Bausch Health Companies Inc (BHC) 2004 Q1 法說會逐字稿

Good morning. My name is Jenny, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Valeant Pharmaceuticals International first quarter 2004 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 yourself 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.

Thank you and good morning everyone and welcome to Valeant's first quarter 2004 earnings call. Before we begin, I'd like to call your attention to the fact that this presentation may contain forward-looking statements that 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 Company's strategic repositioning initiatives and the ability of management to execute them, cost-cutting measures, success of the Company's strategic plan and the ability to achieve financial targets and cost reduction goals and other risks detailed from time to time in Valeant's SEC filings. These statements are based on current management's current expectations and involve risks and uncertainties that include Valeant'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 all requirements and government regulation. Valeant wishes to caution the reader that these factors, as well as other factors described in Valeant's SEC filings, are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements.

Joining us on the call today are Robert W. O'Leary, Valeant's Chairman and Chief Executive Officer; Timothy C. Tyson, President and Chief Operating Officer; Bary G. Bailey, Executive Vice President and Chief Financial Officer and Kim D. Lamon, M.D., PhD., President and Chief Scientific officer. Wes Wheeler, President of North America and Global Commercial Development; Winnie Wu, Controller and Phil Lowber (ph), Treasurer, are also here and available to answer questions during the Q&A session. And now I would now like to turn the call over to Mr. O'Leary.

Thank you, Jeff, and thank you everyone for joining us this morning. This morning, we reported our first quarter results, which after excluding a charge for in-process research and development from our recent acquisition of Amarin shows a loss from continuing operations of $3.3 million, or 4 cents per diluted share. The loss reflects the ongoing investment in our research and development activities, manufacturing operations and our global products that we have been speaking to you about for sometime now, as well as a 48 percent decline in Ribavirin royalties. We have shown growth in our pharmaceutical business, which experienced a 20 percent increase in sales and an expansion in gross margin over last year's first quarter. While sales growth was aided by a favorable impact from foreign currency and lower sales in North America in 2003, we still saw improvements in nearly every region.

Although we saw an increase in product sales, it was not enough to close the revenue gap crated by the significant decline in Ribavirin royalties. Frankly, this was not unexpected. We anticipated limited royalty revenues from the U.S. market this year, primarily because of decreased sales of Rebetol by Schering-Plough and expected generic competition. However, as we have said many times, our focus is not on short-term earnings gains, but on long-term sustainable growth.

To that important end, we remain on track to achieve our 2008 targets as well as our 2004 metric guidance. As a result of recent AMDA approval, Three Rivers and Sandoz launched generic versions of Ribavirin in early April and Schering launched its own generic immediately thereafter. The launch of generic Ribavirin will result in a significant decline in the royalty revenues in the United States, but this decline will have no impact on our ability to execute our strategic initiatives or fund our accelerated research and development efforts. We have a strong cash flow generation capability in our specialty pharmaceutical business and we will continue to receive royalties from international sales of Ribavirin as we have discussed before.

Our focus remains squarely on the business we can control. Our strategic decision to invest in our business is building a platform for future growth. These investments have been primarily directed toward our research and development activities, principally to fund our clinical trials for Viramidine and Remofovir our operations to further our lean Six Sigma efficiency efforts and our global manufacturing rationalization plan.

We have also increased our selling efforts in the first quarter to drive growth in our global products. In the meantime, we continue to maintain strict control over overhead costs as evidenced by the 22 percent decrease in general and administrative expenses this period compared to the same period last year.

On the R&D front, you have seen a number of very positive headlines from Valeant. We presented 24-week clinical data from Phase II trials for Viramidine and the Phase I PK data for Remofovir at the European Association for the Study of the Liver, or EASL Conference, in April, which Tim will speak to shortly. We also have a number of line extension projects in the works which we plan to launch later in 2004.

With that introduction, it is my pleasure to turn the call over to my colleague Tim Tyson, who will share more about the specialty pharmaceutical business and the operational improvements we've implemented throughout the organization. Tim?

Thank you, Rob, and good morning everyone. The we continue to focus on accelerating our research and development programs, growing our specialty pharmaceutical business, investing in our core products and operations and identifying strategic acquisitions to accelerate growth in our business. The long-term future success of our business lies in the investing in activities that will drive the top line and allow us to implement an innovative strategy that will bring new products to market and fully capitalize on our global brand. The investments we have made in the last quarter will allow us to do just this. To drive the top line, we are aggressively pursuing opportunities to expand our product portfolio through internal discoveries and strategic acquisitions. You can begin to see this strategy unfolding through the step-by-step process we have followed to build our neurology platform recently.

Long a core strength of the Company through our enduring Mestinon brand, we have begun to leverage our neurology capability through strategic acquisitions. We made our first such acquisition this quarter with the purchase of Amarin Pharmaceuticals and all of its U.S. products, including Permax, an adjunctive treatment for Parkinson's disease and the rights to Zelepar, an in-licensed late-stage candidate, also for the treatment of Parkinson's disease. Zelepar has received an approvable letter from the FDA subject to the completion of two safety studies which Amarin will fund. We expect to launch this product into the marketplace in 2005. The Phase III study results for Zelepar were published in the April edition of Movement Disorders.

We have further built our neurology platform through today's announcement of the acquisition of rights to Tasmar in the United States and certain non-European union markets where it is currently sold. We acquired Tasmar from F. Hoffman-La Roche for $13.5 million in cash, plus royalties. Tasmar is an important therapeutic agent for patients suffering from severe Parkinson's disease and has patent protection through 2012. We expect this acquisition to be neutral to earnings in 2004. Under the terms of the agreement, Valeant Pharmaceuticals acquired the rights to manufacture, market and distribute Tasmar in these countries. Manufacturing of the product will transition to Valeant over the next two years. Peak sales of this product could approach $50 million within the next five years. These two acquisitions create a strong position in the Parkinson's area as we now have a trained neurology sales force, relationships with key opinion leaders, two marketed products and a follow-on medicine, Zelepar, expected to be available early next year. In the critical U.S. market, we will be able to leverage our newly built sales for his to sell these products, along with Mestinon, which historically had not received the promotional attention this life-saving therapy deserves.

During the quarter, our regions turned in good overall product performance, driven primarily by a significant increase in sales of our global brands, driving a 20 percent increase in overall specialty pharmaceutical sales. Sales in North America increased 80 percent to $27.6 million in the first quarter of 2004, compared to the same period last year. We have continued to maintain U.S. inventory at or below industry norms. Operating income in North America was $6.9 million, compared to an operating loss of $2.9 million in the same quarter of 2003. Gross margin for North America was 85 percent in the first quarter of 2004, up from 63 percent a year ago. The improvement in North America was primarily due to increased sales of Efudex, due to stronger demand in the first quarter and reduced sales in the 2003 first quarter due to the Company's wholesale inventory reduction measures.

In addition, the Company experienced increased demand for several products in the quarter, including Kinerase. Mestinon sales in North America were down as expected compared to last year due to generic competition in the United States. According to IMS prescription data, the Mestinon market share in the U.S. has stabilized at about 50 percent due to the strength of the brand, our promotional efforts and our affiliation with the Myasthenia Gravis Foundation. We've taken a number of steps in the past few months to strengthen our North American business, including price increases that are in line with industry trends, increased sales through the direct to physician channels, royalties from supply agreements and direct sales to government. Sales in Europe were 14 percent higher in 2004 first quarter, totaling $63.1 million compared to $55.6 million in the same quarter last year. The sales improvement includes a $6.2 million benefit from currency translation.

Operating income in Europe was 21 percent higher in the first quarter of 2004, totaling $8.6 million compared to $7.1 million a year ago. Results in Europe were driven by an increase in sales of Mestinon and the successful launch of Dermatix. In Latin America, sales increased by 11 percent compared to the year ago period, while operating income was $1 million lower. Latin America absorbed severance costs as we continued to rebuild our leadership team in the region.

In 2004, we will continue to focus our greatest attention on growing our global brands, which increased significantly in the first quarter. The acquisition of Amarin Pharmaceuticals included a strong and experienced neurology sales force to manage and grow our neurology platform in the US. We recently launched Kinerase in our first European market and expect to add new markets in Europe very soon. We're also planning additional Kinerase line extensions in the U.S. this summer. We continue the launch of Dermatix throughout Europe and plan to launch Dermatix in the United States later this year. In addition, we have a number of line extensions in development for Mestinon and Efudex. We remain confident that these activities will enable our existing specialty pharmaceuticals business to achieve an industry level growth of 5-10 percent which will be accelerated through acquisitions. We continue to be active in the business development area and have numerous product acquisitions under review. We continue to be confident that we will have additional successes in this area in the months ahead.

On the operations front, our global manufacturing initiative is progressing well with early benefit in efficiency improvement and procurement excellence, being offset by implementation expenses. Network rationalization activities are progressing well as we are preparing for significant product transfer. There has been significant interest generated in many of our manufacturing sites which may result in early sales of a number of the sites identified to be rationalized. As mentioned before, this is a 24-36 month process overall and we will share progress with you as we continue to execute on these plans. We had a number of achievements in our research and development activities with quarter and are extremely pleased with the progress being made by our scientists. Our rate of R&D spend of $18.5 million this quarter reflects the accelerated investments that we previously communicated for Phase III trials for Viramidine and investments in Remofovir. I've asked Dr. Kim Lamon to share with you some detailed information about our R&D activities this quarter.

Thank you, Tim. This has been a very, very busy quarter for our R&D development team and it doesn't look to slow down anytime soon. Let me first review the status of our ongoing Viramidine Phase II study.

We presented 24-week clinical data for Phase II of Viramidine at EASL in April and received extremely positive feedback from the physicians and scientists there. The data show that Viramidine demonstrates antiviral activity comparable to that of Ribavirin, but with a statistically significant lower incidence of anemia. This was a milestone of (indiscernible). It represents the first time clinical efficacy data for Viramidine has been presented as a major international medical conference. The data was presented by Dr. Robert Gish (ph), the lead investigator on the Phase II study and Medical Director of the Liver Transplant Program at California Pacific Medical Center in San Francisco. Dr. Gish is considered one of the pre-eminent hepetologists in the world. The reaction to the data presented at EASL adds further to our excitement for Viramidine's future in the hepatitis C market.

On May 18th, we will be presenting additional data from the Phase II trial at the Digestive Disease Week Conference in New Orleans and we plan to submit 48-week data from the study plus, additional safety data for the Phase II trial to the American Association for the Study of Liver Diseases, or AAFLD, for presentations this fall.

Regarding our Phase III activity enrollment into our first trial, Pfizer I is progressing very well with the majority of sites up and actively enrolling patients. In addition, we have identified the via telephone pre-screening sufficient specific patients to fully enroll in this trial. We expect to kick off the second Phase III trial, Pfizer II, in the very near future.

Our second clinical candidate, Remofovir, is being developed for hepatitis B. We recently completed a successful end of Phase I meeting with the FDA and have come to agreement on our Phase II protocol design. We're nearly completed with Phase I testing of Remofovir and expect to move into Phase II testing in mid-2004.

Regarding Zelepar, the results of the Phase III double-blind placebo-controlled trial of once-daily doses of Zelepar in the treatment of Parkinson's disease recently were published in the peer review journal Movement Disorder. In that study, Zelepar at 1.25 milligrams per day reduced off time by 2.2 hours, compared with only 0.6 hours for patients treated with placebo. Off time is a standard measure of a drug's effectiveness in Parkinson's disease.

As Tim mentioned, Zelepar has an approval letter from the FDA and two safety studies to complete the approval process of Zelepar are now in progress and we are expected to complete these studies (indiscernible) support approval and launch the product early next year.

Finally, we are all also working on a number of preclinical projects that we feel show promise in the areas of HIV, hepatitis C and hepatitis B. These projects are still in fairly early stages, but we plan to share more with you in the near future. Now I will turn the call over to Bary Bailey to discuss specifics regarding the financials.

Thank you, Kim. Well, stating the obvious, our adjusted loss excluding the impact of in-process research and development in the first quarter of 4 cents per diluted share is below street expectations. There are two primary reasons for this difference. First, royalties from Schering and Roche were significantly lower than what most everyone was expecting. Second, although we previously indicated that selling expense would be proportionately higher in our first half of the year, such expenses were still more than what the market expected. I will address each of these areas in just a moment.

Top line sales results are consistent with our expectations in the first quarter of 2004 with an increase of $22.2 million, or 20 percent over the same period last year. Excluding the impact of foreign currency, product sales were up 13 percent. As you may recall, sales in the first quarter last year were lower as a result of our wholesale inventory reduction efforts.

As noted above and as you can see on table 6 of our release, foreign currency continues to benefit us on the top line. But as before, the impact to operating income is substantially less with a company-wide net impact to operating income of only about $500,000. That said, the Company has entered into foreign currency hedge agreements covering approximately EUR22 million in 2004 to reduce our overall exposure to currency fluctuations, and we will continue to look at other opportunities to mitigate the fluctuations in this area.

Royalty revenues declined 48 percent in the first quarter $25.4 million, reflecting lower Rebetol sales by Schering-Plough as a result of Schering's post inventory issues and increased market competition. We also received royalties for Roche on worldwide sales of Copegus in the quarter, but at a lower rate than those paid by Schering. As a reminder, because of the recent generic Ribavirin launch, gross royalties ceased in any market with generic competition. So Roche will no longer pay us royalties for Copegus sales in the U.S. market.

Generic competition to Ribavirin will result in a substantial decline in U.S. royalties in the future and as a result of aggressive generic adoption, we expect total royalties in the second quarter to be somewhat less than what we have reported in the first quarter. We continue to expect royalty revenues from sales of Ribavirin overseas and approximately 70 percent of total royalties in the first quarter were from such sales of oral Ribavirin outside of the U.S.

Overall, our gross margin in the first quarter increased to 65 percent from 63 percent in the same period last year. The increase was primarily due to a change in geographic mix with increased contributions from North America. The gross margin remained stable in the first quarter, is on track with our 2004 metric guidance.

We continue to make investments in our operations which results in an increase in cost of goods sold. As previously indicated, we have accelerated in depreciation expense associated with facilities that we expect to dispose of over the next couple of years. The impact of this acceleration is an increase in depreciation expense of $1.8 million, as compared to the same period in the prior year. To the extent that the sales of these facilities would occur sooner, this depreciation would be reduced but may be offset by potential losses on the sale.

In addition, we continue to invest in our operational efficiency efforts, but this is being offset in the course of the year by resulting improvement. Selling expenses were up 28 percent in the first quarter of 2004 compared to same period last year. The increase reflects investments in our core business which we discussed with you last quarter, as well as an impact from foreign currency translation. In fact, we specifically said that selling expense would be higher in the first half of 2004 than in the latter half due to the timing of these expenditures. We are investing in marketing for our global brand to support the key initiatives discussed earlier by Tim. While higher this quarter, we expect selling expense in 2004 to be in the range of our previous guidance of 30-32 percent of sales.

We continue to make progress in reducing our G&A expense, which declined 22 percent in the 2004 first quarter to $23.9 million, compared to the same period last year, primarily due to lower legal fees. While we are pleased with this improvement, legal fees can and will fluctuate significantly from quarter to quarter. That being said, we remain comfortable with our guidance for G&A expense in 2004 of between 20 and 21 percent of sales.

R&D expenses were up significantly in the 2004 first quarter due to Pfizer I trial enrollment for Viramidine and an initial investment in Phase II trials for Remofovir. Our continued progress in 2004 in those trials will drive R&D expenses which we expect to fall in the range of between $85 and $95 million in 2004 as previously communicated. Amortization expense was 65 percent higher in the first quarter 2004 than in the same period last year due to our Ariva Pharm acquisition in the third quarter of 2003 and our most recent acquisition of Amarin, which had an amortization impact of approximately $500,000 for the quarter. We expect -- we continue to expect amortization expenses in 2004 to be in the range of between 50 and $55 million, but future acquisitions will likely increase this estimate.

As a note, the Amarin acquisition had a negative impact of about $1 million pretax in the first quarter. About half of this was due to the amortization and the additional costs associated with addressing the business issues of the Company. We expect for the year that this will be neutral low.

Interest expense was 63 percent higher the first quarter of 2004 versus the same period in 2003 as a result of the new debt issued late last year through our refinancing initiative and our continued carry of the 6.5 percent convertible subordinated note. This expense was partially offset by an increase of about $2.1 million in interest income due to our higher level of cash balances. We plan to regain the remaining $326 million and 6.5 percent convertible subordinated notes on or prior to the first redemption date in July, which will result in a pretax loss upon redemption of about $19 million. We continue to expect net interest expense in 2004 to be approximately $40 million. The Company's effective tax rate for continuing operations in the first quarter of 2004 was 37 percent. This is in line with our expectations for a 36-37 percent range in 2004. With that, I would now like to turn the call over to Rob for closing comments.

Thank you, Bary. The message you've heard this morning is one of consistence, focused investment in our core business and R&D activities that we believe will drive growth in the future. This is a message that we have been communicating consistently for the past 2-3 quarters and has clearly impacted our results in the first quarter of what is a foundation building year.

We're truly excited about the progress made in our research and development activities, our global manufacturing initiatives and our continued growth of our global brands. We have made progress in our business development activities with two recent acquisitions in our Kinerase line extensions. More extensions and reformulations are planned and we continue to expect additional acquisitions during that this year. I am confident that these activities will result in the creation of a sustainable, long-term and profitable growth company.

I want to remind you -- our cash position remains strong, our specialty pharmaceuticals business is growing and we're confident this business and our remaining royalties will continue to generate strong cash flow, even after the investments we're making in the lean Six Sigma and our manufacturing rationalization efforts. As we have indicated in the past, even with the challenge of royalties in the U.S., we believe royalties will be adequate to fund our current accelerated R&D efforts. We will continue to support our outstanding R&D team as they grow in their drug discovery and pre-clinical development capabilities and continue to invest in the development of Viramidine and Remofovir.

Now, following the question and answer period which will begin momentarily, I will return to give you a brief update on our succession planning and our advancements in corporate governance. Thank you all for joining us today and now I would as the operator to give us the first question please.

(Operator Instructions). Michael Tong, Wachovia Securities.

Thank you for taking the question. I have one for Bary and one for Tim. Bary, can you give us your CapEx and cash flow from operations number for the first quarter? And Tim, I noticed that the operating margins for North America and Latin America were down pretty significantly sequentially versus Q3 and Q4 of '03. Can you share some color on that, as well as how you think the operating margins for those geographic areas will trend as we look out to the rest of '04?

Michael, good morning. You managed to get in a number of questions there. We're going to handle them this way, if you don't mind. We're going to do CapEx with Barry and then Phil Lowber will handle the cash flow question and then we will turn to Tim for the Latin American question. Bary, you want to lead off please?

Yes, Michael. First of all, relative to the cash flow issue, that will come out in the cash flow statements in the Q, which will be coming out shortly. We have not disclosed that separately here. But as far as CapEx in the first quarter, we had about $4 million. As you recall, we see our maintenance CapEx running at about $20 million per year. Tim?

Thank you, Michael, for your question and I appreciate your support. The operating incomes in Latin America first are due to some changes of the leadership team there that I mentioned earlier and some costs that we paid off for severances. We continue to have a focus down in Latin America that will drive the business. Some one-off costs affected us there and a focus on appropriate global products will have -- and make a difference there. In North America, we have been investing in a number of things as we have told you, and those investments are starting to pay off and those investments have affected the operating margins. But we are confident that we will deliver on the metrics that we have given you from a consolidated standpoint and you will see improvements in all regions.

Okay.

Larry Smith, DLS Research.

If I could sneak in two questions. One is very quick. I think I'm following most of your guidance and I get about a breakeven year for this year, in terms of earnings-per-share. I do not recall that you have ever given any guidance on earnings-per-share, but does that sound about reasonable? And then the second question I have is on the clinical development of Viramidine. Should we anticipate that the registration or filing strategy will await the completion of Pfizer II, and then with the time required to compile the data and submit it to the FDA and have the FDA act? Or, is there a quicker filing strategy where you might file off of the 48-week Phase II data, along with Pfizer I, which could possibly accelerate the NDA approval by some period of time? I don't think I worded that very well, but I think you know what I'm trying to get at.

Good morning, Larry. Dr. Kim Lamon will deal with the question. Let me first respond to the earnings guidance question. Your memory is absolutely correct. We have not provided earnings guidance. However, we have provided metrics for 2004 and we believe that our guidance relative to those metrics is unchanged. And of course, Larry, you know I cannot speculate on your conclusions. Let me turn things over to Kim to answer about the question on Viramidine.

Hi, Larry. Yes, I do know what you're getting at. Right now, the development plan is something I call here Viramidine Classic, which is the Phase II study and two pivotal studies. If you map that out, we have said previously that we are still comfortable with an expectation of a launch in '07. That being said, there are three things that can really impact the registration strategy. One is obviously enrollment, two is how quickly at the completion of the study we can get things wrapped up and summarized, and three is the strength of the data. So I think it's very fair to say that while we have Viramidine Classic out there, there are four or five other strategies, including the one you mentioned, that we are thinking about. But again, that strategy will be driven by the strength in the data.

Okay, thank you.

Thank you, Larry.

Michael Tong, Wachovia Securities.

Hi. If I could sneak one more back in. As far as your North American marketing organization, how large is that sales force right now and how large do you anticipate that will go to?

I'm going to turn that question to Wes Wheeler, who runs the North American operation.

We Wheeler. Michael, our current sales force, including the Amarin sales force that we just acquired is just at about 90. We expect to grow that up to about 114-115 as we get closer to the Zelepar launch.

Okay. And from a therapeutic category perspective, how do you separate them out, as far as derm, neurology is concerned?

We have 65 dermatology reps. They're full-time on the derms, about 5000 derms we call on a regular basis, and we have 24 currently in neurology and we will grow that to about 48 next year.

Great, thank you.

(Operator Instructions).

I want to thank you. Is there another question?

Robert Uhl, Wells Fargo.

Thank you. Can you just explain a little bit more on the Ribavirin royalty calculation? Has anything happened with the way the calculation is done off the Schering sales? And are they still paying the same royalty rate off their generic product that they pay off the brand?

Robert, good morning, and I'm going to Bary Bailey, Our Chief Financial Officer, to respond to that.

Good morning, Robert. There is no change in the rate that they repay, regardless of whether they launch out of their generic business or whether they launch out of their branded business. As you recall, we have indicated that it goes up in tiers based on sales volume, but there is no change in that relative to whether it is generic or not.

Alright. And when you guys said that royalty stream funds R&D, that would imply that the royalty stream will be at least 85-95 million for this year?

Based on information and what we see, that is consistent.

(indiscernible), Mehta Partners.

Hello, good morning gentlemen. I just have a quick question. I'm happy to see the Tasmar acquisition coming today, but wanted to get an update on your future acquisition plans for the rest of the year?

Tim Tyson will respond.

Thank you, Shoshone (ph). As we've communicated, we're actively out in the marketplace. We have a number of activities and projects that we are looking at, around 30, and we continue to expect to be successful in the coming months.

Thank you, next question, please.

Rachel Golder, Goldman Sachs.

Good morning. Just so I can understand modeling Amarin in going forward, can you give us a sense of what their annual revenues and operating income was the entire year? And then any initiatives that you might have going forward that might change the basic balance of their contribution to you, like increase in sales force investments?

Thank you, Rachel, and good morning and I will turn that over to Tim Tyson.

Thank you for the question, Rachel. We had about $18 million in sales from Amarin last year. And going forward, we have a number of plans. I'm just going to ask Wes to comment quickly on some of the go-forward plans.

Of course Amarin in the last year has been a little bit of an anomaly because of the Permax situation going off patent in 2003. So it's tough to kind of compare year-on-year. The current product line is made up of about five legacy products, which we consider primary care type products, plus Permax, and that does annualize at about $18 million a year. Of course, that will change significantly next year as we launch Zelepar.

How much of the 18 million of revenues was Premax last year?

On an annual scrip basis, I would give Permax 7-8 million of that, and about 10 million from the legacy products.

And Permax going forward, since it's not now off patent, should we haircut that 7-8 by a significant portion?

That's a good question. The way to answer that is look at our Mestinon performance. Permax fits the same sort of a mold. We're holding onto about 30 percent the molecule and we expect to hold that for the next 12 months.

Great. Thank you very much.

Michael Sansky (ph), Tudor Investments.

A number of questions, Bary. The other income item is a negative 1 million. I'm assuming there's 4 million of interest income in there. Is there a net $5 million number in there, and what is that?

The other income is predominantly due to the fact that we got out of some investments that the prior management had made. The investments had been declining in value. But due to foreign currency translation, we were able to buy them out at the original investment amount. So for both purposes, it shows a loss, but we've put in $5 million into it and took 5 million out. And that is really what drove that loss in that line called translation and other; it is predominantly other.

So there's a $5 million negative net there.

No, it's about $1 million negative hit. We put 5 million in the investment, old prior management did in U.S. dollars; we took out 5 million in U.S. dollars. But because over time you had fluctuations from foreign currency because it was treated as a long-term investment, it shows as a loss for book purposes. But for cash purposes, 5 million went in several years ago, 5 million came out. It was really a result of translation --.

It was all the translation in the different rates of the euro at the time the investments were made.

So there is a $5 million net in that number?

No. There is no $5 million net hit. It is a $1 million hit.

You said that supply chain expenses are in the quarter. I'm assuming they were net negative. How should we think about those costs for the rest of the year?

You said supply chain what?

Your supply initiative, supply chain initiative manufacturing.

I'm sorry -- what is your question, Michael?

I think Tim said there were some costs in there that were borne. Can you give us a sense of how that looks going forward?

The manufacturing initiative is progressing well. We have made investments in the launch of a lean Six Sigma program and we're doing the activities necessary to move products and to remove or reduce the number of facilities. So what you're seeing in this quarter is some of the investments. We're seeing some early benefit from our procurement initiative and from our lean Six Sigma activities, and that is being offset by the expenses for implementation. And going forward, we expect to see the benefits that we have communicated.

In general, just to respond, Michael, of course you remember, we are reducing our 17 plants around the world to 5 by 2006. And in the first year, year and a half or so, it is more than investment as we spend the money to upgrade the plants that are seeing in the system and train the people, as well as the cost of transferring all of these products. But we are very pleased to see that the lean Six Sigma activities are getting us some early benefits which are ameliorating some of those costs.

Michael, this is Bary. I wanted to get back to you. I apologize -- I realize what you're looking at. You're looking at the change year-over-year on the translation line, and I was focused on what impacted this first quarter. They are two very different items. Last year was -- the loss was due -- I mean a $4 million dollar credit was due to foreign currency translation. And as I mentioned last year, that is literally the shift over to accumulated translation on the balance sheet. There's largely no economic impact from that item. This year, there was not much change due to foreign currency translation, but it was absolutely impacted by us getting out of the investments. On a net cash basis, though, there was no impact for getting out of those investments.

Thank you.

Larry Smith, DLS Research.

Schering has just announced that they filed for Peg (ph) and Ribavirin in combination in Japan. Could you give us an idea of when you think they might gain approval? And second of all, could you frame the Japanese up to the -- relative to the U.S. and relative to Europe? There seems to be a lot of warehousing going on in Japan in anticipation of the launch of Peg and Ribavirin?

Larry, thank you for the question. The information that we have is the same that you have. We have heard through different sources and from sharing that they expect somewhere in the October-November timeframe for approval in Japan. And the impact in Japan, you would have to estimate that and model it like us. We don't really have any more information about what may or may not happen. There appears to be some under treatment in Japan and better therapies usually indicate and drive additional revenue and sales. So there is some expectation there. And there are a lot of patients around the world in studies right now. And we believe that there's going to continue to be some marginal growth in the worldwide business, offset by some of the pricing pressures.

When do you anticipate -- is Roche on the same track as Schering? And did I hear you right that you're anticipating an October to November launch?

If you want to know the time they will be in the market, you should ask them. All I'm telling you is what they have told the market publicly is October, November from what we have seen in the data. But we are not sure what the approval time is.

And Roche, do you know what kind of a timeframe Roche is on in Japan?

I don't know what timeframe they are on. They are delayed, I know that.

Thank you.

Rachel Golder, Goldman, Sachs Asset Management.

Thank you, I forgot to ask this the first time around. Are you still on track for redeeming your 6.5 percent converts this summer? And secondly, is there any - since I'm a bondholder, I will say -- risk of you doing any shareholder favorable activities, as in share repurchases in the near-term?

Rachel, we're absolutely on track for that redemption, and I will let Bary elaborate.

Rachel, relative to the last part of your question, obviously, we could not comment positively or negatively on any other issues. But no, we are absolutely on track relative to the buyback, the redemption of the 6.5. It's in July.

And will that just be out of cash on hand? Do you have a huge cash balance?

Yes. As we originally intended, when we did the refinancing, we're going to use that cash to buy it back.

And maybe a different way of asking my second question is, perhaps since you've emphasized you are focused on the long-term possibility of the Company is it fair to say that you're somewhat less sensitive to quarter-to-quarter swings in your share price that may reflect the quarter-to-quarter swings in your performance?

I think as we've been consistent, going back to when the management team first got here, our focus is on the long-term. We're going to continue to do that and to grow that business. That's where we're going to be and not quarter to quarter.

Thank you.

Rachel, I couldn't have said it better myself. That is exactly our perspective. Yes, next question, please.

At this time, there are no further questions.

If there are no more questions, then I promised you a brief comment on corporate governance and our CEO succession planning. Let me thank you first for your questions.

I want to take just a moment before we close to bring you up-to-date on our progress in the area of corporate governance in general, and in particular, our progress against our CEO's succession plan. Among other governance initiatives, we have placed great emphasis, in addition to the emphasis on the CEO's succession plan, on the implementation of a formal and rigorous CEO evaluation process and on the implementation of our multi-year board assessment work plan in a robust nominating process which has seen the Company turn over 80 percent of the remaining board members in the last 22 months since the 2002 change of control.

As we first reported to you almost a year ago, the Board has engaged in a very deliberate and careful CEO succession planning process that's consistent with the current thinking in most governance circles today, provides that we will split the dual role of Chairman and CEO sometime next year. That plan is progressing well and on schedule. Accordingly, the Company has nominated Mr. Tyson for election to the Board of Directors at the annual meeting this year in order to position him to succeed to the role of Chief Executive Officer at the appropriate time.

In addition to these substantive governance improvements, we have of course complied early or as required with all of the new standards established by the SEC and the New York Stock Exchange. We on the Valeant Board share a commitment for moving beyond mere compliance and are dedicated to transparency and the continuous improvement in our governance practices and processes. Ladies and gentlemen, I want to thank you for your attention and your continued support and I wish you a good day.

This concludes today's call. Thank you for your participation.