Bausch Health Companies Inc (BHC) 2004 Q2 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 the Valeant Pharmaceuticals second 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 yourselves to one question at a time to allow all participants and opportunity to ask questions. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I will turn the conference over to Mr. Jeff Misakian, Vice President of Investor Relations. Please go ahead, sir.

Thank you very much. Good morning, everyone, and welcome to Valeant's second quarter 2004 earnings call.

Before we begin, I would 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 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 law 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, Chairman and Chief Executive Officer; Timothy C. Tyson, President and Chief Operating Officer; and Bary G. Bailey, Executive Vice President and Chief Financial Officer; Kim D. Lamon, M.D., Ph.D., President and Chief Scientific Officer; Wes Wheeler, President, North America and Global Commercial Development; Winnie Wu, Controller; and Phil Loberg, Treasurer, are also here and available to answer questions during the Q&A session.

And now I would like to turn the call over to Mr. O'Leary. Rob?

Good morning. Thank you, Jeff. And thank you, everyone, for joining us. This morning we reported 2004 second quarter earnings from continuing operations, before adjustments, of $2 million, or 2 cents per diluted share. These results reflect continued improvement in our specialty pharmaceutical business, along with investments in global products, manufacturing operations, and research and development activities. These investments, as noted in the past, are designed to build a platform for long-term, sustainable growth. Our plans for building this platform are firmly on track. And we are already beginning to drive improvements in our core business.

We are executing on schedule, just as we promised, and in many cases, ahead of our original plans. Let me illustrate. We told you that our product sales would grow 5 to 10% per year, and we once again exceeded that rate, driven by continued improvement in our global brands. Tim Tyson will explain more in just a moment. We told you that we would reduce the number of manufacturing facilities from 15 to 5 by 2006, and the pace at which our teams are moving toward that goal has been faster than we expected. We have seen significant interest in several facilities, and we are very encouraged that we will move apace. We have told you that the enrollment in our pivotal Phase 3 trial for Viramidine would take 12 to 18 months, and we've completed enrollment in the first trial several months ahead of schedule. We told you that we would begin a Phase 2 trial for Remofovir by mid-2004, and that trial has begun. We told you that we would complete our debt restructuring through the redemption or repurchase of our remaining 6 and a half percent convertible subordinated notes by July 2004, and we did so, right on schedule.

Our financial performance is on track as well. We saw a substantial improvement in the metrics that drive our business performance, and remain confident that we will achieve our 2004 and our 2008 financial goals. Our cash position remains strong, and as Bary Bailey will tell you shortly, our business continues to generate excellent cash flow.

I'll turn the call over to Tim Tyson who will share more about our product performance, operational improvements, and research and development activities. Tim?

Thank you, Rob, and good morning everyone. We've been consistent in our message that 2004 is the year of transformation and execution of our longer term plans for building shareholder value. As Rob noted, our plans are fully on schedule and we are achieving milestones faster than expected. While this quickened pace has not yet shortened the end points of our strategic plan that was communicated previously, it's encouraging to see this progress and the resulting improvement in business performance.

We took a number of steps in this quarter that were part of this execution strategy, and it resulted in charges to earnings that were not part of our underlying business. We have separated those costs and charges in the tables attached to our quarterly earnings report to help you better track our core business performance. Our underlying core business performance was very strong in the quarter, with improvement in our key metrics over last year. Top and bottom line performance was strong across nearly all regions in the second quarter. Product sales in the quarter were up 12% over the prior year and 16% year-to-date, compared to an industry average growth rate of only about 7%. This excellent performance was driven by sales of our global brands, which grew over 16% in the quarter and 31% year-to-date, as well as new products added to our portfolio through recent acquisitions.

The year-to-date growth also reflects the successful completion of wholesale inventory measures last year. Once again, North America turned in the best regional growth, with an increase in sales of 35% in the quarter and 52% in the first 6 months of 2004, compared to the same periods last year. Importantly, the current quarter represents the first comparable quarter for North America in two years in which sales results more closely reflect retail demand in both the current and prior year periods. We continue to maintain U.S. inventory at industry norms. Primary drivers for the sales increase were Kinerase, Cesamet, and Oxsoralen, as well as products acquired from Amarin in the first quarter.

Operating income in North America in the current quarter was up 25%, compared to last year. Efudex and Mestinon remain market leaders in North America, despite increasing competition. Our Mestinon sales continue to defy typical generic erosion profiles and maintain a dominant molecule share. Our newly formed Neurosciences team has developed an excellent position in the U.S. neurology market with Permax, Tasmar, and Mestinon as lead products, and Zelapar planned as a follow-up compound in 2005.

We've successfully launched two Kinerase line extensions in North America, and have plans for additional launches later this year. We are also planning line extensions for all of our global brands. Plans are underway in the U.S. for the launch of Zelapar, pending completion of 2 safety studies, Cesamet, a product that has performed well in Canada, and Dermatix, a product performing well in Europe. All of these activities drove tremendous growth in North America.

Sales in Europe increased slightly in 2004's second quarter, compared to the same quarter last year, while operating income declined. Europe was impacted by our sales force reduction action as well as the continuing effect of government-imposed price reductions in several key markets. Europe remains a challenge for the entire industry. We are working on several line extension opportunities, which will drive product growth in the region, along with increased sales from Dermatix and Kinerase, which were recently launched in several countries.

Latin America sales were up 8% in the 2004 second quarter, compared to the period last year, and operating income was up 17% over the same period. Our new leadership team in Latin America has been very active in restructuring the business. In a very short period of time, we have centralized functions, reduced and re-deployed our sales force in Mexico, re-focused promotion on our key products, and reduced overhead costs. Our triple-A region turned in a strong performance in 2004's second quarter with a 27% increase in sales, and a significant improvement in operating income over the same period last year. The strong performance by our regions, the steps we've taken to restructure under-performing markets, and our line extension opportunities give us continued confidence in our ability to deliver industry level growth of 5 to 10%.

We have made excellent progress in our plans to rationalize our expense structure and drive further efficiencies. The pace of our steps to reduce the number of manufacturing sites has accelerated. And we have identified several plants whose disposition is now expected sooner than planned. As a result, we recorded an impairment charge of $20.2 million in the second quarter and reduced our ongoing depreciation expense. Our regional leaders have worked diligently to analyze their business and focus promotional efforts. In Europe we re-focused these efforts in Spain and Portugal to concentrate more on specialty care than on the less profitable primary care business, and reduced our sales force by about 60 positions. We recorded severance charges of $4.5 million in SG&A expenses in the second quarter as a result of this action. In Mexico we reduced our contract sales force by 120 positions in the second quarter, and plan to cut another 130 positions by the end of September.

Apart from the restructuring in Europe and Latin America, we have also made specific investments in selling expenses in the first half of the year to drive performance in our global brands. By its nature, significant elements of selling expense relate to promotional and other activities that occur in advance of actual sales generation. In the first half of the year, this included costs associated with future launches of Dermatix, Kinerase, Tasmar, and Catrix in many major markets; and development of standardized promotional materials and campaigns for all of our global products. In addition to the unusual costs in Spain discussed earlier, we have incurred some severance, recruiting and relocation costs associated with getting the right people in place across our major markets, notably in the U.S., Mexico, France, and Germany. We also significantly increased our presence at major medical conferences and conducted critical medical support programs. These investments are already showing results with a strong sales improvement announced this morning. In the second half of the year, selling expense as a percent of sales will moderate as the one-time activities are completed and as our sales growth accelerates.

We continue to have important developments in our R&D operations that we're excited about. We completed enrollment in our VISER1 Phase 3 study of Viramidine in July. As Rob noted, this is months ahead of schedule, and, frankly, very unusual for a pivotal Phase 3 study of this size. It speaks to the strength of our R&D team, and to the interest our team created for participation in our phase 3 trials. The unprecedented enrollment in VISER1 was no accident. It was the result of experience and the combined efforts of our R&D, commercial, and global manufacturing teams that drove the demand for participation, and built the infrastructure to execute a highly complex study in 200 investigator sites and in 15 countries around the globe.

The steps to get to this point took about 18 months, beginning in 2003, and involved accelerating enrollment into the Phase 2 study; an interim analysis at 12 weeks that allows progression into Phase 3; successful meetings with the FDA that addressed all information needed for an NDA and increased their level of confidence in Valeant; early and extensive interaction with key opinion leaders; an outstanding, medically and scientifically sound Phase 3 protocol that underwent minimal challenges by the FDA and investigators, which is a rarity; and the creation of several advisory boards with key opinion leaders in hepatology. All of these activities created the climate that allowed to us move quickly through the enrollment and regulatory process to-date. We initiated enrollment in VISER2 in June, as promised. And this second pivotal trial is progressing as planned.

As we've said in the past enrollment in trials of this size and scope have historically taken anywhere from 9 to 18 months. Our experience with the first arm, suggests that enrollment in VISER2 could be toward the earlier end of this range. For now, we expect to complete VISER2 enrollment by mid-2005, at the latest.

We also initiated a Phase 2 trial for Remofovir in July, and enrollment is proceeding as planned. The Remofovir Phase 2 trial will enroll 220 patients at approximately 20 sites in the U.S., Taiwan, Singapore, and Korea, and will consist of 5 treatment groups. The trial is designed for 48 weeks, with an interim look at 24 weeks to evaluate safety and efficacy. We will present end-of-treatment data for our Phase 2 study of Viramidine, as well as safety and efficacy data from our Phase 1 study of Remofovir at the American Association For the Study of Liver Diseases Conference in Boston in late October.

We continue to be active in the business development area, and have numerous acquisitions under review. We are confident that we will have additional successes in this area in the months ahead.

And now I'll turn the call over to Bary Bailey for a detailed discussion of our financial results in the second quarter. Bary?

Thank you, Tim. And thank you, everyone, again, for joining us today. Excluding non-GAAP adjustments for nonrecurring or unusual items, we reported income from continuing operations of 2 cents per dilute share in the second quarter of 2004, lower than the 21 cents per diluted share reported in the same period last year but ahead of street expectations. The decrease over last year was primarily due to a decline in royalty revenue, as well as increases in selling and R&D expenses, partially offset by an increase in top-line sales.

Starting at the top line, our sales results exceeded expectations, with an increase of 12% in the 2004 second quarter, over the same period last year. Foreign currency gains added less than 1% to this increase in the second quarter, and even less on the operating income line. As we suggested last quarter, royalty revenues declined 56% in the second quarter, compared to the same period last year, reflecting lower Rebetol sales by Schering-Plough, primarily as a result of increased generic competition in the U.S. Approximately 80% of our royalties in the 2004 second quarter came from sales of Rebetol and Copegus outside of the U.S. As we have said in the past, we expect royalty revenue by quarter, to be relatively consistent for the next few years, as we rely on sales outside the U.S.

Gross margin improved significantly in the 2004 second quarter to 69%, from 64% in the same period last year. The increase is primarily due to a change in geographic mix with increased contributions from North America, a focus on higher margin products, and an improvement in manufacturing costs. Importantly, the gross margin of 69% includes expenses related to the implementation of our global manufacturing and supply chain initiative, which are running at about $3 million per quarter this year, but are only 1.1 million in the second quarter last year. We expect to see this level of investment in the global manufacturing and supply chain initiative through 2005, and then start to see it decline and go away by the end of 2006. In addition, the accelerated pace of disposition of some of our manufacturing facilities, that resulted in an impairment charge in the quarter, has virtually eliminated the accelerated depreciation on manufacturing that we expected this year. We were pleased with these improvements, and remain confident that we will reach our metric goal of a 64 to 66% gross margin for 2004.

Selling expenses were up 16% in the second quarter of 2004, excluding severance costs, compared to the same period last year, and represented 34% of sales. As Tim mentioned, this was due to several initiatives in the first half of 2004. We expect our ratio of selling expenses-to-sales to abate in the second half, as these initiatives are completed, and as our sales growth accelerates. And that we will finish the year within our guidance for 2004 of 30 to 32% of sales. G&A costs declined 10% in the 2004 second quarter, compared to the same period last year and represents 16% of sales on an adjusted basis. This is the fourth consecutive quarterly decline in G&A costs, and reflects our continued focus on cost containment. While a portion of G&A expense includes legal costs, that can fluctuate from quarter to -- one quarter to the next, our current pace suggestion that G&A could run closer to 18 to 19% for the year, versus our previous guidance of 20 to 21%.

R&D expenses were up significantly in the 2004 second quarter, due to the accelerated VISER1 enrollment and initiation of the VISER2 trial for Viramidine, as well as Phase 2 trial for Remofovir. We're running at about the pace we would expect in 2004 in R&D expenses, and continue to expect R&D to fall in the range of 85 to $95 million, as previously communicated. Amortization expense was higher in the second quarter of 2004 than in the same period last year, due to our Ribapharm acquisition in the third quarter of 2003, and our recent acquisitions of Amarin and Tasmar. We continue to expect amortization expense in 2004 to be in the range of 50 to $55 million, but future acquisitions will increase this estimate.

Net interest expense was 69% higher in the second quarter 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 and a half percent convertible subordinated note. This expense was partially offset by an increase of $2 million in interest income due to our higher level of cash balances. As promised, we eliminated the remaining $326 million in 6 and a half percent convertible subordinated notes, on or prior to the first redemption date in July. This was accomplished in two steps. In the second quarter we repurchased $89 million in notes in the open market transactions which resulted in a pre-tax loss of $5.9 million in the quarter. In July we redeemed the remaining 237 million, and will record a pre-tax loss upon redemption of $14 million in the third quarter of this year. We continue to expect net interest expense in 2004 to be approximately $40 million. As a result of the redemption, our total debt outstanding declined from $1 billion at June 30th, to $787 million at July 31st.

Cash, as of July 31st, was approximately $450 million, following the redemption of the 6 and a half percent convertible subordinated notes, and after spending $63 million on acquisitions, primarily Amarin and Tasmar since the beginning of the year. Cash flow is one of the aspects of this Company that is often overlooked. Our business consistently generates positive cash flow from operations each and every quarter. There tend to be varying measures of cash flow used by investors, but we look at EBITDA as a good measure of cash flow generation for our business.

For second quarter of 2004, EBITDA, that is, earnings before interest, tax, depreciation and amortization, was $37.5 million in total, excluding non-GAAP items, which although lower than the $62.6 million in the same period last year, is a strong result in spite of reduced royalties and increased our investment in R&D in the period. Current expectation is that EBITDA will come in at more than $120 million this year. The Company's effective income tax rate for continuing operations, excluding non-GAAP adjustments in the second quarter 2004, was 42%, resulting in an effective tax rate for the year to-date of 26%. Lower year-to-date rate is the result of the higher tax benefit recognized in the first quarter. We expect this lower rate of approximately 26% to continue for the remainder of 2004. But lower tax rate reflects a shift in the mix of taxable income, with less income expected in higher tax jurisdictions, primarily as a result of the lower royalty revenue and increased R&D spending. We expect to experience a shift in the mix of taxes paid in 2005, with continued improved performance in U.S. with higher tax rates, and that, as a result, our effective tax rate next year will be between 33 and 35%.

With respect to our discontinued operations, as you know, we recently completed the sale of our raw materials and manufacturing operations in the Czech Republic. The Czech business was included in discontinued operations as of the end of the quarter, and its sale represents one of the last pieces of the divestiture of non-core assets, substantially completed last year. At the same time, we recorded additional reserve of $16 million for cleanup of environmental contamination at a site previously used by the Biomedical division sold last year.

Now, I'll turn the call back to Rob for closing remarks. Rob?

Thank you, Bary. As you've heard this morning, the continued investment in our business is delivering results, both now and for the future. We are executing right on schedule, and in many instances ahead of our expectations. As a result, our financial performance has improved, with notable gains in every metric that impacts our business. These improvements solidify our confidence in our ability to achieve our long-term goals and expectations.

We expect to see steady improvement for the remainder of this year, most of which will occur in the last quarter. We're excited about the developments in global marketing, manufacturing, and, of course, R&D, and in our regional operating performances. This Management team is one of the best in the industry, and is leading our strategic turn around at an aggressive pace. Thank you, all, for joining us today. And now, operator, may we have the first question?

Once again, if you have a question, press star, 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster . Your first question is from Rich Watson with William Blair & Company.

Good morning. Thank you for taking the call. Just had a question about the, sort of, end licensing environment, how you would characterize it right now. Obviously you've done a lot of good things already. Was just wondering, you know, going forward, how you would characterize the environment, and how you intend to balance between, sort of, remaining focused in your 3 core therapeutic areas, versus being opportunistic as potential, you know, opportunities may arise? Thanks.

Thank you, Rich. I'm going to ask Tim Tyson to comment.

Thanks for the question, Rich. We continue to see some great opportunities. It's a crowded field out there, a lot of people interested and looking for acquisitions and opportunities, but as I mentioned earlier, we have some really good things that we're under discussion and evaluation of, and remain confident in our ability to be successful in the near future in this area.

Okay.

And, Rich, just as a supplement to that comment, we are very, very committed to staying in our core areas. And while we won't rule out being opportunistic if the opportunity comes along, we're going to -- we're continuing to be very, very disciplined at looking at our 3 primary therapeutic areas. And we think there's sufficient opportunity there to move things ahead. Next question, please.

Your next question is from Rachel Golder with Goldman Sachs Asset Management.

Yes. Thank you. You said you were going to be interested in acquisitions going forward, and that you had made 63 million in acquisitions to-date, if I got the right number. What you have said that the rest of the year pace would be comparable to that, and then with your comfort with your guidance of 120 million of EBITDA for the full year, this quarter you're pacing ahead of that, you have acquisitions that have recently closed, therefore, that sounds conservative. Are there areas of expense that we should expect to see go up in the balance of the year?

Thank you, Rachel. Bary Bailey. Good morning, Rachel. Relative to the acquisitions we have seen what we believe to be -- or we've experienced great success relative to the Amarin and Tasmar acquisition. And Wes Wheeler and his team have done an outstanding job of identifying opportunities, sticking to our program. And, again, we're very excited about the prospects those two acquisitions bring. We do see others out there, and we see that the pace could accelerate, but again one of the things we've held to is making sure that the products we get deliver a proper return, not just over the short term, but over the long haul, as we all are investors in this. So that, you know, it could, but again, you wouldn't want to commit to anything as a lot of things can change as you go into due diligence and negotiations. And one of the things we've committed to is not over-paying. The EBITDA, we've said actually that we expect our EBITDA to be over 120 million, and so, without getting into more specificity relative to that, we're very comfortable with that number.

Are there areas of expense, though, we should be watching to increase? For instance, gross margin is higher now than your full-year outlook? What areas of growth of cost of goods might be increasing over the balance of the year?

We, you know, I think if you look at just the relative guidance that we've communicated, there isn't anything more, other than the specific guidance that we've provided that I could even point to, and Tim?

I think the point, Rachel, is that cost of goods are probably in a relatively stable area. There's a lot of things that affect gross margin other than just cost of goods, price and mix of product sales, geography and where products are located, so those are the things that we have a lot of change going on in, and that's why the difference.

Okay. Thank you.

Your next question is from Andrew Sidoti with William Smith & Company.

Good morning, gentlemen. Just a question on Viramidine. You've completed enrollment in the 1, and I was just curious as to at what point is the interim analysis potentially going to take place?

Well, the interim analysis will be 24 weeks after the enrollment of the last patient, so I haven't done exact calculations, but it's 24 weeks from the last day in July.

Okay. Great. Thank you.

Your next question is from Frank Bianca with McMann Securities.

Can you repeat what the cash flow from operations number was from the quarter?

We haven't -- since we haven't issued our 10-Q, we haven't presented cash flow from operations. This is Bary, by the way, Frank, sorry -- cash flow from operations. That will come out in our Q. What we focus on is, what I like to look at, is the cash flow generation ability, which is on -- we focus on EBITDA at this point.

Okay. Thanks.

Your next question is from Franz Tutor with Variant Research.

Hi. I just wanted to get into the operating margins in the U.S. business, and what we should be expecting as a trend there?

Franz, this is Rob. What exactly would you like to know, the trend?

Just, the operating margins in the quarter were just slightly under 31%, I know, last year they were trending in the mid to upper 30s, in fourth quarter actually at 42%, so just sort of what's happening from a pricing standpoint there.

Franz, thanks for the question. We have disclosed information on North America, U.S. is the majority --

That's what I mean, North America.

Okay. So the U.S. is the majority of that, and we have a mix of pricing and volume increases that are affecting the area from a top line, that you are requesting. And, of course, reducing the cost of goods based on the sale of higher margin products, as well as, attention to and focus on reduction of costs of manufacturing.

So what should we be modeling or what should we be looking for going forward? What's the target for the year, operating margins in North America?

We haven't communicated specific targets by region. We've looked at globally and so that is -- isn't factor. A small impact is also that we allocate a part of that global manufacturing cost to each of the markets, and that actually increased year-over-year. I mean, it's a contributory factor but not major one.

Okay. Thank you.

Tim wants to add something, Franz.

The difficulty in looking at market right now in gross margin or cost of goods is that there's a huge amount of change going on in the supply chain as we've communicated. Gone from 33 sites to 13 sites in the continued operations area, and we are going from 13 to 5 sites. And so, as we're moving all of those activities around it's changing things on a global basis that are hard to see on a regional basis.

Okay. Thank you.

Your next question is from Blake Goodner with Bridger Capital.

Thanks. I just had a couple quick questions. My first one was, you made a comment about, I think last quarter, you talked about your accelerated depreciation being about a negative $6 million impact to the year to your cost of goods. And I think you mentioned earlier that the accelerated manufacturing, you know, rationalization has allowed to you reduce that dramatically, so what would that, kind of, $6 million target be going to now? I assume it's down.

Bary Bailey.

Thank you, Rob. Blake, the number, actually, from the second quarter on, goes away. You ought to assume that it essential goes away.

What was it in the second quarter?

It essential went away. The manufacturing effort was initiated at the beginning of the quarter. That is, the identification of the opportunity to get rid of those facilities sooner, and so it is not in the quarter.

Okay, great. And then my second question is, obviously you took a severance charge for European sales force realignment, but sounds like you're making some sales force changes in Latin America as well, I think you said 120 reps this quarter, and maybe another 130 next quarter. But I didn't see any charge for that sales force realignment, so is that just embedded in the ongoing operations, or is that, have you been taking -- do you plan on taking charges for that as well?

Thanks for the question. We don't plan on taking charges because, as I had mentioned, these are contract sales reps that are working for CSO, Contract Sales Organization, so we don't have severance charges for redundancy types of fees. So the reductions are just reassignments from the outside company.

Okay. Great. Thanks so much.

We'll reduce expenses but we don't take a charge for doing that.

Got it.

Once again, if you have a question press star, 1 on your telephone keypad . Your next question is a follow-up question from Rachel Golder with Goldman Sachs Asset Management.

Thank you. You have said that you expect that you will be able to sell some of your facilities in more accelerated time frame. Fair for to us assume that a couple of them will probably be sold by the year-end?

I'm going to let Tim answer that, Rachel. Thank you.

Thanks, Rachel, for the question. We're hopeful, so the answer is, we're hopeful. We are confident in the coming short months that we will see some. We've got a lot of interest in a number of the facilities, so we're hopeful.

Okay. Fine. You mentioned a 15 million environmental charge. I wonder if you could give us a little more color on that.

Bary?

Certainly. We identified that there was some contamination in one of the facilities that was associated with the former biomedicals business that we sold last year. It's within a -- or under the floor of a particular building. We identified that we needed to remove some soil from there, and what we've done is calculated what we believe the cost of doing that and disposing of it appropriately.

Is that an expense that you expect will be cash incurred over the next 12 months?

I suspect that will go on over sometime from an actual cash outflow. As you know, just going through process of pulling that out and disposing of it takes time. We haven't set a specific time frame.

I want to underscore, Rachel, that is a part of the -- our discontinued operations.

Okay. Great. One last, if I may. You mentioned that you -- that inventory was holding relatively steady and at a level you were reasonably comfortable with. It looks like it's about 60 days. Is that right?

Are you saying that -- I'm sorry, this is Bary -- in the wholesalers

Actually, on your own books. And then that was going to be my follow-on question, was what your view of inventory levels at wholesalers were and where that was trending.

We manage -- the inventory we're talking about is wholesaler inventoried, and that's what we've been talking about. We're in the -- probably around 6 to 8 weeks, somewhere around the 2 months is probably around a norm.

And relative to what we have in house, it's up a little bit as we're looking at some of this manufacturing rationalization, but only marginally.

That's great. Thank you.

Thank you, Rachel.

Your next question is a follow-up question from Rich Watson with William Blair & Company.

Thanks. Just a quick quick question on the sales force in the U.S., given some of the apparent success you're seeing there. Any near term plans to expand the sales force, particularly with some of the line extensions and that sort of thing? And then, if I could just ask, if you could clarify on the Remofovir Phase 2 data, whether you plan to release interim analysis results? And likewise for Viramidine, VISER1. Thanks.

Okay. Rich, we're going to Wes Wheeler for the answer to the first part of your question, then we'll ask Dr. Lamon to answer the second part of your question.

Sure, Rich, thanks for the question. The sales force in the U.S. for dermatology is at 65. We've looked at this every month since I've been here, and that's about the right size for calling on the key dermatologists. We call on about 5,000 derms on a regular basis between 12 and 24 times a year. So that's, sort of, a right size dermatology sales force in the U.S. We don't plan to expand that until we bring in more products. On the neurology side, we've hired, now, 24 sales reps to promote Permax, Tasmar, and Mestinon. And as we launch Zelapar next year we'll double the size of that sales force.

Okay. And, now, Kim.

Thank you. Rich, couple things. On Remofovir, we have had an abstract accepted for AASLD. Now, this is a Phase 1 study, but it's in patients, and they were treated for 4 weeks. In that study, you will see results of efficacy, even over a short period of time. If you were referring to the Phase 2 study, we would likely release those results in the terms of, it has allowed to us make a decision to go on to Phase 3. In a phase 3 study for Viramidine, the way the regulations are, because we have an external, blinded committee, we will not see the actual results. What they will do is tell us we may proceed, we may proceed with some changes in the protocol, or in some cases companies have been asked to discontinue studies based on superior efficacy or safety. So the actual numbers for the Phase 3 studies will not come out.

Thank you. That's very helpful.

Next question is from Robert Hule with Wells Fargo.

Good morning, and thank you.

Good morning, Rob.

Good morning. The -- I believe at one time you said you had about 35 potential acquisitions under evaluation. And since then, you've gotten a few and lost the few. So what, now, is the current number you're evaluating? And then secondly, on the gross margin, I think you said the strength in Q2 was due to a mix shift to a maybe the more profitable or better margin North American market. So, you know, if we see declining gross margins in the second half, does that mean it's an erosion of that North American business, or that mix is becoming less than it was in Q2?

Bary on the last question, on the margin question.

Robert, relative to the mix, again, it's going to evolve, and you'll look at it by each region, based on the purchasing patterns in that particular quarter on those products. We are focusing on the higher margin products, but as you see, sales of Mestinon and others continue, those can impact us. We don't see it as a particularly negative issue, which is why we're focused on our -- the guidance we've presented.

Okay. I'm going to ask Tim Tyson to respond to the development question.

Yes. Thanks, Robert. We've reviewed about over 200 leads. We currently have active in the neighborhood of 20 to 25 leads on different opportunities, and continue to be confident of our ability to execute.

Okay. Thanks.

Your next question is a follow-up question from Franz Tutor with Variant Research.

Just a couple quick questions on the royalty side. I missed when you broke out what percentage of the royalties were outside the United States. Also, what should we be using, going forward, sort of, as a blended royalty rate, you know, just to make that assumption? And, also, if you could give us any update on the European challenges of the patents for ribavirin.

Certainly, Franz. This is Bary. The -- outside of the U.S. is about 80% in the quarter. And we expect to see the numbers continue, as we said, on a fairly consistent basis for time. I'm sorry, what were the other two questions?

Just what should we be using, going forward, sort of, as a blended royalty rate, now. What Schering's paying, much higher, obviously, outside the U.S. versus the U.S., and Roche is no longer, I guess, paying in North America because of the generic launch.

We haven't, because of our agreements with Schering and Roche, we can't disclose the amount. They are, obviously, different. And, you are right, that Roche no longer has any obligation to pay royalties in the U.S., as the generic's launched. Relative to your last question on the patent state, I'll ask Tim to answer that.

Thanks for the question. Firstly, I'll answer the question on the patent, but the most important protection in Europe is data exclusivity, and that expires in 2009 for Schering and 2012 for Roche in the European Union. We do have limited rights for ribavirin in the EU, Switzerland, and in Japan, which expire in 2005. We filed for an extension of those patents through 2010. And the extension is being challenged by a subsidiary of Novartis in the EU. But, again, we depend on the data exclusivity capability and protection in the EU.

Okay. Thank you.

Once again, if you after question, press star, 1 on your telephone keypad . Your next question is from Jean Vindeche with SAC Capital.

Hi. It's Jean Vindeche with SAC Capital. I was wondering, Bary, could you tell me what the book value of the assets you're interested in selling are, the ones that you wrote down?

You're talking about the manufacturing facilities. We haven't --

Yes.

We haven't carved those out. They're not significant. As far as absolute book value of them, they just aren't that significant.

Okay. Thank you. That's all.

Your next question is from Andy Ecker with Janice Fund.

Hi. Thank you. Can you detail what the product sales growth would have been, excluding the newly acquired products? And then can you detail how many sales reps you have, now, in the different territories? And as you're restructuring the sales forces, what is the appropriate size for the different territories?

Bary's going to respond to the first question.

Andy, thank you. Yes, without the Amarin and Tasmar acquisitions, sales growth on a global basis would have been approximately 9%.

Okay.

And Wes will respond to the second.

Yeah. We talked earlier about the U.S. sales force being about 89 total in the U.S., that includes neurology and dermatology. In Canada we have about 30, in Europe, we've got about 275 reps. In Latin America in total, which is mainly Mexico, Argentina, and Brazil, 524 sales reps. And in the rest of the world territories, primarily in Australia, Korea, Taiwan, et cetera, 75 reps. I don't have the total in front of me but you've got the regional breakdown.

Okay. And as -- are you continuing to restructure, I mean, you said that you're restructuring Latin America.

I think overall, across all the regions, we're taking the same approach, and that is to look at our promoted brands and the optimum number of sales reps to drive the business. Tim, do you have anything to add to that?

Yeah. Thanks, Wes, for the information. As Wes said, we have about 520 reps in Latin America before the restructuring. We've taken 130 out. We're going to take another 120 out, so we're going to end up with, in that evaluation, somewhere in the 250, 300 reps. So we're looking at right-sizing all of our areas, and feel like we've now done a fairly decent job at looking at the region frequency required to get key target, to be able to influence the decision makers in all of the major markets. We've, relatively, finished that, but as you know, this is an on going activity, and we'll continue to look at opportunities for improving our promotional effectiveness.

Mm-hmm. And that 275, is that after the current restructuring?

275 in Latin America?

In Europe.

In Europe, it would be before taking out the 60 in Portugal and Spain. So it will be about 210, 215 after that.

Okay, thank you.

Operator, do we have any more questions?

At this time there are no further questions.

Then I'll -- I want to thank you all for your participation this morning. Obviously, we feel good about the progress we're making in our core operations, and feel very, very comfortable about the steady progress as we go out through the end of the year. We feel more than confident and excited about the efforts we have in both manufacturing, R&D, and in our marketing efforts in building for a really exciting future and are very, very re-committed to the metrics we have been communicating to you for 2008. Thank you all for your participation, and we'll look forward to talking to you next time.

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