Bausch Health Companies Inc (BHC) 2003 Q3 法說會逐字稿

Good morning. My name is Melissa. And I will be your conference facilitator today. At this time I would like to welcome everyone to the ICN third quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Please limit yourselves to one question at a time to allow all participants an opportunity to ask questions. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would now like to turn the call over to Mr. Jeff Misakian, Vice President of Investor Relations. Please go ahead sir

Thank you Melissa. Good morning, everyone. And Welcome to ICN's third quarter 2003 earnings call. We are very pleased to be with you this morning. Before we begin, however, I'll like to call your attention to the fact that this presentation may contain forward-looking statements that may involve risks and uncertainties including but not limited to projections of future sales, royalty income, operating income returns on invested assets, regulatory approval processes, competition from generic products, marketplace acceptance of the company's products, success of the companies a strategic repositioning initiatives and the ability of management to execute them.

Cost cutting measure, success of the company's strategic plan and ability to achieve financial targets and cost reduction goals and other risks detailed from time to time in ICN's SEC filings. These statements are based on management's current expectations and involve risks and uncertainties that involve ICN's ability to retain key employees and reduce costs, general economic factors and business and capital market conditions, general industry trends and changes in tax law requirements and government regulation. ICN wishes to cautions reader that these factors, as well as other factors described in ICN's SEC filings are among the factors that could cause actual results to differ materially from the expectations described in these forward-looking statements.

Joining us on the call today are Robert W O'Leary, ICN's Chairman and Chief Executive Officer. Timothy C Tyson, President and Chief Operating Officer. And Bary G Bailey, Executive Vice President and Chief Financial Officer. Dr. Kim Lamon, President R&D and Chief Scientific Officer. Wes Wheeler, President North American Global Marketing and Business Development. Willi Wu Controller and Bill Robert, Treasurer are also here to answer questions during the question and answer session. Now I would like to turn the call over to Mr. O'Leary. Robert?

Thank you, Jeff. Good morning, everyone. Thank you for joining us. We announced results for the third quarter this morning that reflect the execution on a number of fronts. While our results include a decline in royalty revenues and the financial impact from some of our strategic initiatives, our core business, the business we can influence continued to make remarkable progress in this quarter. Total revenues from continuing operations decreased 2% in the current quarter compared to a year ago. Primarily due to the royalty revenue decline. However, product sales from the specialty pharma business increased 21% in the same period.

Tim Tyson will provide you with more information about our product sales in a few minutes. I am particularly pleased with the strong management team we have built here at ICN that continues to deliver on our focused strategy while maintaining an adherence to strict control over operating expenses. This focus continued to pay off in the third quarter. With an increase in product sales and expansion of our gross margin and continued improvement in our expense ratios. As a result, operating income in the specialty pharma business from which we exclude our R&D division increased substantially to a profit of 21.9 million in the third quarter from a loss a year ago.

Royalty revenue from the sales of ribovirin declined 43% in the third quarter compared to last year. The decline in royalties is consistent with the information disclosed in Shering plows third quarter announcement and the market place dynamics. While we continue to pursue legal and regulatory relief we are operating under the assumption that generic manufacturers of ribovirin will enter the United States before the end of the year which we expect to further impact ribovirin sales and royalties we receive.

ICN successful reapplied the minority interest in Riba pharm this quarter and we merged Riba pharm operations into our own. This was the culmination of a long process in which we concentrated on the best outcome for our shareholders and frankly never took our eye off the ball. Merging Riba Pharm, which is now our R&D division into ICN was clearly the right thing to do and our shareholders have already begun to realize the benefits. The acquisition did trigger a one-time write-off of $117.6 million of in process research and development expenses which resulted in a net loss in the third quarter of 82.4 million and a loss from continuing operations of 98.5 million.

However, when you exclude the one-time write-off from in process R&D income from continuing operations was a positive $19.1 million or 23 cents per diluted share. This is a penny ahead of the first call consensus estimate in spite of the substantial decline in royalty revenue and speaks once again not only to the strength but to the potential of our core business. We have now almost nearly wrapped up all of you are a divestiture activity which we report to you in our operations. Our divestiture team was active again this quarter continuing to execute ahead of schedule on the safely our non-core assets.

We sold the cemetery business and recorded a begin on the sale as well as a $58 million increase in our cash. We now have only our much smaller API business in the Czech republic and Hungary left to divest and we expect to complete that soon. Bary Bailey will provide you with more details on our financial performance for the third quarter in a few minutes. Importantly, we also announced this morning that the company has decided to initiate phase three studies on verity, our lead anti-viral compound that we intend to develop in oral form for the treatment of hepatitis C.

Our decision follows a meeting with the FDA in early September in which the company presented interim analysis of 12 weeks of clinical data in a phase 2 trial. We are pleased with this development and that we are proceeding into phase three. We have scheduled an investigators meeting for later this month and expect to enroll our first patient in the phase three studies by the end of the year. Hopefully, you have seen our press release announcing this development with verity. We will be somewhat limited in what we can add to that release in this mornings call so we refer you to it.

And in fact, we are very proud of our third quarter results and we are going to focus our attention on this call on those results. With that, I would like to turn the call over to Tim Tyson, our President for a review of our regional and on product performance.

Thank you, Robert. Good morning, everyone. We are very pleased with the steady progress made this quarter in a our specialty pharmaceutical business. As you can see in the results published this morning, we saw both top and bottom line improvements in nearly all regions. North America which represents our most important opportunity stood out with the strongest performance in the quarter compared to last year. North American sales in the third quarter were $29.4 million. An increase of 75% over a year ago. Operating income for North American was $12.9 million in the third quarter versus a loss in the same quarter last year.

We saw improvement in several products in North American, particularly in our core dermatological business. Active X sales increased in the third quarter due to the restructuring out of a US sales force and strong promotional effort and remains the leader for the treatment of acetonic care toes with a 52% share of the US market. We recently re-launched an effective further treatment for severe psoriasis. Sales of actor Lin(ph) were up significantly in the third quarter and are expected to continue to increase as we approach the peak winter season.

Our Hydrocilin known flu-like Quinn is holding total market share just slightly introduction of new products. Annually our products for fine line and wrinkles continues to grow and is now being advertised to consumers. We have also seen strong growth in Sesamet (ph) an anti-hematic in Canada. Mestinon, our leading global product and product for the treatment for myasthenia gravis continued to be a strong contributor in North American despite of genuine competition. Our defense strategy has helped us retain business at more than 50% of total prescription which is significantly above what typical erosion models would predict. It is important you note that last year's third quarter was impacted by our reduction measures which we completed in April of this year.

Sales in Europe in the third quarter totaled $54.5 million which represents a 23% increase over the same period last year. European sales were aid by the strength of foreign currencies which added $4.8 million in the quarter. In addition, we saw sales growth in Poland and other central European countries. Major contributors were Mestinon and Kelsatonin (ph). Operating income in Europe improved significantly totaling $8.4 million in the third quarter compared to a near break-even results a year ago due to good financial management.

Europe continues to deliver impressive results in spite of tremendous challenges with German health care reform, reference pricing in Spain and Italian price controls. We have further strengthened this important region through leadership changes that we believe will drive further growth.

This quarter, we announced the appointment of Charles W Bramlage as President of our European operations. Mr. Bramlage brings more than 20 years of pharmaceutical experience to ICN including significant sales and marketing expertise. It's a privilege to have someone of Mr. Bramlage his experience and capabilities join ICN. In connection with Mr. Bramlage appointment, we reorganized and consolidated our European operations.

Latin America sales increased 9% in the third quarter to $34.7 million. Operating income in Latin America improved as well. Increasing 6 percent in the quarter to $11.8 million. These improvements primarily reflect unit and price increases in the quarter offset by a negative currency variance. We continued to see an impact from generic substitution in the region.

The steps we have taken to realign and increase our sales force as well as to improve our targeting strategies are beginning to pay off. Our AAA region experienced a decline in sales of 17% in the quarter to $12.6 million.

However, operating income improved significantly with a one point million-dollar profit in the third quarter compared to a loss reported in the same period last year. Sales in the current quarter were lower primarily because of a reduction in sales of Restalase (ph), a key product in the region. We have submitted an application for an import license for Restalase. We have further strengthened our management team with the appointment of David Kuo(ph) as EVP of the AAA region.

Mr. Kuo brings over 30 years of pharmaceutical experience with a strong background in general management, marketing business development. Mr. Kuo's experience and contacts in the critical Asian region will be particularly important as the company further develops its hepatitis franchise in this area.

Our research and development division has been very successful. With the past distractions of the old RIBA pharm structure removed. Our teams are now fully concentrated on science and discovery. All of our projects are at or ahead of internal schedules.

Our lead product in the pipeline at the moment is Vera Deen (ph). As Robert indicated, this will be transitioning into phase three by the end of the year. Most of you are also aware of Hepaveer B (ph); our compound under development for the treatment of Hepatitis B. Hepaveer B is a pro drug of PMEA and is currently in late phase one clinical evaluation.

We have expanded the program to Asia where we have filed an IMD in Taiwan and conducted an investigators meeting for a phase one study expected to begin in the fourth quarter. We hope to move Hepaveer B to phase two sometime in the first half of next year. We're in the process of designing the protocol for the phase two study, which we intend to conduct in Asia.

In addition we are moving forward aggressively with our growth plans in identifying key acquisition targets. We expect to announce our first acquisition by early next year. In the meantime, we're busy working on more than 20 life cycle expansion projects internally.

We also announced our first ever direct to consumer advertising campaign for Kin erase. Which is designed to generate 35-million consumer impression. Kin erase has broad consumer appeal and we are hopeful the DTC campaign will significantly increase sales of this core brand. But it's still early in this campaign.

Finally, we have recently announced our global manufacturing and supply initiative and began implementation of our manufacturing rationalization efforts. As a result of this initiative, we will establish a global network of five manufacturing facilities and sell eight facilities from continuing operations.

This comprehensive strategy will enable us to achieve our commitment to restructure our operations, achieve cumulative cost savings of between 150 and $200 million dollars over five years and significantly reduce our cost of goods sold to 20 to 25%. We recently launched a corporate-wide operational excellence initiative, which has at its core the lean six-sigma process. We expect this initiative to deliver significant financial benefits in the coming years. I'll now turn the call over to Bary Bailey for a discussion of our financial performance. Bary?

Thank you, Tim. And again, thank you everyone for joining us today. Overall, our financial performance in the third quarter can be characterized as steady and consistent progress toward our goals. As you have already heard, our top line performance from the specialty pharma business was strong and we continue to hold the line on expenses.

Our gross margin expanded in the third quarter to 68% from 63% in the same period last year. The increase was primarily due to favorable changes in both geographic and product sales mix. With more sales coming from our higher margin products overall, particularly in North America this year and efficiencies in our manufacturing operations.

Selling expenses in the third quarter were basically flat compared to the same period last year in spite of a 21% increase in product sales. General and administrative expenses were down 17% in the third quarter reflecting our ongoing efforts to keep costs under control.

We will continue to appropriately manage costs in this area. You should also note that the third quarter included one-time expenses of 4.5 million for legal, banking and consulting fees incurred by RIBA pharm in connection with the acquisition.

Selling expense as a percent of sales dropped to 31% in the 2003 third quarter from 37% in the same period last year as a result of cost control and good investment choices. Overall, our lower -- we lowered our SG&A to 50% of sales in the current quarter from 65% a year ago. Significant improvement in key metrics for this company. As Tim mentioned our global manufacturing and supply initiatives will result in the sale of eight facilities from our continuing operation.

We previously had indicated that a one-time charge related to the sale of these facilities might occur this year. We have performed impairment tests on each of the facilities to be sold in accordance with applicable accounting rules and determined that none of the facilities actually met the technical or impairment test criteria for asset write-downs. Thus no one-time charges are expected for the sales at this time.

However, we did determine that it was appropriate to accelerate depreciation on these plants over their estimated remaining life of approximately two years. Impacts of the incremental depreciation expense, which is included in cost of goods sold, will be approximately $1.6 million in the fourth quarter and $6.4 million per year for the next two years.

This will have the impact of reducing our gross margins for the periods covered. As previously announced, we completed the RIBA pharm acquisition in the third quarter for $6.25 cash per share. And merged Riba pharm's operations into those of ICN. Minority interest in Ribapharm has been recorded through the date of the merger. The total purchase price in the transaction was $207.4 million, which includes costs and fees incurred by ICN associated with the buy-in.

Minority interest on the balance sheet of $33.9 million, was eliminated in the transaction and the remainder of the purchase price was allocated between in process R&D of $117.6 million. Ribavirin royalty intangibles of $67.4 million and good will of $12.8 million.

The in process R&D was written off in the third quarter and is reported separately in the income statement. The intangible assets associated with the Ribavirin royalties is being amortized over the next five years on an accelerated basis based on a projected royalty stream. The impact of this amortization in the third quarter was $1.9 million nd is expected to be $5 million in the fourth quarter and 17.5 million in 2004.

Our provision for income taxes from continuing operations of 38% in the quarter, which was in line with our expectations. We expect to remain at this rate for the remainder of 2003. We continued to move aggressively in shedding non-core assets, which we classify as discontinued operations. In the third quarter, we completed the sale of our symmetry unit which resulted in an after tax gain of $23 million. Our API business in the Czech republic and Hungary is the only business that remains to be sold.

During the third quarter we recorded an additional impairment charge on the API business of $6.2 million reflect the fair value of the net assets to be sold. Obviously this charge was recorded in discontinued operations. As a result, the remaining net assets of discontinuing operations totaled $8 million at September 30.

Cash at September 30th totaled $301 million, which is a significant increase over our cash balance at the beginning of the year but a decline from the balance at June 30th. The acquisition of RIBA pharm in the third quarter reduced cash by approximately $200 million. This was partially offset by the 58 million in cash received in the symmetry sale as well as net sale of cash from operations.

We believe that our cash on hand is efficient to fund our operations for the foreseeable future. We remain comfortable with our five-year targets and metrics for 2004. As Robert mentioned earlier, we expect U.S. ribovirin royalties to be subject to considerable uncertainty for the remainder of this year and into 2004. But we continue to be comfortable with the stability of royalties for non U.S. markets.

We continue to feel quite comfortable with the pieces of the business that we can control and we'll continue to update the street on the metrics and market factors that investors need to evaluate our business potential. And with that, I will turn the call back over to Robert. Robert?

Thank you, Bary. All this year, you've heard us talk about the transform imagination of ICN from an old world intrapreneurially run enterprise to a truly modern integrated operating company. You have heard us talk about what is arguably one of the strongest management teams under development in the industry. This team has the experience and knows how to deliver results.

You heard us layout our strategic plans and set targets to drive performance at the Bear Stearns conference in New York. The results of the third quarter are just a foreshadowing of what we believe we can do. And what we think we can achieve. As we conclude our restructuring phase, we will focus greater attention on the transformation and growth phases we discussed in our strategic plan.

While we expect to deliver even stronger results as we move through these phases in the future, it's appropriate this morning to remind you that we expect the remainder of 2003 and 2004 to be foundation building periods as we work through the early stages of our transformation effort.

The largest benefits we expect to achieve are scheduled for 2005 and beyond as we move beyond transformation and further into the growth phase. We expect to achieve the targets that we have presented, but also want you to know that this is a management team that is focused on the long-term value and not just short-term gain.

We believe in steady progress, but we will never manage this business just to hit a quarterly earnings estimate. This, of course, should come as no surprise to those of you who know this team, but it bears repeating as we move into the next phase of our strategic plan. I want to thank you now for your time and we would like to now open the line to questions. Operator may we have the first question, please.

At this time if you would like it ask a question; please press "*1" on the telephone keypad. Again, please limit yourselves to one question at a time, as we were like to give everyone a chance to ask a question. If you have a follow-up question you may re-enter the queue. We'll pause for just a moment to compile the question and answer session. Your first question comes from Michael Tong with Wachovia Securities.

Hi, good morning. Congratulations on the quarter and thanks for taking the question. Just a background question on the phase two with respect to Viramidine was that done in conjunction with phenylated Interferon or Interferon or by itself? And as a follow-up to that, how much do you think a phase three of this rise would run?

Michael, thank you very much. I just want to precede our efforts to respond here with a really strong reminder; all of you, or most of you who have been involved with this company know we have some history here. And rarely have certain orders and directions that constrain us in our ability to talk about FDA matters. We were going to continually refer you back as much as possible to the press release to the extent that we can elaborate beyond that, it will be very limited, but we will try when it's appropriate. Tim, can you help them with the questions?

Michael, as you saw in the release, what we saw at week 12 was a clinical significant reduction in viral load. And when you compare that to ribovirin from a safety point of view, hemoglobin levels were about half that of what was seen with ribovirin. Now additional data including the drugs used and more detailed results, we expect to present in a scientific forum yet to be decided on.

Right. But, can you talk about whether there was Interferon in phase two or not?

Oh, definitely. There was a phenylated Interferon in combination with ribovirin and Vir amidine.

Great. That's what I was getting at. And the potential cost of a phase three trial of this size?

I'm sorry; I missed the first part of that question?

Just, how much a trial of this size would run from a phase three perspective?

Well, as you know, clinical trials in phase three can be very expensive. What I have said before I haven't pegged a number but they can certainly be in the tens of millions of dollars.

OK. Great. Thanks, I'll get back in queue.

Thank you.

Your next question comes from a Robert Uhl with Wells Fargo.

Thank you. Just another one on the Vir amidine trials. Will this therapeutic regimen be pretty much like the current regimen of 48 weeks of treatment and six months of follow-up in the phase Three? Also, is this a worldwide multi national hundreds of centers type of thing?

Robert, yes, it is a global trial or they will be global trials. And the trial design, as you pointed out, is pretty standard now for hepatitis C. You treat patients for 48 weeks, take them off therapy for 24, then you measure their viral tooiters (ph). That's the patient participation. There's a set up phase, enrollment phase and a phase at the end to analyze the data.

Your next question comes from a Andrew Sidoti from William Smith and Company.

Could you talk about how we should think about growth rates out of ribovirin outside of the U.S.? Is it growing overseas?

Surely. The current quarter has been impacted significantly as you know from the sharing release and our current results reflect about 60% of non-U.S. --of the royalties about 60% are non-U.S. That should give you an indication they're stable or growing in Europe.

And in other parts of the world?

Stable or growing in other parts of the world. So 60 percent of our current performance is for rest of world not just European, it's for all of the rest of the world.

OK. Thank you.

Your next question comes from a Alan Seymour (ph) with Columbia Management.

Hi. My question has do with, you mentioned I think the remaining assets of discontinue -- are 8 million. The question has to do with the operations in Yugoslavia, it seems to me those are written down a long time ago. What's the status of those? I presume anything you get out of there is cash?

The operation in Yugoslavia was completely written off prior to the change in management team. There is a case currently being arbitrated in Paris relative to the G&A Len ka assets. We continue to pursue that, but in fact there is nothing on our books for this nor do we project anything in the Mariucci, we're just going to see in a through to conclusion. We don't envision that market being a significant part of our future.

Thanks.

Your next question comes from Matt Tiplus with Quaker Capital Management.

With respect to your specialty pharma operations, obviously very impressive on a year over year end sequential basis. Is this a maintainable sort of base from which to grow the business going forward? I gather, I guess it will be a higher depreciation charge. But that aside, I mean is this level fl profitability sustainable and can it be grown from here? Is there anything seasonal, I guess, is my question or catch up going on?

This is Tim Tyson, thank you for your compliments, we appreciate that. Yes, we believe the growth is sustainable and we do believe that we have a foundation from which to grow. We believe that the base business can grow similar to what the industry growth rates will be and INS data suggests somewhere in the 5-10% range and we expect to further that growth through further pipeline development.

Thank you.

One of the things to supplement Tim's comments -- one of the things, of course to add to that will be the ability to evolve and bring to the market additional products. We have been somewhat constrained from that as we've been going through our restructuring phase, but one of the things we initiated and reported to you a year ago is that we have reorganized and re-emphasized life cycle management programs across the company and we now have a consolidated 20-plus projects in the pipeline, not 6 which we brought to the market since our beginning of that effort.

That will start to come to play as we move later into 2004 in the next six to 18 months and clearly have a full impact as we reach out into 2005. So that's something we've already done the lead work. The efforts are under way and we'll start to reap the benefits of that as we move later into 2004. In addition to whatever we do on the acquisition side.

Your next question comes from a Larry Smith with DLS Research.

Yes. I was wondering if the guidance that you gave in September still holds for 2004, which was five to ten percent revenue growth of 34 to 36%, selling expense of 30 to 32% and G&A of 20 to 21 percent and also, could you give us some help on what R&D and amortization might be in 2004?

Let me take -- this is Tim Tyson. Yes, we're confident of that guidance. We're still performing so that we believe we will meet those results. And you can see some significant improvements towards those activities and towards the margins that we communicated. We have significant focus on each one of those areas, a lot of activity and you can see some progress towards the objectives. On the R&D expense and the amortization I'm going to ask Bary to comment.

On the amortization expense, as we mentioned in my earlier comment, amortization should increase about 17.50 million in 2004 as a result of the amortization of the royalty, the intangible that was booked associated with the royalty. Depreciation again obviously non-cash charges, depreciation is up as I indicated before as a result of the fact we've accelerated depreciation on the that we anticipate divesting of so sure at the manufacturing operations. That should help us shouldn't be other factors affecting amortization.

It looks like your numbers are substantially better than what you're indicating on your cost ratios. If looks like your COGS is going to come in at 31,5 next year and your guidance for next year is 34 to 36. Am I missing something? Is there a reason to think that 2004 will see an acceleration of cost of goods sold?

There's a couple of issues there. We are doing exceptionally well and have had a good quarter. One quarter is only a point on a curve and so there's a number of things that we have to do. As we've communicated we're focused on achieving those five year targets and there is going to be some investment required to achieve a couple of those margins.

And so especially in cost of goods, you have to initiate a project which we have begun to rationalize our facilities and there's some expense in relocating the products and in reregistering them in other markets. So we are going to have to spend some money next year to do those things and we expect to see some accelerating benefit and majority of the benefit past 2005.

But I guess the one thing I'm trying to figure out is are you changing your guidance? You know, are you still saying 34 to 36% COGS ratio in 2004? Are you still saying 30 to 32% selling expenses?

Larry, the simple answer is we're changing nothing.

That's still remains your guidance?

Yes. What we've stated in the past is what we're sticking with. If in fact some of these developments mature into what results as a trend, we'll re-evaluate of course, but remember, 2004 is a period of some relatively heavy investment for us in the transformation particularly in the manufacturing rationalization plan, a the lot of those investments haven't started to kick in. So again, come back to Tim's point, one quarter doesn't a trend make, but clearly we're pleased a lot of the right things are happening.

If I follow your guidance I come in with about a 60 to 65 cents a share next year. Is that the message you want to leave us with?

You will have to draw your own conclusions, Larry?

OK.

Again to ask a question, please press "*" and then the number '1' on your telephone keypad. Your next question comes from a Michael Stanski with Tudor investments. That question has been withdrawn. Your next question comes from Derek Winker with Jeffries and company.

Yes, thank you I have many financial questions. Can I give them to you all at once or do you want them one by one?

We would like to try to limit it to one question because we have other people that have questions, too. So if you can give us, if you will your most important ones, we'll try to respond to those and come back as time permits.

And We'll certainly stay on line to let you come back into the queue.

The gross interest expense for the quarter D&A and CAPEX, I had others.

I'm sorry? What's the question?

Gross interest?

Expense.

Yes and CAPEX.

And D&A.

OK.

We'll get back to you in just a minute on the interest expense and what was the other?

CAPEX and D&A.

CAPEX for the year historically our trends have been around $20 million a year. We're expecting our CAPEX for the year to be a little over 50% of what that historical trend has been in continuing operations. We don't expect that to continue into 2004. We expect to go back to normal CAPEX our historical CAPEX run rates in 2004.

What is it year-to-date or in the third quarter?

The year-to-date is 9 million. Gross interest expense is $7.9 million.

OK. What was the other question?

What was the depreciation and amortization in the quarter? I believe that's in the table. Yes in the financial. Hold on a second.

16.8 million for the quarter and 45.8 year-to-date.

45.8 year-to-date?

That's correct.

OK. Derek.

Thank you.

Your next question comes from a Michael Stanski (ph) with Tudor Investment.

Could you comment on the impact of capital utilization from lowering the plant level in '04 and '05? And Bary what would be the tax rate we should use for '04?

Michael, thanks for your call. The capacity utilization at the conclusion of the plant will more than double and it will progress over the next few years, so I don't expect significant improvements next year as next year will mostly be re-registration activities an movement of equipment and capabilities. So most benefit will come after those happen. But we'll more than double at the conclusion.

And rose to the tax rate, Michael, as we communicated at the Bear Stearns conference, and we're sticking to these projections, if you will, next year tax rates will be between 36 and 37%.

OK. Do you expect any meaningful cash flow from selling those plants or they'll just be closed down?

The manufacturing facilities?

Yes.

No, we're not expecting anything substantial.

Thank you.

Thank you.

However, Michael, they will be sold. That is our first priority, but don't expect to realize a great deal.

That's a significant point.

Your next question comes from a John Buzz Bosalari (ph) with GIC capital.

Thank you. Good morning. Can you go over the inventory, if you will? How much was taken last year and where we stand now?

I can tell you where we stand now. We're back to normal industry rates, which are in the one to two months of supply and have been since April and we continue to basically have inventories that reflect real demand. So we're back at normal rates and have been since April and Bary is going to comment on last year.

Yes, as we mentioned last year, associated with the third quarter, the impact of whole sale inventory reduction program was approximately $10 million for the third quarter.

Last year?

Last year.

OK. Thank you.

Your next question comes from a Brian Turner with Seligman.

Thank you for taking my call. Congratulations on a great third quarter. The way I would model this on veer ram dean going out, could I assume I probably start to see sales in '06 and then accelerating in '07? One of the things that I, part of the feedback I've gotten from many docks is the cost of pro-krit because of the anemia is so expensive that a lot of docs would love to see this come in earlier than later, if that were the case, could you see coming in earlier in '06? Or where do you stand on that?

As Robert indicated, we aren't communicating any significant details about ver ram dean, but we have said and continue to expect that product to come to the market in 2007. And of course, we have competent people here and we're looking at everything possible to accelerate that, but right now, our position remains in the 2007 area. This is a life threatening disease. You know, this is a benefit, we know there is a significant cost out there to anemia treatment, so we are concerned for patients and we're doing everything possible to accelerate those dates.

Al right. Thanks, guys. Great quarter.

Your next question come from Suzanne Henigan with Rorer Asset Management.

Hello. Could you just tell us what the growth in you're mean sales would have been ex-currency?

Yes, we have in table 6 to our earnings release, we outlined the impact of foreign currency.

OK.

In European sales if you, the impact on European sales was $4.8 million as compared to the same period last year.

Got it thanks.

I have a follow-up question from Michael Tong from Wachovia securities.

Thanks for taking the follow-up. I just want to clarify, excluding the accelerated depreciation and the cost of moving products and projects around the globe, would you expect gross margin on product sales to be at this level going forward? Again, excluding all that depreciation. And secondly, if I can sneak one more in, any idea how much, what percent of Vir amidine is converted into Ribavirin in the body?

The question on the gross margin and the cost of goods is a complex one, as you know. What I can tell is that the cost of goods is going down because of two major things that we're doing. Number one, focusing on North America, generating different sales profiles so as we increase our sales in a higher margin market, it's improving our gross margin.

As we're focusing on manufacturing, we're improving efficiencies, increasing productivity and focusing on taking out unnecessary cost and waste, we will be decreasing the cost of goods by that focus. So without those other things, yes, we are confident we will see a continuing trends or report reduction of our cost of goods towards that 20 to 25% cost of goods target.

It will take some time because we still have all of these facilities and we are doing the things necessary to improve our productivity as rapidly as possible. And regarding conversion of Vir amidine to Ribavirin, we don't know that yet in human trials. We will in the course of the clinical development do the kinds of study that will give us that answer. In animal studies, it is well north of 70% as converted.

Great. Thank you.

Thank you.

We have a follow-up from Matt Tiplus with Quaker Capital Management.

Just wanted to clarify a couple remarks as relates to next year's broad earnings guidance. The amortization expense, I'm just trying to remember, was that caught out as a separate item or is that included in those percentages given? And in the other question as you discussed I guess you are characterizing significant investments next year for re qualification, plant moving, that sort of thing. Is it your anticipation that most of that is expensed as opposed to capitalized?

Relative to amortization expense it was not carved out separately. Again, you would expect to see our historical amounts for this year and add to it or historical trend add to it the increase that we suggested. Recognizing that for 2003 some of that impact will be reflected in the annualized 2003 result. Relative to the cost of moving the product, In all, you would not expect to capitalize any of those costs. Those would be expensed.

OK. Just so I'm straight then, when the numbers, I'm just taking notes from the other questioner, but the 30, 32% of sales, you know, in selling that 34 to 36 cost of goods and I can't remember what the G&A guidance was.

21.

None of those include the amortization, is that correct?

That is correct.

So it would be on top of those?

Yes.

OK. Thank you.

Thank you.

We have a follow-up from Alan Seymour with Columbia management.

Yes. I'd like a little more detail, if you might, on how you kind of allocate your R&D dollars in terms of maybe either killing projects or giving me some sense of how you prioritize things? Obviously that's going to be important as you go forward?

Well, we are just beginning to put together what I would call portfolio management. And it is a series of ten or 20 different risk factors and timing et cetera that we work very closely with the commercial group to do. And based on the output of those is the way we would allocate dollars to R&D.

All right. Thanks.

We have a follow-up question from Larry Smith with DLS research.

I just wanted to see if we could pin you down a little bit more on R&D. It looks like with Vir amidine is in phase three trial that your core R&D when Vir amidine was in phase two, your core R&D seemed to be running at about, $10 million per quarter. As you go into a broad phase three trial with a thousand patients on Vir amidine vis-a-vis at 150 or so in the phase two trial, shouldn't we expect a very significant ramp-up in R&D in 2004? Perhaps as much as taking it from, something like 41 million this year to 57 million? Am I missing anything? Is that a fairly good way of looking at it?

Let me just characterize back to what we said. We did consider this as you could expect in our discussion at the Bear Stearns conference and our 10 to 12% of sales is still in the range that we think is going to be needed. That is an increase over what we've been spending and that considers the phase three trials that we're doing. And the phase three trials, as you know, will take more than one year, at least there will be some activity in a couple of years.

Robert O'Leary; I would like to reinforce that. Just remember, that these are long studies that we said earlier that patient participation alone is 72 weeks. So certainly the R&D expense would be spread over probably three or more fiscal years.

OK. Thank you.

I guess in summary, we expect the R&D expense to go up. I'm not sure we would use the word significant as you did in your question. But we expect it to go up consistent with what we have committed to in the 10 to 12% total range of sales after we committed to it at the Bear Stearns conference. Nothing about these developments in the last 24 hours has in any way changed our perspective on that and we believe the numbers we have given you previously are solid for the inclusion of phase three trials.

Your next question comes from a Robert Uhl with Wells Fargo.

Thank you. I just had a question about the royalty stream and the percent of that that might be starting to arise from KOPIGAS if any of it is? And what does that do to the international portion that is safe from generic competition? And then one other thing on the share count is the lower number that we saw in Q3 what the base will be going forward? Thank you.

Go ahead on the share.

On the share count, yes, that's the base. It reflects the fact that earlier in our divestiture activity we brought back in a little over a million shares on one of the sales. So that should be your base count for shares going forward.

On the royalty, we don't break out the difference between the rates or the amounts from Roche or Shering. We do know that our royalties this quarter were significantly impacted by Shering's earnings release comments and activities. And the 60% of the non U.S. that I mentioned is a stable and growing -- contains both Roche and shering royalties.

Your next comes from a Vick Roy with Bain capital.

Hello. Thanks for taking my question and congratulations on the great results. I'm curious to know if you decided on which regulated Interferon you'll use in the phase three trial or will you use both given that both are widely used now and obviously would be good to see Vir amidine data with both Interferons? Thanks very much.

We have not yet decided which one we're going do in the current trial, the trial we're about to start.

And what thought process will you use to make that decision, do you think?

Well, we obviously at the end of the day would like to have information with both regulated Interferons, it's just a matter of strategically in what order we do those trials?

Great. Got it. Thanks very much.

Thank you.

Operator, as we're running up to the close of the hour, if we could take perhaps two more questions.

Your next question is a follow-up question from Derek Winger with Jeffries and company.

Yes. Thank you. Do you have own balance sheet items there?

We have in the press release on the attached exhibits you should have additional balance sheet items reflected on table five.

Is current assets, current liabilities, current portion, long-term debt and intangibles on there?

What you have in there is cash, accounts receivable inventory, and long-term debt. We have not communicated the others yet.

OK. When do you expect filing the Q?

Obviously it's got too come up in the next week.

OK. Thank you.

You're welcome.

Our last question is a follow-up question from Unidentified with RT capital.

Robert, you answered my question. Thanks a lot.

Thank you, John. I want to thank everyone today. This is obviously an exciting time for the management. We're completely pumped up about the quarter, of course and excited about extraordinary results out of our R&D capability and under Dr. Laman's leadership. I want to thank you all for joining us today. We're as pleased at about our performance and prospects for the future. You can expect to hear more news from us in the near future as we break away from the past and accelerate our plans for building shareholder value. Thank you and good morning.

This concludes today's ICN third quarter conference call. Thank you for your participation. At this time, you may now disconnect from the conference.