Bausch Health Companies Inc (BHC) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Paul and I will be your conference facilitator today. At this time, I'd to welcome everyone to the Valeant Pharmaceuticals first quarter 2005 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. (Operator Instructions). 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 is time for opening remarks and introductions, I would like to turn the conference over to Mr. Jeff Misakian, Vice President of Investor Relations.

Thank you. Good morning everyone and welcome to Valeant's first quarter 2005 earnings call. Joining us on the call today are Timothy C. Tyson, President Chief Executive Officer and Bary G. Bailey, Executive Vice President, Chief Financial Officer. Kim D. Lamon, M.D., Ph.D, President , R&D and Chief Scientific Officer; Wes Wheeler, President, North America and Global Commercial Development, Chuck Bramlage, President, Europe; Peter Blott, Group Financial Controller and Phil Loberg ,Treasurer, are also here and available to answer questions during the Q&A session.

Before we begin, I would like to call your attention to the fact that this presentation may contain forward-looking statements that are based on management's current expectations and involve risks and uncertainties, including but not limited to risks and uncertainties relating to projections of future sales, royalty income, operating income, returns on invested assets and clinical development, regulatory approval processes, competition from generic products, marketplace acceptance of the Company's products, the Company's ability to successively integrate Xcel's operations into those of Valeant; success of the Company's strategic repositioning initiatives and of 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 reductions goals; the Company's ability to retain key employees, reduce costs; general economic factors and business and capital market conditions; general industry trends; changes in tax law requirements and government regulation; adverse events that would require clinical trials to be prematurely terminated; clinical results that indicate continuing clinical and commercial pursuit of product candidates is not advisable and the fact that Phase II clinical trial results are not always indicative of those seen in Phase III clinical trials and other risks detailed from time to time in Valeant's SEC filings.

These factors as well as those described in our SEC filings are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements. Certain figures discussed in today's presentation will be based on adjusted or non-GAAP information. A reconciliation of GAAP to non-GAAP result can be found in the tables to the Company's press release issued earlier today and on Valeant's web site at www.Valeant.com. And now I will turn the call over to Mr. Tyson. Tim?

Thank you, Jeff, and good morning everyone. We're very pleased with our first quarter results. They reflect continued execution in our company's transformation and the strength of our core business. As with any transformation though, we must caution that one quarter's results are not necessarily indicative of the pace of change throughout the year. Bary Bailey will touch on this further in his remarks in just a moment.

On an adjusted basis, we reported income from continuing operations in 2005 first quarter of $4.6 million or $0.05 per diluted share, reflecting strong topline performance and continued control of expenses. These improvements were somewhat offset by a decline in Ribavirin royalties and higher research and development expenses.

Revenue growth was strong in the first quarter which highlights the rapid rate at which our specialty pharmaceuticals product sales are replacing the decline in ribavirin royalties. Product sales grew at a rate of 22% in the 2005 first quarter compared to the same period in the prior year driven by an increase of 35% in the Company's global brands, strong performance in certain regional products and sales from products that were recently acquired. The global brands that increased at the fastest pace in the first quarter include EFUDEX, Oxsoralen, Kinerase and Dermatix. EFUDEX sales were nearly $20 million in the first quarter, almost half of the level of sales in all of 2004 and an increase of 62% over the year-ago quarter due to continued market penetration resulting from our lifecycle management strategy, growth in the AK market, strong seasonal demand and a relaunch in Canada. EFUDEX now holds 53% of prescription share of the topical AK market in the U.S. Mestinon sales worldwide grew 11% and the product still holds 37% of U.S. prescription share of the myasthenia gravis market in spite of generic intrusion in the U.S.

Several regional products also performed well in the first quarter, including Bedoyecta, Cesamet and Reptilase. In particular, Bedoyecta grew 67% in the first quarter compared to the same period last year and was the third-largest product in sales due to a successful direct to consumer marketing campaign in Mexico. Cesamet is a synthetic cannabinoid that performed well in Canada which we think will aid in our efforts in launching the product in the United States this year.

We also benefited during the quarter from sales and products that were acquired in this past year as well as foreign currency translation adjustments that Bary will address.

Sales of products acquired from Xcel Pharmaceuticals performed well in the first month since we closed the transaction primarily due to strong sales of Diastat. Our regions performed well in both top- and bottom-line results in the first quarter compared to the same period last year. North America reported the largest advance with a 77% increase in sales in the quarter. Excluding sales of acquired products, North America grew 42% in the first quarter. North America represented 30% of overall sales in the quarter due to the product sales advance in the region and the addition of Xcel.

Because of these strong results coupled with our continued control of expenses, operating income in North America grew 143% in the quarter. Sales in Europe grew 4% in the first quarter. We are very pleased with our new team in Europe. They're making a difference in this market and delivering results in our areas of focus. Our efforts in Europe on TASMAR, Dermatix and Catrix generated solid sales.

Overall growth in the region however was somewhat constrained by significant government reimbursement and pricing actions in key markets. TASMAR has recently been launched in Germany, Sweden, Denmark and the United Kingdom. We recruited a new sales force to promote sales of TASMAR and other neurology products in Europe and results have been very encouraging. Favorable currency translation adjustments in most markets also continued to benefit topline results in Europe.

In spite of the reimbursement and pricing challenges in Europe, operating income in the region improved 36% due to our efforts to control costs and the impact of last year's sales force restructuring. Latin America sales grew 10% in the quarter due to the success of marketing campaigns for Bedoyecta. Last year's sales force restructuring and continued expense control in the region helped Latin America achieve a 78% increase in operating income in the quarter.

We continued to make progress in several product initiatives this year. We recently announced a celebrity endorsement for Kinerase with actress Courteney Cox, and an agreement with Sephora to distribute Kinerase from their 97 high-end retail stores in the United States. We had a successful launch of this new Kinerase marketing campaign last month and the early results are very encouraging. Additional Kinerase line extensions are planned for later this year as we continue to develop a full line of competitive products.

A revised submission for Zelapar was recently sent to the FDA and we expect to receive a PDUFA date soon. Approval was recently obtained for a new inhaler for Migranal and we're making plans to launch this line extension in the second quarter and we are nearing the PDUFA date in the U.S. for Cesamet and expect to launch this product in the second quarter also.

The integration of Xcel has gone very well and is expected to be completed by the end of the second quarter. There have been no significant issues and we are seeing strong results in the first month of integration. Our sales teams are now fully integrated and we have a formidable U.S. neurology presence of 104 sales representatives, 11 district managers and four regional directors. The newly integrated sales force is selling Diastat, TASMAR and Migranal.

Progress continues in clinical development and discovery activities. We presented Viramidine Phase II clinical data at the European Association for the Study of the Liver meeting in Paris last month. The response received from physicians and key opinion leaders was very positive. As we've communicated in the past, we expect to complete our Viser1 Phase III pivotal trial by the end of this year and report Viser1 results sometime in the first half of 2006. The Viser2 trial is expected to be completed just six months after Viser1. We've begun our commercialization preparation activities.

We are excited about our newly acquired pipeline product Retigabine, a medicine for the treatment of epilepsy with a novel dual mechanism of action. Plans are moving forward to submit a special protocol assessment to the FDA in the next few weeks. As you know, a preliminary discussion of plans for Phase III development of Retigabine was held with the FDA last November. We continue to move ahead with the initiation of global investigative sites for Phase III trials and expect to begin enrollment by the third quarter.

Pradefovir continues to move as scheduled through its Phase II trial. We expect to have interim 24-week data from this head-to-head comparison to Hepsera around the middle of the year.

Our manufacturing improvement plan continued to advance aggressively. We recently sold one of our manufacturing facilities in Argentina which brings the number of current facilities to 11 sites worldwide. We recently decided to sell our facility in Wuxi, China. As a result, we took an impairment charge in the quarter of $2.2 million on this facility. This means that at the conclusion of our manufacturing improvement plan in 2006, we will be focused on only four manufacturing sites worldwide.

Now I will turn the call over to Bary Bailey for a review of our first-quarter financial results. Bary?

Thank you, Tim, and thank you everybody for joining us today. As you can see from our earnings release this morning and taking into account non-GAAP items, income from continuing operations of $0.05 per share was substantially ahead of street expectation, primarily due to a much stronger topline result that included both increases in product sales and better-than-expected royalties from the sale of ribavirin.

We continue to be optimistic about the future but as you know, the business is not always linear. There are factors which I will discuss in a moment that need to be considered as you evaluate our prospective performance.

Product sales were well ahead of expectations with growth of $29.5 million or 22% in the first quarter of the year compared to the same period last year. Recent acquisitions contributed $10.5 million to product sales in the first quarter, including $7.3 million in Xcel sales since the March 1 acquisition closing date. Excluding acquired products, our sales grew by 14% in the quarter.

The impact of foreign currency translation also positively impacted product sales by $7.3 million, although the impact to operating income was considerably smaller at $2 million. We continue to expect sales growth in 2005 to be on par with the industry average rate of 5 to 10% overall excluding acquisitions. Royalties were lower in the 2005 first quarter compared to the same period last year primarily due to the lower royalties in the United States, partially offset by an increase in royalties in Japan following Schering's launch of combination pegylated interferon and ribavirin therapy in that market. U.S. royalties continued to be affected by what appeared to be significant returns of REBETOL to Schering in this market.

We remain comfortable for now in our estimate of ribavirin royalties of 60 to $70 million in 2005 excluding the increases in Japan. We should experience greater consistency in ribaviran royalties in the future since most of our royalties are now coming from Europe and the royalty rates with Schering in these markets are constant versus a tiered royalty structure in the United States.

While we are encouraged by the growth in Japan, this is a unique market and because of the potential patient warehousing in the first quarter, the trends may be different for the remainder of the year. At this time, it remains difficult for us to predict Schering's performance in Japan.

Gross margin in the first quarter was 70%, substantially ahead of the 65% recorded in the first quarter last year. This improvement is due to a favorable mix of higher margin products and increased sales in North America in the quarter. As we have communicated in the past, there are many moving pieces in the gross margin as we continue to execute our global manufacturing plan. We remain comfortable with our expectations for gross margin in 2005 of between 68 and 70%.

Selling expenses were 33% of sales in the first quarter compared to 36% in the same period last year. The decline was primarily due to our efforts to control expenses, even as sales rose significantly in the same period. We expect to end the year within our previously communicated range of between 30 and 32% of sales, although we expect the second quarter to be at a higher rate due to a number of our marketing initiatives that are launching in that period.

General and administrative expenses were 15% of sales in the first quarter compared to 18% in the same period last year. These expenses can fluctuate from quarter to quarter depending on legal and other costs but we continue to expect that they will range 14 to 16% of sales for the full 2005 year.

Research and development expenses were 16% of sales in the first quarter compared to 14% in the same period last year. The increase was due to our ongoing clinical trials for Viramidine and Pradefovir. We expect these three costs associated with Retigabine to begin in the second quarter. These expenses will increase as we move forward with Phase III development plans for Retigabine and our preclinical discovery work. We continue to expect R&D costs to be in the range of 16 to 18% of sales in 2005.

In connection with our acquisition of Xcel, we wrote off $126.4 million of the purchase price attributable to in-process research and development. The write-off does not affect cash and was reported as a non-GAAP item. We indicated in our briefings on the Xcel acquisition that we expected this number to be in the $120 million range. Now that we have completed the Xcel transaction, we expect amortization expense to be in the range of 60 to $65 million in 2005 which is somewhat lower than earlier expectations.

Our cash position decreased by $100 million in the first quarter to $362 million at the end of March, primarily due to our acquisition of Xcel, which used $292 million in cash partially offset by $189 million in net proceeds from our equity offering. Additional information about cash flow is included in the tables attached to the press release.

Inventory levels have increased, a portion of which is attributable to acquisitions. We're taking steps to improve our inventory turns while still managing the shift of products from manufacturing facilities scheduled for divestiture to our anticipated remaining facilities. On an adjusted basis, EBITDA in the first quarter was $36.9 million compared to 29.3 million in the same period last year. We continue to expect adjusted EBITDA to be in excess of $140 million this year.

Now on the tax front, a number of items impacted us. As we have indicated in the past, the Company experiences a loss in the U.S. tax jurisdiction which includes our R&D operations. At year end, we established a valuation allowance to offset the deferred tax asset that we had previously established. Without implementing alternative tax strategies, the Company will continue to experience losses in the U.S. until the launch of Viramidine. The Company continues to assess its tax planning strategies taking into account the impact these will have on near-term and future benefits until such time as the strategies can be implemented that will permanently eliminate the tax losses which includes the launch of products in our pipeline for GAAP purposes. The Company will reflect no benefits from these losses in calculating its effective tax rate. We have reflected a $3.5 million non-GAAP adjustment for this impact.

We have another non-GAAP adjustment on the tax line totaling $10.3 million for additional reserves established to address proposed adjustments from the IRS for tax returns filed for the period from 1997 to 2001. As we have mentioned in the past, the IRS has been performing a regular audit of the Company's U.S. tax returns for the period 1997 to 2001. The IRS has completed their review and has proposed several adjustments that the Company is evaluating. While we believe some of these adjustments are not appropriate, we have recorded what we believe to be a prudent adjustment to our tax reserves. The largest of these adjustments is the recognition of gains on the Company's restructuring of operations in 1999 through the contribution of several non-U.S. subsidiaries to a wholly owned Dutch Company. As we discussed in last year's 10-K, we recently discovered and voluntarily informed the IRS that the Company's former management inadvertently omitted the gain recognition agreements that are required with this action from our 1999 corporate tax return. It was clearly the Company's intent to file these agreements and we have operated as if these filings have been submitted.

Nevertheless, the IRS denied our request to rule that reasonable cause existed for the failure to provide the agreements. We will continue to pursue a resolution through a formal appeals process.

The resulting cash and tax obligation from the IRS proposed adjustment is substantially offset by the Company's accumulated tax loss carryforward. The majority of the impact, or approximately $35 million of the proposed adjustments are applied against the valuation allowance we established at the end of last year. The balance of the adjustment for which accumulated NOLs can not be utilized due to carryback limitations, offset by the reversal of a valuation allowance established for NOLs in certain non-U.S. jurisdictions resulted in a net adjustment of $10.3 million.

Now I will turn the call back to Tim for closing remarks.

Thank you, Bary. Results for the first quarter demonstrated consistent and determined execution on the part of our leadership team and dedicated employees. We continue to drive impressive sales gains that are well ahead of the rest of the pharmaceutical industry. This growth when combined with our focus on cost control is delivering solid bottom-line performance in our base business.

Progress also continues at an aggressive pace in clinical development and discovery efforts. Our acquisition strategy is paying off and we remain focused on opportunities to grow our business further. I am very optimistic about our future and look forward to continuing our dialogue in the days ahead. Thank you for your continued support of Valeant and now we will take questions. Operator, may we have the first question please?

Gregg Gilbert, Merrill Lynch.

Good morning. I have a three-part question. First for Tim, can you update us your progress in moving your manufacturing of your products to the five key plants? Wes, I believe you already have IMA's in the U.S., but can you tell us how many weeks the wholesalers are limited to in those agreements and where you stand now? And lastly for Kim, understanding the limitations of any Phase II study, can you discuss the factors that support your confidence that efficacy for Viramidine will be non-inferior to ribaviran when Viser1 is reported? Thanks.

Gregg, thanks for your question. First with the manufacturing improvement plant, things are going well. We're a little bit ahead of our plan, continue to expect as we have communicated to be completed with the movement of products and the restructuring to the four facilities by the end of 2006. So thanks for the question. The second on IMA's, I will let Wes address that.

Hi, Gregg, it's Wes. Thanks for the question. As we told you all in the past, we do have IMA's in place in the U.S. and Canada and actually are performing quite well on those. And all I can say at this point without giving specific numbers is that we're very stable and we're operating our business in both the U.S. and Canada at a very stable industry average rate.

Okay. Kim, the question on Phase II and confidence in Viramidine based on the results?

Gregg, as we've talked about, the study is small. It was not powered to show a statistical difference between the groups. But that being said, it filled what we wanted to do, which is -- does Viramidine have a better safety profile as was predicted from the animal studies? And that is yes. Do we see clinical activity? Absolutely yes, and can we predict a dose, and the answer to that was yes as well. So I am confident that we will be successful in our Viser1 and 2 trials as a result of those studies.

Are you able to share with us the margin of error you have on efficacy to still meet your primary endpoint? I understand there's not an absolute, but can help us with that?

Yes, there's not an absolute number because it's tied to both the safety endpoint and the efficacy endpoint that's somewhere between I would say 5 to 7% for non-inferiority.

Thanks.

Gregg, thanks very much. Operator, can we have the next question please?

Deb Knobelman, Piper Jaffray.

Hey, guys, a couple of questions. First a follow-up on the inventory, specifically on the Xcel revenues. Were any of those products, did they have unusually high inventories that you booked in this quarter and would they be working down?

This is Wes -- no, absolutely not. Xcel has done a good job over the last year or so to bring their wholesale trade inventories down to very reasonable levels and there's no unusual occurrence there.

Great, and then a second question on Retigabine. Will you be making full Phase II data more available? I know we've seen some topline stuff, but will there be an opportunity to look at the Phase II data as you going into Phase III?

The answer is yes, Deb, at appropriate scientific meetings. Kim, do you want to comment on that?

Yes. We're going to present the entire data at one of the future meetings and then plan to publish it very soon.

Last question. Now that you guys have absorbed Xcel, are you still opportunistically looking at acquisitions, or are you really focusing more on your internal business at this point?

As we've said Deb, we're focusing on appropriate acquisitions. We're looking for opportunities to grow the business, either with the base business or through our internal pipeline commercialization or through acquisitions. So we continue to look out there for opportunities but we would use the type of challenge that we have had to ensure that anything that we do would make some financial sense and strategic impact for the business.

Great, thanks guys.

(Operator Instructions). Rich Watson, William Blair & Co.

Good morning, thanks for taking the question. Can you just give us a little bit of an update on how TASMAR is performing in the U.S. and Europe and maybe any differences between the two markets, some of the drivers may be behind that, and also the status of Zelapar, when we can expect to see that approved and how that could potentially impact TASMAR and your overall neurology franchise sales? Thank you.

Okay, Rich, thanks. First of all, the TASMAR launch and performance has -- and reception in the market has been good. It's a product that has a place in the treatments of Parkinson's and it's gaining some good acceptance. I'm going to ask Wes Wheeler, who's running the North American business and Chuck to make a comment about North America and Europe.

TASMAR -- as you know, we relaunched this product last summer with a very small salesforce. We had acquired the Amarin salesforce of 24 representatives. We got around about three sales cycles in the 6 months that we had that salesforce in place, and so we're really getting the awareness up across the neurologist community and the PD community and it's still early days. The scrips are fairly flat but we're very encouraged by both our liver monitoring program, which we just launched in the U.S. just a couple of weeks ago and the fact that we are working very hard now with all 104 sales reps from the Xcel acquisition to promote TASMAR. So we're very encouraged by the initial response. The scrips aren't quite there yet, but we're expecting that to come through very soon.

Ask Chuck also to comment -- Chuck from Europe.

We're very excited in Europe about the launch, the relaunch of TASMAR in Europe which happened at the end of March. Two key markets, Germany and UK, are leading that for Europe. In Germany, we hired 24 new sales reps, very high-quality reps that joined the organization. In the UK, our 13 people are all focused on that and we also have hired three new folks in Sweden and Denmark to launch there.

So early signs look great, but again, nothing but positive comments from doctors. We're just waiting to see as we progress each month and each week how things look.

Your second question was on Zelopar. Zelopar, as you know, we have an approvable letter from the FDA. We had some questions and we resubmitted all of the data that the FDA asked for. We have not received a PDUFA date yet but expect to receive one anytime and we continue to expect to launch Zelopar in the U.S. this year. And the question about impact or how it positions with TASMAR, I'm going to ask Wes to comment on.

Again with now a really full force out there with 104 reps and 11 district managers, we have really a formidable sales force now that can take both TASMAR and Zelopar into the marketplace and gain the share of voice we need to compete. So TASMAR is our entry and Zelopar is our home run and we're very excited about the launch of Zelopar later in the year, Rich.

And as you know, they have different mechanisms of action, so there's different positioning and treatment of the disease with these drugs. They are not really competing drugs, they are adjunctive types of therapy. So we will take the next question.

Michael Tong, Wachovia Securities.

Thank you for taking the question. The question is on Viramidine. Could you remind us if there is any difference between Viser1 and Viser2 in terms of clinical trial design? And in the Phase II data, even though you weren't (indiscernible) for statistical significance, could you perhaps explain or maybe have a rational explanation of the directional movement between the 400 mg to the 600 to the 800 in terms of the sustained response rates?

I'm going to ask Dr. Lamon to respond to those two questions. Kim, difference between the study designs and then the data?

Okay, Michael, thank you. The designs are essentially the same, it's just using a different regimen. Viser1 using the comparison with the Schering product and Viser2 with the Roche product, so the designs are essentially identical.

In terms of response rates, as we have said previously, the different response rates between the doses are really point estimates based on statistics and they are indistinguishable from each other.

There are no further questions at this time. Do you have any further comments or any closing remarks you would like to make?

Thank you very much for your support. We appreciate it and look forward to talking with you in the future. So thanks a lot.

Ladies and gentlemen, this concludes today's conference. Again, thank you for participating. You may now disconnect.