—			0.23		%
Other Cash Equivalents	475.7			—		—		—		—			—			475.7			475.7		988.6			—		—		—			—			—			988.6			988.6
Weighted Average Interest Rate	0.33		%	—		—		—		—			—			0.33		%			0.14		%	—		—		—			—			—			0.14		%
Total Cash Equivalents and Short-Term Investments	$	2,708.8		$	—	$	—	$	—	$	—		$	—		$	2,708.8		$	2,708.8	$	2,441.7		$	—	$	—	$	—		$	—		$	—		$	2,441.7		$	2,441.7
Weighted Average Interest Rate	0.18		%	—		—		—		—			—			0.18		%			0.13		%	—		—		—			—			—			0.13		%

LIABILITIES
Debt Obligations:
Fixed Rate (US$) (a)	$	—		$	—	$	—	$	—	$	847.1		$	668.4		$	1,515.5		$	1,694.2	$	—		$	—	$	—	$	837.5		$	20.0		$	1,247.1		$	2,104.6		$	2,201.6
Weighted Average Interest Rate	—			—		—		—		3.94		%	3.48		%	3.74		%			—			—		—		3.94		%	5.65		%	2.84		%	3.31		%
Other Variable Rate (non-US$)	40.7			—		—		—		—			—			40.7			40.7		51.6			—		—		—			—			—			51.6			51.6
Weighted Average Interest Rate	6.15		%	—		—		—		—			—			6.15		%			7.00		%	—		—		—			—			—			7.00		%
Total Debt Obligations	$	40.7		$	—	$	—	$	—	$	847.1		$	668.4		$	1,556.2		$	1,734.9	$	51.6		$	—	$	—	$	837.5		$	20.0		$	1,247.1		$	2,156.2		$	2,253.2
Weighted Average Interest Rate	6.15		%	—		—		—		3.94		%	3.48		%	3.80		%			7.00		%	—		—		3.94		%	5.65		%	2.84		%	3.39		%

——————————


(a)	The carrying value of debt obligations maturing in 2016 includes an unamortized amount of ~~$47.8~~$38.1 million related to a terminated interest rate swap associated with the 2016 Notes.

4751

Table of Contents


	December 31, 2011																				December 31, 2012
	Maturing in																		Fair Market Value		Maturing in																			Fair Market Value
	2012			2013		2014		2015		2016			Thereafter			Total			Fair Market Value		2013			2014		2015		2016			2017			Thereafter			Total			Fair Market Value
	(in millions, except interest rates)																				(in millions, except interest rates)
ASSETS
Cash Equivalents and Short-Term Investments:
Commercial Paper	$	1,171.9		$	—	$	—	$	—	$	—		$	—		$	1,171.9		$	1,171.9	$	1,709.0		$	—	$	—	$	—		$	—		$	—		$	1,709.0		$	1,709.0
Weighted Average Interest Rate	0.10		%	—		—		—		—			—			0.10		%			0.14		%	—		—		—			—			—			0.14		%
Foreign Time Deposits	189.1			—		—		—		—			—			189.1			189.1		341.7			—		—		—			—			—			341.7			341.7
Weighted Average Interest Rate	0.56		%	—		—		—		—			—			0.56		%			0.17		%	—		—		—			—			—			0.17		%
Other Cash Equivalents	1,078.9			—		—		—		—			—			1,078.9			1,078.9		685.0			—		—		—			—			—			685.0			685.0
Weighted Average Interest Rate	0.02		%	—		—		—		—			—			0.02		%			0.17		%	—		—		—			—			—			0.17		%
Total Cash Equivalents and Short-Term Investments	$	2,439.9		$	—	$	—	$	—	$	—		$	—		$	2,439.9		$	2,439.9	$	2,735.7		$	—	$	—	$	—		$	—		$	—		$	2,735.7		$	2,735.7
Weighted Average Interest Rate	0.10		%	—		—		—		—			—			0.10		%			0.15		%	—		—		—			—			—			0.15		%

LIABILITIES
Debt Obligations:
Fixed Rate (US$)(a)	$	25.0		$	—	$	—	$	—	$	799.0		$	668.3		$	1,492.3		$	1,667.2	$	—		$	—	$	—	$	843.9		$	20.0		$	648.5		$	1,512.4		$	1,673.0
Weighted Average Interest Rate	7.47		%	—		—		—		5.79		%	3.48		%	4.78		%			—			—		—		3.94		%	5.65		%	3.41		%	3.74		%
Other Variable Rate (non-US$)	58.9			—		—		—		—			—			58.9			58.9		48.8			—		—		—			—			—			48.8			48.8
Weighted Average Interest Rate	10.05		%	—		—		—		—			—			10.05		%			6.06		%	—		—		—			—			—			6.06		%
Total Debt Obligations ~~(a)~~	$	83.9		$	—	$	—	$	—	$	799.0		$	668.3		$	1,551.2		$	1,726.1	$	48.8		$	—	$	—	$	843.9		$	20.0		$	648.5		$	1,561.2		$	1,721.8
Weighted Average Interest Rate	9.28		%	—		—		—		5.79		%	3.48		%	4.98		%			6.06		%	—		—		3.94		%	5.65		%	3.41		%	3.81		%

INTEREST RATE DERIVATIVES
Interest Rate Swaps:
Fixed to Variable (US$)	$	—		$	—	$	—	$	—	$	—		$	300.0		$	300.0		$	48.1
Average Pay Rate	—			—		—		—		—			0.95		%	0.95		%
Average Receive Rate	—			—		—		—		—			5.75		%	5.75		%

——————————


(a)	~~Total~~The carrying value of debt obligations maturing in ~~the unaudited condensed consolidated balance sheet at December 31, 2011 include debt obligations~~2016 includes an unamortized amount of ~~$1,551.2~~$44.6 million ~~and the~~related to a terminated interest rate swap ~~fair value adjustment of $48.1 million.~~associated with the 2016 Notes.

Foreign Currency Risk

Overall, we are a net recipient of currencies other than the U.S. dollar and, as such, benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect our consolidated revenues or operating costs and expenses as expressed in U.S. dollars.

From time to time, we enter into foreign currency option and forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow our management to focus its attention on our core business issues. Accordingly, we enter into various contracts which change in value as foreign exchange rates change to economically offset the effect of changes in the value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. We enter into foreign currency option and forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed 18 months.

We use foreign currency option contracts, which provide for the sale or purchase of foreign currencies, to economically hedge the currency exchange risks associated with probable but not firmly committed transactions that arise in the normal course of our business. Probable but not firmly committed transactions are comprised primarily of sales of products and purchases of raw material in currencies other than the U.S. dollar. The foreign currency option contracts are entered into to reduce the volatility of earnings generated in currencies other than the U.S. dollar, primarily earnings denominated in the Canadian dollar, Mexican peso, Australian dollar, Brazilian real, euro, Korean won, Turkish lira, Polish zloty, Swiss franc, Russian ruble, Swedish krona and ~~Swiss franc.~~South African rand. While these instruments are subject to fluctuations in value, such fluctuations are anticipated to offset changes in the value of the underlying exposures. Changes in the fair value of open foreign currency option contracts and any realized gains (losses) on settled contracts are recorded through

~~Table of Contents~~

earnings as “Other, net” in the accompanying unaudited condensed consolidated statements of earnings. The premium costs of purchased foreign exchange option contracts are recorded in “Other current assets” and amortized to “Other, net” over the life of the options.

All of our outstanding foreign exchange forward contracts are entered into to offset the change in value of certain intercompany receivables or payables that are subject to fluctuations in foreign currency exchange rates. The realized and unrealized

Table of Contents

gains and losses from foreign currency forward contracts and the revaluation of the foreign denominated intercompany receivables or payables are recorded through “Other, net” in the accompanying unaudited condensed consolidated statements of earnings.

The following table provides information about our foreign currency derivative financial instruments outstanding as of ~~September~~June 30, ~~2012~~2013 and December 31, ~~2011.~~2012. The information is provided in U.S. dollars, as presented in our unaudited condensed consolidated financial statements:


	September 30, 2012				December 31, 2011				June 30, 2013				December 31, 2012
	Notional Amount			Average Contract Rate or Strike Amount	Notional Amount			Average Contract Rate or Strike Amount	Notional Amount			Average Contract Rate or Strike Amount	Notional Amount		Average Contract Rate or Strike Amount
	(in millions)				(in millions)				(in millions)				(in millions)
Foreign currency forward contracts:
(Receive U.S. dollar/pay foreign currency)
Japanese yen	$	8.9		78.59	$	9.0		77.85	$	10.0		95.44	$	8.3	83.88
Australian dollar	19.1			1.03	17.3			0.99	16.4			0.94	17.3		1.05
Russian ruble	18.1			31.06	6.5			32.48	23.4			32.58	17.9		31.31
Polish zloty	1.1			3.19	1.5			3.48	—			—	1.1		3.14
New Zealand dollar	—			—	1.1			0.76
	$	47.2			$	35.4			$	49.8			$	44.6

Estimated fair value	$	0.2			$	(0.4	)		$	1.4			$	0.3

Foreign currency forward contracts:
(Pay U.S. dollar/receive foreign currency)
Euro	$	39.2		1.31	$	39.1		1.30	$	40.1		1.34	$	39.6	1.32

Estimated fair value	$	(0.6	)		$	(0.3	)		$	(1.1	)		$	—

Foreign currency sold — put options:
Canadian dollar	$	103.5		1.02	$	83.2		0.99	$	88.0		1.02	$	105.6	1.02
Mexican peso	5.9			13.92	21.3			13.79	9.7			13.21	17.8		13.10
Australian dollar	60.4			0.99	50.9			1.01	53.8			0.99	67.9		1.00
Brazilian real	57.3			2.03	49.4			1.78	35.7			2.22	45.5		2.14
Euro	154.1			1.29	141.2			1.36	160.3			1.31	168.0		1.29
Korean won	5.7			1,146.25	21.3			1,143.10	10.8			1,089.82	20.1		1,086.16
Turkish lira	4.4			1.98	18.8			1.93	12.8			1.85	27.0		1.83
Polish zloty	2.2			3.44	8.8			3.41	4.5			3.21	8.7		3.19
Swiss franc	2.6			0.92	9.8			0.92	4.3			0.92	8.6		0.92
Russian ruble									4.0			32.24	10.6		31.74
Swedish krona									4.7			6.72	9.7		6.70
South African rand									6.3			9.04	12.1		8.94
	$	396.1			$	404.7			$	394.9			$	501.6

Estimated fair value	$	11.4			$	26.3			$	18.5			$	9.9

4953

Table of Contents

ALLERGAN, INC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Principal Executive Officer and our Principal Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September~~June 30, ~~2012,~~2013, the end of the quarterly period covered by this report. Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at the reasonable assurance level.

Further, management determined that, as of ~~September~~June 30, ~~2012,~~2013, there were no changes in our internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

5054

Table of Contents

ALLERGAN, INC.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

~~The following supplements and amends~~Certain of the ~~discussion set forth under Part I, Item 3 “Legal Proceedings” of~~legal proceedings in which we are involved are discussed in Note 11, "Contingencies," to our ~~Annual~~Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form ~~10-K for the year ended December 31, 2011~~10-Q, and Part II, Item 1 “Legal Proceedings” of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012 and is limited to certain recent developments concerning our legal proceedings.

~~Clayworth v. Allergan, et al.~~

In August 2012, the Court of Appeal of the State of California affirmed the Superior Court's orders granting motions for summary judgment in favor of defendants. In September 2012, plaintiff filed a petition for rehearing with the Court of Appeal, which was denied. In October 2012, plaintiff filed a petition for review with the California Supreme Court seeking review of the Court of Appeal's decision affirming the Superior Court's granting of summary judgment.

~~Allergan, Inc. v. Cayman Chemical Company, et al.~~

In August 2012, Athena Cosmetics, Inc. filed a motion for reconsideration of the order granting partial summary judgment on our unfair competition claim and a motion to dismiss our unfair competition and false advertising claims, which were denied in October 2012. In September 2012, we entered into a settlement agreement with Peter Thomas Roth Labs, LLC.

~~Zymar~~^® ~~Patent Litigation~~

In October 2012, the U.S. Court of Appeals for the Federal Circuit affirmed the U.S. District Court for the District of Delaware's entry of judgment in favor of Apotex, Inc., or Apotex, which ruled that claim 7 of U.S. Patent No. 6,333,045, or the '045 patent, was invalid.

~~In October 2012, Lupin Limited, or Lupin, filed a motion for judgment on the pleadings in the U.S. District Court for the District of Delaware asserting that the claims of the '045 patent~~ are ~~invalid and not infringed.~~

In September 2012, the U.S. District Court for the District of Delaware granted Apotex's motion to dismiss our complaint against Apotex alleging that Apotex's product infringes the '045 patent pursuant to the USPTO's reexamination certificate. In October 2012, we, Senju Pharmaceutical Co., Ltd., or Senju, and Kyorin Pharmaceutical Co., Ltd., or Kyorin, filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit.

In September 2012, we, Senju, Kyorin, and Hi-Tech Pharmacal Co., Inc., or Hi-Tech, filed a stipulation of dismissal with prejudice of claims against Hi-Tech with respect to U.S. Patent No. 5,880,283, or the '283 patent, which was granted.

~~Combigan~~^® ~~Patent Litigation~~

In November 2012, the U.S. Court of Appeals for the Federal Circuit heard oral argument regarding the U.S. District Court for the Eastern District of Texas, Marshall Division's holding that U.S. Patent Nos. 7,030,149, 7,320,976, 7,323,463 and 7,642,258 are not invalid, are enforceable and infringedhereby incorporated by ~~defendants' proposed products.~~

In August 2012, Sandoz, Inc., or Sandoz, Alcon, Inc., Apotex, and Watson Pharmaceuticals, Inc., or Watson, filed a motion to stay proceedings pending the resolution of the appeal pending in the U.S. Court of Appeals for the Federal Circuit. In September 2012, the U.S. District Court for the Eastern District of Texas set jury selection for January 2014.

In October 2012, the Canadian appellate court heard oral argument regarding the Canadian Federal Court's ruling regarding Canadian Patent No. 2,440,764, or the '764 patent, and granting our application to prohibit approval of Apotex Canada Inc.'s generic product.

In September 2012, we received a Notice of Allegation letter from Cobalt Pharmaceuticals Company and The Watson Group, collectively, “Cobalt”, indicating that Cobalt had filed an ANDS under paragraphs 5(1)(b)(iii), 5(1)(b)(iv) and 5(3) of the Patented Medicines (Notice of Compliance) Regulations for approval of a generic form of ~~Combigan~~^® (DIN 02248347). In the letter, Cobalt contends that Canadian Patent Nos. 2,173,974, 2,225,626, or the '626 patent, 2,357,014, or the '014 patent, and the '764 patent are invalid and/or not infringed by the proposed Cobalt product. In October 2012, we filed a notice of application in the Canadian Federal Court alleging that Cobalt's proposed product infringes the '626 patent, the '014 patent and the '764 patent.

~~Table of Contents~~

~~Sanctura XR~~^® ~~Patent Litigation~~

~~In September 2012, we, Endo Pharmaceuticals Solutions, Inc., and Supernus Pharmaceuticals, Inc., filed a petition for a writ of certiorari in the U.S. Supreme Court, which was denied in October 2012.~~

~~Latisse~~^® ~~Patent Litigation~~

~~On November 5, 2012, the U.S. District Court for the Middle District of North Carolina commenced a bench trial on U.S. Patent Nos. 7,351,404 and 7,388,029 in the Apotex, Sandoz, and Hi-Tech actions.~~

In August 2012, the U.S. District Court for the Middle District of North Carolina consolidated the Apotex, Sandoz, Hi-Tech, and Watson actions to the extent they relate to U.S. Patent Nos. 8,038,988 and 8,101,161.

~~Lumigan~~^® ~~0.01% Patent Litigation~~

In August 2012, the U.S. District Court for the Eastern District of Texas consolidated the Watson, Hi-Tech, Sandoz, and Lupin actions. In September 2012, we and Watson filed a stipulation of dismissal without prejudice of our claims for infringement and declaratory judgment of infringement of U.S. Patent No. 5,688,819.

~~Zymaxid~~^® ~~Patent Litigation~~

~~In October 2012, Lupin filed a motion for judgment on the pleadings asserting that the claims of the '045 patent are invalid and not infringed.~~

~~In September 2012, we, Senju, Kyorin, and Hi-Tech filed a stipulation of dismissal with prejudice of claims against Hi-Tech with respect to the '283 patent, which was granted.~~

~~Stockholder Derivative Litigation~~

~~Louisiana Municipal Police Employees' Retirement System Action~~

~~In October 2012, the Supreme Court of Delaware scheduled oral argument before the Court~~ ~~en banc~~ ~~for February 5, 2013.~~

We are involved in various other lawsuits and claims arising in the ordinary course of business. We believe that the liability, if any, resulting from the aggregate amount of uninsured damages for any outstanding litigation, investigation or claim will not have a material adverse effect on our consolidated financial position, liquidity or results of operations. In view of the unpredictable nature of such matters, we cannot provide any assurances regarding the outcome of any litigation, investigation, inquiry or claim to which we are a party or the impact on us of an adverse ruling in such matters.reference.

Item 1A. Risk Factors

~~There have been no material changes to~~The following supplements and amends the risk factors ~~previously disclosed by us in~~set forth under Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2011,~~2012.

We operate in a highly competitive business.

The pharmaceutical and medical device industries are highly competitive. To be successful in these industries, we must be able to, among other things, effectively discover, develop, test and obtain regulatory approvals for products and effectively commercialize, market and promote approved products, including by communicating the effectiveness, safety and value of products to actual and prospective customers and medical professionals. Many of our competitors have greater resources than we have. This enables them to make greater research and development investments, including the acquisitions of technologies, products and businesses, and spread their research and development costs, as ~~supplemented~~well as their marketing and ~~amended~~promotion costs, over a broader revenue base.

Our future growth depends, in part, on our ability to develop and introduce products which are more effective than those developed by our competitors. Developments by our competitors, the entry of new competitors into the markets in which we compete, and the rapid pace of scientific advancement in the pharmaceutical and medical device industries could make our products or technologies less competitive or obsolete. For example, sales of our existing products may decline rapidly if a new product is introduced that represents a substantial improvement over our existing products or that is sold at a lower price. Additionally, if we lose patent coverage for a product, our products may compete against generic products that are as safe and effective as our products, but sold at considerably lower prices. The FDA has substantial discretion in administering the generic drug approval process, and may change current approval policies or adopt new policies that may facilitate the more rapid development and approval of generic products, including products that would compete with our existing products. The introduction of generic products could significantly reduce demand for our products within a short period of time. Certain of our pharmaceutical products also compete with over-the-counter products and other products not regulated by the ~~risk factors previously disclosed by us in Part II, Item 1A “Risk Factors” of~~FDA which may be priced and regulated differently than our ~~Quarterly Reports on Form 10-Q~~products.

We also expect to face increasing competition from biosimilar products. Recent U.S. healthcare reform legislation included an abbreviated regulatory pathway for the ~~quarterly periods ended March 31,~~approval of biosimilars. As a result, we anticipate increasing competition from biosimilars in the future. Title VII of the PPACA and the Biologics Price Competition and Innovation Act of 2009, or BPCIA, create a new licensure framework for biosimilar products, and the FDA issued draft guidance in early 2012, which could ultimately subject our biologic products, including Botox^®, to competition. Previously, there had been no licensure pathway for such a follow-on product. Further, Congress recently authorized user fee programs for both generic drugs and ~~June 30,~~biosimilars in the Food and Drug Administration Safety and Innovation Act of 2012. The availability of industry user fees obtained through these new programs may facilitate biosimilar product development and faster approvals of both generic drugs and biosimilars. While we do not anticipate that the FDA will license a biosimilar of Botox^® for several years, we cannot guarantee that our biologic products such as Botox^® will not eventually become subject to direct competition by a licensed biosimilar.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table discloses the purchases of our equity securities during the ~~third~~second fiscal quarter of ~~2012.~~2013.

Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (2)
July 1, 2012 to July 31, 2012 901,695
$ 88.67
901,400
11,859,497
August 1, 2012 to August 31, 2012 934,120
85.45
931,748
11,312,372
September 1, 2012 to September 30, 2012 168,216
86.18
166,852
11,246,443
Total 2,004,031
$ 86.96
2,000,000
N/A



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (2)
April 1, 2013 to April 30, 2013	289	$	113.55	—	7,245,903
May 1, 2013 to May 31, 2013	5,876	104.68		—	7,541,499
June 1, 2013 to June 30, 2013	59	99.75		—	7,660,162
Total	6,224	$	105.04	—	N/A

——————————

Table of Contents

(1)

We maintain an evergreen stock repurchase program, which we first announced on September 28, 1993. Under the stock repurchase program, we may maintain up to 18.4 million repurchased shares in our treasury account at any one time. At ~~September~~June 30, ~~2012,~~2013, we held approximately ~~7.2~~10.7 million treasury shares under this program. ~~Effective July 1, 2012, our current~~Total number of shares purchased represents shares of common stock withheld by us to satisfy tax withholding obligations related to vested employee restricted stock awards.

~~Table of Contents~~

Rule 10b5-1 plan authorizes our broker to purchase our common stock traded in the open market pursuant to our evergreen stock repurchase program. The terms of the plan set forth a maximum limit of 4.0 million shares to be repurchased through December 31, 2012, certain quarterly maximum and minimum volume limits, and the plan is cancellable at any time in our sole discretion and in accordance with applicable insider trading laws. The difference between total number of shares purchased and total number of shares purchased as part of publicly announced plans or programs is due to shares of common stock withheld by us to satisfy tax withholding obligations related to vested employee restricted stock awards.


(2)	The share numbers reflect the maximum number of shares that may be purchased under our stock repurchase program and are as of the end of each of the respective periods.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Reference is made to the Exhibit Index included herein.

5356

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~November~~August 67, ~~2012~~2013




	ALLERGAN, INC.

	/s/ Jeffrey L. Edwards
	Jeffrey L. Edwards Executive Vice President, Finance and Business Development, Chief Financial Officer (Principal Financial Officer)

5457

Table of Contents

ALLERGAN, INC.

EXHIBIT INDEX



Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation of Allergan, Inc. (incorporated by reference to Exhibit 3.1 to Allergan Inc.'s Report on Form 10-Q for the Quarter ended March 31, ~~2011)~~2013)

3.2		Allergan, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit ~~3.1~~3.2 to Allergan Inc.'s ~~Current~~ Report on Form ~~8-K filed on October 7, 2008)~~10-Q for the Quarter ended March 31, 2013)

10.1		~~Second Amendment to~~Offer Letter, dated as of June 24, 2013, between Allergan, Inc. ~~Pension Plan (Restated 2011)~~and Douglas S. Ingram

10.2		Severance and General Release Agreement, effective as of July 9, 2013, by and between Allergan, Inc. and David J. Endicott

31.1		Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended

32		Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350

101		The following financial statements from Allergan, Inc.'s Report on Form 10-Q for the Quarter ended ~~September~~June 30, ~~2012,~~2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Earnings; (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income; (iii) Unaudited Condensed Consolidated Balance Sheets; (iv) Unaudited Condensed Consolidated Statements of Cash Flows; and (v) Notes to Unaudited Condensed Consolidated Financial Statements

5558



	(in millions)
Earnings before income taxes, as reported	$	1,084.0
Changes in the fair value of contingent consideration liabilities related to business combinations	15.8
Upfront payments associated with two agreements for the in-licensing of technologies from Molecular Partners AG	62.5
Fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia	0.9
External costs for stockholder derivative litigation and other legal contingency expenses	8.9
Interest expense associated with changes in estimated taxes related to uncertain tax positions in prior year filings	0.8
Restructuring charges	4.7
	$	1,177.6

Provision for income taxes, as reported	$	306.7
Income tax benefit (provision) for:
Changes in the fair value of contingent consideration liabilities related to business combinations	—
Upfront payments associated with two agreements for the in-licensing of technologies from Molecular Partners AG	15.8
Fair market value inventory adjustment rollout and integration costs related to the purchase of a distributor's business in Russia	0.1
External costs for stockholder derivative litigation and other legal contingency expenses	1.1
Interest expense associated with changes in estimated taxes related to uncertain tax positions in prior year filings	0.3
Restructuring charges	1.5
Changes in estimated taxes related to uncertain tax positions in prior year filings	(6.7		)
	$	318.8
Adjusted effective tax rate	27.1		%



	(in millions)
Earnings before income taxes, as reported	$	1,299.7
Upfront payment for a collaboration and co-promotion agreement with MAP	60.0
Regulatory milestone payment for a collaboration and co-promotion agreement with MAP	20.0
Upfront payment for a collaboration and license agreement with Molecular Partners AG	45.0
Restructuring charges	4.6
Impairment of intangible assets	20.4
Aggregate net gain for the fixed asset impairment and gain from the substantially complete liquidation of a foreign subsidiary resulting from the discontinued development of EasyBand™	(7.2		)
	$	1,442.5

Provision for income taxes, as reported	$	361.6
Income tax benefit for:
Upfront payment for a collaboration and co-promotion agreement with MAP	22.2
Regulatory milestone payment for a collaboration and co-promotion agreement with MAP	7.4
Upfront payment for a collaboration and license agreement with Molecular Partners AG	4.6
	$	395.8
Adjusted effective tax rate	27.4		%