Bausch Health Companies Inc (BHC) 2004 Q3 法說會逐字稿

At this time I would like to welcome everyone to Valeant Pharmaceuticals' third-quarter 2004 conference call. (OPERATOR INSTRUCTIONS). As a reminder this call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Jeff Misakian, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to Valeant's third-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, clinical development, 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 regulations.

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 Lobert (ph), 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. Leary.

Thank you, Jeff. And good morning, everyone, and thank you for joining us. This morning we announced results of our 2004 third quarter that continued to reflect the strength of the performance of our specialty pharmaceutical business. In spite of declines in ribavirin royalties and our expected higher rate of R&D spend, we continued to make consistent improvements in the business leading to earnings from continuing operations and before adjustments for the third quarter for -- of 2.4 million or 3 cents per share. Continuing the trend we've seen over the past quarters sales were up solidly in the specialty pharmaceutical business. Overhead costs were down overall. And we saw a continuing strength in our operating metrics.

Our specialty pharmaceutical business is strong and growing stronger. All plans are very much on track, and we continue to execute according to schedule. We once again exceeded our promise to grow the business at industry average growth rates. Our global manufacturing initiative is moving swiftly. We have launched several line extensions for our global brands in the quarter.

We presented important clinical data for viramidine and remofovir at the liver meeting in Boston. And we have completed the clinical work for two safety studies for Zelapar and are on track to submit the data from the studies to the FDA by the end of the year. In the midst of these activities we continued to reduce overhead costs, turning in the fourth consecutive quarterly decline in G&A. Tim Tyson will provide you with a detailed update on our business performance in just a moment.

These are all important steps as we execute our strategic plan. We expect these positive trends to continue in the fourth quarter and into 2005, but it is important for you to remember that this improvement will be modest in the near term, and that accelerated growth won't come until we are further down the road. As I have said before, we view this as a marathon, not a sprint. Bary Bailey will provide you with more specific information on our financial outlook in his remarks.

And I will turn the call over now to Tim Tyson, who will provide you with more information on our products, operations, and marketing activities.

Good morning, everyone. And thank you for your continued support of Valeant. As Rob mentioned, we continue to see consistent progress in the performance of our specialty pharmaceuticals business. There were several areas of strength in the third quarter that I want to highlight this morning.

Sales were up 15 percent overall in the quarter, which was ahead of the industry average growth of 7 percent. This increase was led by continued improvement in our global brands which grew 28 percent in the third quarter compared to the same period last year. Our global brands represented 25 percent of overall sales in the 2004 third quarter compared to 22 percent a year ago.

Product sales are up 16 percent year-to-date, and our global brands are up 32 percent year-to-date compared to one year ago. Of the global brands, Efudex, Mestinon and Kinerase were the top performers in the quarter and demonstrate that effective promotion and lifecycle management strategies work in this business when they're applying in a focused way.

In addition, we had sales in the third quarter from Tasmar and the other products that we acquired this year, which Bary will discuss in further detail in a few minutes. All of our regions experienced double-digit sales growth with North America turning in the strongest performance with 25 percent growth in the third quarter. North America now represents 24 percent of total sales in the third quarter, up from 22 percent in the same quarter last year.

Kinerase continued to increase as result of our promotional efforts and launch of our C6 peptide and cleanser line extensions this quarter. We have also begun selling Kinerase through new strategic channels as you saw in our recent announcement to co-promote Kinerase with Caleel+ Hayden in high-end spas.

Efudex has also turned in strong results in the quarter due to our recent launch of the 40 gram product, which is taking market share away from the competition, and our recent head-to-head comparison study that demonstrated superior efficacy to the competition in every category. This month we launched Dermatix in the United States, which we plan to sell through the direct-to-physician channel.

Turning to our neurology business in North America, we have successfully integrated Amarin and Tasmar and continue to see excellent results in neurology. Cefamet (ph) continues to do extremely well in Canada, and we plan to launch this product in the U.S. in the near future. Through the focused efforts Mestinon continues to defy typical generic erosion, and has maintained 42 percent TRX share in the U.S. according to recent IMS data.

Europe reported strong results, increasing 13 percent in third quarter in spite of government-imposed price controls, mandatory price reductions in key markets, and a seasonal summer reduction in demand. Mestinon and Dermatix were the primary drivers of sales in Europe in the third quarter. Dermatix was recently added to reimbursement lists in the UK, and has become the number one prescribed scar reduction product in that market. A study was also reasonably published in Germany that demonstrated good to very good efficacy and tolerability in patients treated with Dermatix for hypertrophic scars and keloids. These results are very encouraging and will support future business growth.

We recently acquired the rights to Tasmar in the European Union, completing our worldwide acquisition and expect to launch Tasmar throughout Europe by the end of year. Tasmar has become an important global brand for Valeant and will greatly expand our neurology business in this market.

Latin America sales increased 11 percent in the quarter led by growth in Bedoyecta sales. We completed our salesforce restructure and redeployment, which has strengthened our position in the market. We have focused our attention in Mexico on our largest and most profitable customer relationships, and have negotiated new terms to help drive sales improvement in the quarter.

During the quarter we also launched our new oral formulation of Bedoyecta along with a new promotional campaign, and early results have been very encouraging. Lastly, sales from our AAA region increased 15 percent in the quarter compared to the same period last year. Operationally we continue to drive improvement through a focus on efficiency. As a result, our G&A costs were down substantially again this quarter. We are ahead of schedule on the sale of a number of our manufacturing facilities and continue to receive interest in others. We expect to share more information on our progress with you soon. We remain on track to deliver on our commitment to reduce our network to 5 sites by 2006.

Our research and development activities continued to move forward aggressively. This past week we presented 48-week data from Phase II studies for Viramidine, and Phase I efficacy and safety data for remofovir at the liver meeting in Boston. Viramidine 48-week data continued to show comparable efficacy to ribavirin, the standard of care in treating hepatitis C, and dramatically better safety profile. For remofovir we saw a significant dose-related decrease in HBV DNA levels compared to baseline and to placebo at all doses.

There were no now unexpected adverse events reported during the trial. Enrollment in our Phase III pivotal trials for Viramidine and our Phase II trial for remofovir remain on track. VISER2 enrollment began in July and is proceeding very well, with approximately half of the required patients having entered the screening period. We remain comfortable with our estimate of completing enrollment in VISER2 by mid-2005.

We also completed the clinical work on two safety studies required by the FDA for Zelapar, pursuant to the approvable letter from the FDA. We expect to submit the data from these studies to the FDA by the end of year, and assuming a six-month review, be in the market by mid 2005.

Now I'll turn the call over to Bary Bailey for a review of our third-quarter financial results.

Thank you, everyone, for joining us this morning. We reported income from continuing operations, adjusted for non-GAAP items, of 3 cents per share in the third quarter, lower than the comparable number in 2003, but slightly ahead of the second quarter of this year and ahead of FirstCall consensus. The decrease over last year was due to the decline in royalty revenue and higher R&D spend, partially offset by our continued growth in product sales and lower general and administrative costs.

The increase over last quarter reflects the incremental improvement in our specialty pharmaceuticals business with increased product sales and reduced selling, general and administrative costs. Starting at the top line, product sales exceeded expectations and came in 15 percent ahead of last year. Included in this increase were sales from Tasmar and Amarin products, which as a group added about $4.5 million to sales in the third quarter. Excluding these acquired products, on a same-store basis if you will, our top-line sales grew 12 percent. We also benefited from foreign currency translations which added $3.8 million to sales overall in the third quarter.

Ribavirin royalties continued to decline, reflecting the first complete quarter of generic competition in the U.S. for ribavirin. Generic substitution has had a significant impact on Schering-Plough’s sales of Rebetol. Royalties from sales of ribavirin outside the U.S. aggregated $15.3 million, with the impact of sales in the U.S. being essentially zero. We will likely see royalties in 2004 at the bottom end of our previously communicated expectations as a result of the decline in the third quarter, but this is a difficult area to predict.

In 2005 and over the next two years we expect annual royalties to be in the 60 to $70 million range, with very little assumed from U.S. These amounts do not include any impact from Schering's recent approval in Japan for combination pegylated interferon and ribavirin treatment.

Gross margins remained relatively stable in the 2004 third quarter at 67 percent compared with 68 percent in the same period last year. There are several factors influencing the gross margin, including costs associated with our global manufacturing improvement plans. These costs are running at about $3 million per quarter this year and will continue at this rate through 2005, declining to zero by the end of 2006. These costs were offset by increased contributions from North America and a focus on higher-margin products.

Our gross margin was 67 percent for the year to date, and we expect this pace to continue as we finish the year. Accordingly, we believe that a more realistic expectation for our 2004 gross margin is between 66 and 68 percent versus our previous expectation of 64 and 66 percent.

Selling expenses were up 15 percent in the third quarter compared to the same period last year, primarily reflecting the launch of line extensions and new products, including Efudex, Kinerase, Bedoyecta, Dermatix and Tasmar. More importantly, selling expenses were 30 percent of sales in the third quarter, which is flat with the year-ago period. We feel confident that we will end the year consistent with the metrics we have previously communicated of 30 to 32 percent of sales.

G&A expenses continued to decline significantly and represented 14 percent of sales on an adjusted basis in the third quarter. For the year to date this is running at about 16 percent of sales on an adjusted basis. Our efforts to keep costs under control have been very successful to date. And we believe that our rate for the year is likely to be closer to 16 to 17 percent of sales than our previously communicated metrics.

Excluded from adjusted G&A is $3.2 million for a settlement for the bondholder class-action lawsuit that was initiated in 2003. The settlement represents another important execution step for the Company as we continue to clear away the vestiges of the past.

Our business continues to generate a nice cash flow. On an EBITDA basis we generated $97 million in the first nine months of the year, adjusted for non-GAAP items. This is lower than the adjusted EBITDA total of $164 million in the same period last year, but still a strong result given the decline in ribavirin royalties and increased R&D spend. We continue to expect adjusted EBITDA to be at least $120 million in 2004.

Cash and marketable securities at September 30 totaled $472 million compared with $874 million at December 31. The decrease is due to the planned redemption of our 6.5 percent convertible notes, and the $76 million used for acquisitions during the year.

Now looking out into 2005. We're confident that we will continue to experience sales growth of at least 5 to 10 percent, excluding acquisitions, although market purchasing patterns suggest that we will see lower sales in the first quarter than in the remainder of the year. To be specific, we expect that sales in the first quarter of 2005 will decline from the level we expect in the fourth quarter of 2004, primarily due to purchasing trends in Latin America at the end of year, and to a smaller extent in the U.S. and other markets. This is an annual pattern that is similar to what we experienced earlier this year when sales in the first quarter of 2004 were lower than in the fourth quarter of 2003, almost all of which was attributable to Latin America.

For the full year we expect selling and promotional costs in 2005 to be in the 30 to 32 percent of sales range. But the pattern of when we will incur these expenses throughout the year will be very similar to what we experienced in 2004 in which selling expenses were higher in the first half of year than in the latter half as we invest in driving topline growth.

In terms of our expectations for other metrics in 2005, we currently expect our gross margin in 2005 to continue at between 66 and 68 percent, G&A costs next year to be in the 16 to 17 percent level that we're experiencing this year, and R&D expense to be higher in 2005 given the fact that we will have two pivotal Phase III trials on Viramidine running simultaneously along with a Phase II trial for remofovir. And as we reported last quarter, we continue to believe our effective tax rate next year will be between 33 and 35 percent.

We'll have more to say about our 2005 expectations when we report our fourth-quarter results. Now I will turn the call back to Rob O'Leary for closing remarks.

It was two years ago that we announced the first phase in the strategic turnaround of Valeant Pharmaceuticals and the initial steps in the formulation of a new management team with the appointments of Tim Tyson as Chief Operating Officer and Bary Bailey as Chief Financial Officer. Since that time Valeant has made enormous strides in our transformation to a unique, global specialty pharmaceutical company. We have restructured the Company, focused in on our core business, and set a new strategic direction. We have also completed the recruitment of a best-in-class management team to help drive this transformation, all of whom bring considerable leadership experience and extensive backgrounds in the pharmaceutical and health care industries.

Tim Tyson has been a key driver of the Company's transformation, and we have benefited enormously from his leadership, experience and industry knowledge. Since Tim joined the Company two years ago, the Board has carefully planned a succession process in which Tim would be named Chief Executive Officer at the appropriate time. The Board has managed this transition seamlessly. And we have provided you with forecasts and updates along way. Today we announced the final step in that process and set January 1, 2005 as the official date in which Tim will take over the reins as Chief Executive Officer.

Now most of you know and have met Tim. He is a man of considerable talent and experience in the pharmaceutical industry. He has a vision for this Company that will move Valeant to the forefront of leadership in that industry, and lead the Company to deliver on our promise of building long-term sustainable value for our shareholders.

Some of you may know that this is the eighth organization that I have had the privilege of leading through a transformation or restructuring. Few have been as gratifying as Valeant. And I can say unequivocally that I have never felt more comfortable or confident in a successor as I do with Tim Tyson. He is the right leader, at the right time to lead this Company to the success it is positioned for.

I want to take this opportunity personally to thank all of you who follow us, or who have invested behind the Company for your support and patience these last 2.5 years. It has been a privilege to represent and work for you.

For my part I look forward to continuing my role as Chairman of the Board and to leading Valeant in our efforts to build a strong governance platform. We have already made great strides in this area, and we will continue our aggressive pace. I have enjoyed the day-to-day changes at Valeant and the excitement of watching the Company grow from the dark days of ICN's past to a Company that is transparent, financially secure, and building a platform for accelerated growth.

We're very encouraged by the consistent improvement we have seen in our specialty pharmaceutical business, and particularly with how this extraordinary performance has continued to replace the degradation of ribavirin royalties. Every element of our strategic plan is on track or ahead of schedule, and our team continues to execute on every major initiative.

This steady execution is delivering financial results, as you saw this quarter, and building increasing confidence in our ability to achieve our milestones and targets. We're building a platform that is driving immediate improvement and delivering long-term sustainable value for our shareholders.

I want to thank you once again for joining us today, and ask the operator if she might take the first question please.

(OPERATOR INSTRUCTIONS). Greg Gilbert of Merrill Lynch.

Just curious when you would next expect to meet with FDA to discuss Viramidine, would then not be until the end of VISER1? And then I have some follow-ups.

I am going to ask Dr. Lamon to respond to that.

Actually you're right it would be at the end of VISER1. Obviously it depends upon the strength of the data. When we met with them in September of last year we actually not only talked about Phase III, but we really mapped out the whole NDA and got their feedback crude. So we know we need to include in it. So it would really be on results from one of VISER trials.

And since I have you on the line, I know it is early, but are you at least thinking about looking at trials of Viramidine with other agents or is it premature to think about that?

Yes, we are thinking about that with other agents. We've had some discussions. We are also thinking of different indications, for example, a maintenance therapy, studies with co-infection and things like that. And that is part is what of what is being baked into our budget process right now.

And then, Bary, Do you mentioned on --.

Greg, if we might -- this is Rob -- if we could give other people a chance, and then we will cycle back to you please.

No problem.

Rich Watson of William Blair & Co.

Just real quick could you just, Bary, repeat the guidance for '05 R&D as a percentage of sales? And then I just had a follow-up on Tasmar with a few I guess months under your belt in the U.S. market, what you're seeing for that product, and what you're expecting going forward? Thank you.

Relative to specific metrics around R&D, I didn't include it. So you didn't miss anything. What I said it was going to increase. Part of the process we're currently going through reflects on just what Mr. Gilbert just asked Dr. Lamon about looking at other indications, and then as well looking at line extensions. We're currently going through that process and have not really finalized that, so we have not provided a specific metric for 2005 on that, other then it will invariably increase as a result of Viramidine or remofovir studies.

Okay, thanks.

And then relative to Tasmar, I think if you will look at the table in the earnings release we outlined how much that has contributed in the quarter. Wes, I don't know if you have other questions.

We are really encouraged with Tasmar. We're on our third sales cycle right now. We have been through all of our thought leaders and all of our major prescribers, and we're very, very encouraged. Tasmar, new prescriptions are actually starting to grow. And we're pretty much on track to hit our targets for the year. And we're very encouraged by our European launch as well.

Michael Tong of Wachovia Securities.

Just a quick question on the gross margin in North America and Latin America. It showed some year-over-year decline. I was wondering if there's any specific reasons for that? And how do you see that gross margin, particularly in those two areas panning out for Q4?

Michael, Tim is going to respond.

As we have said in the past, there are so many things going on right now it is hard to look at gross margin on a regional basis quarter–by-quarter. We have the manufacturing improvement going on, which is reducing sites and focusing attention from product sourcing. That is one issue.

Second is the product mix that is being sold and the geographic focus and mix. So all of those things are impacting, so on a quarter-by-quarter basis it is hard to see it on a regional basis. But we're confident you'll see continued improvement in the gross margin and a reduction in cost of goods, which will ultimately get back to regions and stabilize probably by the end of 2006.

Great. Thanks. If I can have a quick follow-up on VISER2 and Roman (ph). I think some of the other pegylated interferon players are also doing a lot of additional trials. Are you seeing competition as far as recruiting patients is concerned?

I can tell you that we're seeing virtually no competition at all. You know VISER1 was enrolled in what we know as record time in eight months. And the way we're tracking with VISER2 we are seeing great enrollment. As we said earlier, we have more than half of the patients already in the screening period, and that has been four months.

David Gruber (ph) of Earthis (ph) Capital.

In the Rebetol label, 13 to 16 percent of patients had hemoglobin levels of less than 10.9 grams per dl. In the Phase II trial you presented 27 percent had anemia less than 10 grams per dl. Two questions, why the disparity from the label, and secondly, have you disclosed what percentage of patients who had anemia either had a dose reduction, required epo or discontinued treatment to better understand the clinical significance of those numbers?

We have not disclosed those data. The difference between what is in the label and what is at our end of treatment to me is related to a very small sample size for the phase 2 study, 40 patients per group, whereas in the registration trials there are anywhere between 300 and 900. That is not to me a meaningful difference.

(OPERATOR INSTRUCTIONS). Greg Gilbert of Merrill Lynch.

For Kim, a follow-up on that last one. Do you have any idea what percentage of Rebetol patients are eventually put on epo in the real world setting? And, Bary, is it possible that Rebetol sales in the U.S. could rebound in the fourth quarter as third quarter might have been some sort of inventory adjustment or something like that?

I will have Wes answer the question on epo.

Our estimate right now, based on a lot of quantitative research, is about 17 percent of all patients and up with epo.

And relative to expectations, again I think ourselves and the market have always overestimated the results on the royalties that we experience. But we believe that the TRx on branded Rebetol are still out there. And therefore since we're essentially at zero in the quarter on an accounting basis as presented from our partners, I would expect to see some in the U.S. in subsequent quarters. So that is something that you have identified and we would expect as well.

Just so it is clear for you and everyone, we're not allowing growth factors or epo in the VISER trials.

Thanks for that. And Tim and Wes, can you just give us a snapshot of where you are on the business development front? Thanks.

We continue -- as we had communicated at the Bear Stearns conference, we are at about one-third of what we expected to do in our plan based on what we have already completed. We continue to have significant activity, and we're confident that we will be able to acquire the opportunity to fill the rest of that business development improvement that we have in our plan. We have some activity right now -- a lot of activity. And we're excited and confident in our ability to execute.

And I would point out with the deals we have already done, we're more than 1/3 of the way through our business development commitments included in our 2008 metrics.

At this time we have no further questions. Do you have any closing remarks?

No, we are fine here. And if there are no further questions, we will thank everybody and sign off. Thank you very much.

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

Thank you, operator.