Bausch Health Companies Inc (BHC) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter earnings conference call for Biovail Corporation. [OPERATOR INSTRUCTIONS] This conference call is being webcast on the worldwide web Biovail.Com. After Management has completed it's review a question and answer session will be held for research analysts who cover Biovail. After the conference call other participants are encouraged to follow-up with the Company by calling 905-286-3000 and asking for Investor Relations. [OPERATOR INSTRUCTIONS] As a reminder a replay of this Conference Call will be available until 7:00 p.m. Eastern Time on Thursday, November 16, 2006, by dialing 416-695-5800, Toronto and international callers and 1-800-408-3053 for U.S. and Canada , using access code 3201838 followed by the number sign.

On behalf of speakers who follow investors are cautioned that the presentations and responses to questions may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and which comprise forward-looking information within the meaning of the Safe Harbor Provisions of Canadian provincial security laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements. Actual results may differ materially from those expressed or implied in such statements. Forward-looking statements include but are not limited our goals, targets, strategies, intentions, plans, beliefs, estimates, expectations, outlooks, and understatements which contains language such as believe, anticipate, expect, intend, plan, will, may, and other similar expressions.

For additional information about the material factors or assumptions underlying such statements and about the material factors that may cause actual results to vary from those expressed or implied in such statements, please consult the Company's earnings and guidance news release dated November 9, of 2006, that are available on the Company 's website as well as it's filings with the Securities and Exchange Commission and the Ontario Securities Commission including the Risk Factors detailed in it's most recent Annual Report on Form 20-F item 3D. The Company does not undertake to update any forward-looking statements.

Investors are also advised to consult the description of non-GAAP financial measures related to net income and earnings per share excluding specific items detailed in the Company's November 9, earnings news release. At this point I would like to turn the call over to Ken Howling, Senior Vice President of Finance and Corporate Affairs for Biovail Corporation. Mr. Howling will moderate today's call.

Thank you, Operator, and good morning, everyone. On be half of Biovail, thank you for joining us this morning for our quarterly conference call during which we will provide additional insight into the financial results and operating highlights for the third quarter and first nine months of 2006. Joining me on today's call are Dr. Douglas Squires, Chief Executive Officer of Biovail Corporation; Charles Rowland, Senior Vice President and Chief Financial Officer; Dr. Peter Silverstone, Senior Vice President, Medical and Scientific Affairs; also on the call today is Wendy Kelley, Senior Vice President , General Counsel, and Corporate Secretary.

They will be available along with myself to participate during the question and answer session with research analysts following our prepared remarks. As always, we will try to get to an many questions as possible while limiting the call to approximately one hour. After the conference call other participants are encouraged to follow-up with the Company by calling 905-286-3000 and asking for Investor Relations. Doug would you like to begin, please?

Thank you, Ken. Good morning, everyone. Thank you for joining us this morning. I am pleased do provide you with an in depth review of Biovail's operational performance for the third quarter of 2006. An ongoing goal for us is to execute against our stated financial and operational objectives, and once again, for the ninth consecutive quarter, we have met that committment.

For the first three months ended September 30, 2006, Biovail generated record revenues and robust cash flows on operations. Overall, our products performed very well, in many cases, they met or exceeded our expectations while continuing to grow market share. This strong performance has also left us well positioned to invest in strategic growth initiatives for the business while maintaining our dividend policy. Clearly, the investments we have made in our business combined with the transformations that we have made during the past 24 months to the ways we do business have played a major role in our performance. During this time, we have remained conscience and optimistic about the dynamic nature of the pharmaceutical industry and in turn optimistic of Biovail's role and ability to add value to this industry.

One of the on the omnipresent realities of a pharmaceutical industry is the generic ablation of drug products. As you will recall, in early August, the United States District Court Of the Central District of California surprisingly granted, in part, Anchen's motion for summary judgment with respect to patent infringement litigation relating to Wellbutrin XL. The Court ruled that Anchen's abbreviated new drug application did not infringe on Biovail's patents but denied the portion of Anchen's motion that sought to invalidate Biovail's patent.

Let me now take a few minutes to provide an update on where things stand with patent infringement litigation between Biovail and Anchen. In mid September, Biovail filed a formal appeal of the United States District Court for the Central District of California decision in Federal Appeals Court. It is impossible for us to predict exactly when the case will be resolved but it's quite possible that the legal process could take a year or longer.

There are, of course, a number of other factors that may impact the entry of generic competition to Wellbutrin XL. Among them, before Anchen can launch a generic version of Wellbutrin XL in the U.S. market they must first receive final approval for it's abbreviated new drug application from the United States Food and Drug Administration. Also, the FDA has yet to rule on either of the two citizens petitions filed by Biovail. The first, filed in March, 2003, requests that the FDA require that if an ANDA filer amends it's ANDA, such that it's Paragraph four certification is no longer accurate, the ANDA filer must recertify to the NDA holder and patent owner with respect to each such ANDA amendment. After receiving tentative approval, Anchen filed with the FDA an amendment that Biovail believes reinforces the merit of it's citizens petition and could impact the analysis of Anchen's patent infringement.

The fundamental purpose of a second citizens petition filed in December 2005 was to ensure that generic versions of Wellbutrin XL are safe and effective as the innovator product. Let me remind everyone that we believe that it is critical that the FDA require that any abbreviated new drug application for a generic version of Wellbutrin XL satisfy the following four criteria--One, all bioequivalents trials should calculate and evaluate parameters based on concentrations of the parent drug and active metabolites. Two, any generic formulation should be shown based on the above criteria to be bioequivalent to Wellbutrin XL -- to Wellbutrin XL and the sustained release and the immediate release Bupropion. Three, the bioequivalent study as described above should be conducted at steady state evaluating the performance of the dosage form based on a number of metrics including area under the curve, maximum concentration on C-Max, and minimum concentration or C-Min. Fourth, data used in the FDA's in vitro approach for evaluating the effect of alcohol on the performance of controlled release dosage form should be required to ensure the absence of dose data, if the drug is consumed with alcohol. By that, I mean that some controlled release formulations can rapidly release or dump large amounts of drug in the presence of alcohol.

Additionally, there are a number of commercial factors that may affect the potential timing of when Anchen may launch a generic version of Wellbutrin XL, assuming that it receives final FDA approval. These commercial factors include Anchen's ability and the ability and willingness of it's manufacturing and/or distribution partner to launch at risk, pending a course decision on Biovail's appeal, and Anchen's ability to manufacture sufficient quantities to support such a launch.

Given the potential near term loss of exclusivity for Wellbutrin XL, and a period during which our new products cannot entirely offset these lost sales, we are scrutinizing all aspects of our business and will take an aggressive line on cost containment. Everything is on the table with the exception of our continued investment and high value pipeline programs. Biovail's executive management team is currently assessing every aspect of our operations to reduce costs and increase operating efficiencies, and while it was difficult to predict exactly when generic formulations of Wellbutrin XL may enter the market, or to what extent competitors may be able to supply the market, Biovail will position it's business to minimize the negative impact this could have on the Company 's operating margins while continuing to invest in our pipeline programs. We anticipate being in a position to make announcements related to this review before the end of the year.

Biovail remains committed to advancing our product development pipeline by accelerating those programs with the most value. To this end, we are currently in discussions with a number of companies regarding several of our ongoing development programs with the intention of accelerating these programs in a very cost effective manner. We are also assessing outlicensing opportunities for a number of products that we have developed that are based on our oral disintegrating tablet technology. Research and Development remains an integral part of our future. At this time, I would like to ask Dr. Peter Silverstone, Biovail's Senior Vice President, Medical and Scientific Affairs, to provide you with an update on the status of some of our pipeline programs. Peter?

Thank you, Doug. Good morning, everyone. As you're aware, Biovail has a number of products in development. In the past these initiatives have been referred to in a variety of ways. Going forward, to clarify each project and to simplify communication each of these is now being given a specific identifier, consisting of the letters BVF followed by a three number code. As I spend a few minutes updating you on some of the recent developments, I will use these codes.

As has been previously discussed, Biovail has developed a Novel Bupropion sort referred to now as BVF 033. In keeping with the timeliness, previously publicly outlined by Dr. Squires, in late September, 2006, Biovail submitted a new drug application to the FDA the BVF 033, for the treatment of depressive illness in adults. Biovail believes that BVF 033 may offer a superior safety profile to Bupropion hydrochloride, the compound upon which Wellbutrin XL is based. Dose dumping in the presence of alcohol also presents significant risks to patients and is of increasing concern to regulatory parties such as the FDA. In the presence of alcohol, BVF 033 has a more favorable release profile than other long acting Bupropion formulations and does not dose dump. This Novel formulation of Bupropion is also being used as the platform for our Bupropion combination product, BVF 045. Biovail believes that BVF 045 which combines drugs with different mechanisms of action may provide physicians a single tablet option that may be particularly effective in the treatment of depression.

In keeping with Biovail's committment to develop a pain management franchise with Canada, Biovail filed a new drug submission with a therapeutics product directorate in Canada in late August for BVF 127. This is a once daily extended release Tramadol for the management of moderate to moderately severe chronic pain in adults. On Monday of this week, we received word from TPD that our NDX for BVF 127 has been accepted for review. Consistent with our belief that our ongoing development work with combination products offers significant upside potential and further to our previously stated intention to accelerate key research programs, I'm pleased to inform you that Biovail has initiated Phase III clinical trials for BVF 146, a once daily combination product, comprised of Tramadol hydrochloride and an undisclosed non-steroidal antiinflammatory drug. We believe that BVF 146 may provide physicians and healthcare practitioners with a Novel treatment option for patients who suffer from moderate to moderately severe chronic pain.

Biovail further believes that BVF 146 may provide physicians with a single tablet option that incorporates two separate classes of drugs, essentially acting analgesic, Tramadol, with an antiinflammatory agent which in turn provides a double pronged, essentially synergistic approach to the management of pain and inflammation. The Phase III clinical trial program will compare BVF 146 to Tramadol alone, the onset alone and to placebo in varying dosage strengths. They will involve several multicenter randomized double blind efficacy studies to measure the effectiveness and safety of BVF 146 for the management of pain and inflammation. We expect this program will be completed to allow an NDA filing in the third quarter of 2008.

Let me now provide you with an update pertaining to two other previously discussed products under development. BVF 012, our enhanced absorption formulation of Venlafaxine actively demonstrates the capacities of our various platform technologies. Thus, not only has Biovail been able to develop a robust once daily bio equivalent formulation that uses significantly less drug to produce the same serum levels, the BVF 012 is also resistant to the effects of alcohol and does not dose dump. We also continue to move forward with our development efforts to treat cardiovascular and metabolic disorders. For example, BVF 211, our controlled release product has received an IND to allow commencement at the clinical program.

Biovail is actively involved in discussions with interested parties about the product. As Doug has previously mentioned, in addition to the five products I've discussed, we have an active R&D portfolio. We are now in the process of completing a comprehensive review of our pipeline that results in moving some programs forward, canceling others, as well as initiating some new ones, expect to be able to provide updates pertaining to this initiative and our R&D program in general in the coming months. Doug?

Thank you very much, Peter. In late February, Biovail and marketing partner Ortho-McNeil launched Ultram ER, the first once daily extended release formulation Tramadol to receive approval in the United States. Biovail and OMI continue to believe that Ultram ER is well positioned on the pain ladder between nonsteroidal anti-inflammatory drugs and the Hydrocodone products. To accelerate awareness for the enhanced therapeutic benefits for Ultram ER for patients who may derive the most benefit from it, OMI has made a significant investment in the awareness and promotional activities associated with this drug. These activities include a direct-to-consumer advertising campaign which was launched in late October, the launch of a website which is by the way worldwide web paininformationcenter.com, whose purpose is to educate people with respect to chronic pain and it's treatment. This site, which was launched on October 23, received more than 10,000 hits in it's first week. Biovail and OMI have been very encouraged by the high number of requests from visitors for additional information.

Discount cards for Ultram ER, equivalence of the difference in patient out of pocket cost between tier three and tier two formulary positions are are available on another website, worldwide web, Ultram-ER.Com. These discounts allow patients to Eso if Ultram ER is an appropriate treatment for them at a reduced out of pocket cost. Increases to the sample size of Ultram ER which will help healthcare practitioners and their patients with dose titration, and in turn, more effectively get their patients to the appropriate dose.

And lastly, Biovail and OMI are finalizing an agreement to collectively make a significant additional investment to further create awareness for the brand among those who will benefit from it. Each company will invest an equal amount to further increase the already significant advertising and promotion spending to support Ultram ER.

Now let me take a few minutes to briefly recap some of the commercial highlights from the first quarter. Wellbutrin XL continues to strengthen it's position in the United States antidepressant market. Total prescriptions for Wellbutrin XL increased 16.4% in the third quarter of 2006 compared with three months ending September 30, 2005. For the first nine months of 2006, total prescriptions for Wellbutrin XL were up 17% compared with the corresponding period in 2005. Indicative of Wellbutrin XL's continually growing market acceptance is that in September this year, Wellbutrin XL captured almost 60% of new prescriptions written for the Wellbutrin brand including Generics. We also continue to work closely with our marketing partner, GlaxoSmithKline as Glaxo continues to proactively move forward with plans to build additional new markets for Wellbutrin XL in Europe.

Biovail Zovirax franchise continues to fortify it's position as the dominant treatment in the topical herpes market Zovirax continued to strengthen it's market position in the third quarter. Zovirax cream and Zovirax Ointment captured a combined 72.9% of the topical antiviral market for herpes up 5.2 percentage points from the corresponding period in 2005. Total prescriptions for Cardizem LA, decreased 3.1% in the third quarter of 2006 compared with the corresponding three-month period in 2005. This can largely be attributed to a manufacturing issue that has impacted Biovail's ability to supply the lower dosage strengths of 120 milligram and 180 milligram strengths of Cardizem LA to our marketing partner, Kos Pharmaceuticals. We firmly believe this issue will be resolved and that trade supplies will return to normal levels in December of this year.

The performance of biovail pharmaceutical Canada continues to be negatively impacted by the genericization of Tiazac and Wellbutrin SR. Total prescriptions for BPC were down 25% and 30% respectively for the third quarter and first nine months of 2006 versus the corresponding periods in 2005. However, we're very pleased with the continuing growing acceptance of Tiazac XE which was launched in January 2005. Prescriptions were up 127% in the third quarter of 2006 and 271% year-to-date compared to the corresponding periods for 2005. In April 2006, BPC launched Wellbutrin XL to Canadian physicians, however we're still in the early phase of the launch, we are very encouraged by early prescription trends. As of September 30, 2006, Wellbutrin XL captured about 14% of Bupropion prescriptions.

I would also like to point out that private and public formularies continue to respond favorably to Wellbutrin XL. In the past six months Biovail has secured formulary coverage with all major Canadian private health insurers. In addition, five of ten provincial government formularies representing in excess of 60% of Bupropion's government r claims now reimburse Wellbutrin XL and we expect formulary decisions from other provincial governments over the next two quarters. Ken, this concludes my remarks.

Thank you, Doug. I would now like to ask Charles Rowland, Biovail's Senior Vice President and Chief Financial Officer, to provide additional information on the Company's financial performance for the third quarter and first nine months of 2006. Charlie?

Thanks, Ken. Good morning, everyone. Biovail reports it's financial results in U.S. dollars and under U.S. Generally Accepted Accounting Principles or U.S. GAAP. All earnings per share information discussed in the conference call today will be presented on a diluted basis.

On a consolidated basis total revenues for the three months ended September 30, 2006, were were 289.6 million compared with with 258.1 million for the third quarter of 2005, an increase of 12%. Total revenues for the first three quarters of 2006 were 762.9 million up 18% from the the 647.9 million for the corresponding period in 2005. These revenues represent record levels of performance for the Company.

Third quarter 2006 net income was a net loss of of 56.5 million compared with net income of of 101.7 million for the corresponding 2005 period. For the nine months ended September 30, 2006, net income was 88.6 million compared with 116.5 million for the same period a year earlier. In the third quarter, Biovail reported a net loss per share of $0.35 versus earnings per share of $0.64 for the third quarter of 2005. In the first nine months of 2006, EPS was $0.55 compared with $0.73 for the first nine months of 2005. GAAP net income and GAAP EPS figures for the third quarter of 2006 were negatively impacted by $147 million non-cash write down of intangible assets, a $40 million charge related to the contract loss contingency in the Wellbutrin XL agreement with GSK, and a $6.8 million charge related to the loss profit provision in the Company's agreement with Kos related to Cardizem LA. These charges were partially offset by a 4 million gain related to the termination of the Athpharma agreement. These charges negatively impacted net income and EPS in the third quarter of 2006 by 189.8 million and $1.18 respectively.

GAAP net income and EPS figures for the third quarter of 2005 were negatively impacted ed by 1.1 million and $0.01 respectively. As a result of the restructuring charge related to the May 2005 realignment of Biovail's U.S. commercial operations. GAAP net income and EPS figures for the first nine months of 2006 were also impacted by initial $4.5 million provision related to the contract loss contingency and the GSK agreement recorded in the second quarter of 2006. In aggregate, these items negatively impacted net income and EPS in the first nine months of 2006 by 194.3 million or $1.21 respectively. Net income and EPS for the first nine months of 2005 were negatively impacted in the amount of of 51.1 million and $0.32. As a result of the restructuring charge, a non-cash write down of assets, and the write-off of inventory related to the transaction with Kos in May of 2005.

For a reconciliation of EPS, excluding specific items to GAAP EPS, see the table included in our earnings news release. We encourage investors to examine the reconciling adjustments between GAAP and non-GAAP measurements contained in the news release.

Adjusting for these specific non-cash items, Biovail posted record net income, excluding specific items in the third quarter of of 133.3 million and earnings per share excluding specific items of $0.83. Adjusting for these one-time non-cash items Biovail posted record net income for the nine months ended September 30, 2006, of 282.9 million and earnings per share of $1.77. Biovail's portfolio of products continues to perform strongly in the third quarter of 2006. Product revenues for the three months ended September 30, 2006, were 277.3 million, compared with 244.5 million in the third quarter of 2005, an increase of 13%. Product revenues for the nine months ended September 30, 2006, were up 19% to 728 million compared with 609.5 million for the nine months ended September 30, 2005. These results were driven by Wellbutrin XL, Zovirax and the Company's portfolio of Legacy products which were partially offset by declines for DTC and our generics portfolio.

Wellbutrin XL revenues were were 123.3 million in the third quarter of 2006 compared with 109.3 million for the same period a year ago, an increase of 13%, for the nine month period ended September 30, 2006, Wellbutrin XL generated revenues of of 302.2 million, 40% higher than the the 216.5 million for the same period in 2005. Wellbutrin XL's performance in the third quarter can be attributed to GSK's efforts to drive prescription growth combined with price increases implemented by GSK. Biovail also entered the third tier of our three tier supply agreement during this quarter. Revenues for the third quarter of 2006 for Biovail Zovirax franchise were up 22% to 27.8 million compared with 22.8 million in the prior year period. For the nine month period ended September 30, 2006, Zovirax generated 81.3 million in revenue, a 19% increase over the $68.2 million in the corresponding period in 2005. This performance was driven by price growth and the impact of our distribution service agreements in reducing our actual returns experience.

In the third quarter of 2006, Biovail pharmaceutical Canada generated revenues of 13.7 million compared with 23.5 million in 2005. BPC revenues for the first nine months of 2006 were 53 million compared with 72.1 million for the corresponding period a year earlier. These declines can be mainly attributed to the recent entry of generic competitors for Tiazac and Wellbutrin SR. In the third quarter of 2006 Cardizem LA generated revenue of 21.5 million compared with 17.3 million for the corresponding period in 2005. The increase reflects a 7.2 million positive cumulative adjustment related to price increases affected by Kos since May 2005 as well as a 6.5 million back order situation that remained for Cardizem LA at the end of the third quarter of 2006. In the first nine months of 2006 Cardizem LA generated revenue of 46.9 million compared with 46.3 million in the first nine months of 2005. The amortization of deferred revenues associated with the May 2005 Kos transaction positively impacted Cardizem LA revenues by 3.8 million and 11.3 million in the third quarter and first nine months of 2006 respectively. This compares with 3.8 million and 6.3 million for the corresponding periods a year earlier.

Also, as a result of manufacturing issues that have halted production of the lower strengths, the 120 and 180 milligram of Cardizem LA, Biovail recorded a $6.8 million charge related to lost profits based on contractual provisions in the agreement with Kos. Biovail does anticipate a return to full production of these strengths in December of 2006. Ultram ER generated 18.6 million in revenues in the third quarter of 2006. Product sales in the first nine months of the year were 34.6 million which is a net -- which is net of a 7.8 million return provision related to the decisions by Biovail and partner Ortho-McNeil to issue a level two recall of certain dosages of the product from the market. Revenues for Biovail's portfolio of Legacy products were up 31% to 38.7 million in the third quarter of 2006 versus 29.5 million for the comparable period in 2005.

For the first nine months of 2006, revenues for Biovail's off patent branded pharmaceutical products were up 13% to 110.9 million compared with 98.4 million in 2005. These increases can be attributed to higher sales of Cardizem CD and branded and generic Tiazac. Gross margins based on product sales were 79 and 77% in the third quarter and first nine months of 2006 compared with 79 and 75% in the corresponding periods in 2005. Gross margins in 2006 were favorably impacted by price increases and partially -- these were partially offset by costs associated with recent manufacturing issues.

Turning now to expenses. SG&A for the third quarter of 2006 were 50.2 million compared with 42.4 million in the third quarter of 2005. This increase reflects the inclusion of stock based compensation and higher legal expenses primarily driven by our intellectual property litigation. For the first nine months of the year, SG&A was 173.4 million compared with 174.3 million for the corresponding period a year earlier. The modest decrease reflects the May 2005 restructuring of the Company's U.S. commercial operation which was largely offset by the costs related to the Ultram ER recall to best of our intellectual properties, Sarbanes-Oxley compliance, information technology infrastructure upgrade, the launches of Glumetza and Wellbutrin XL in Canada, and the inclusion of stock based compensation expenses.

As Doug mentioned earlier, Biovail's management team continues to carefully review our cost structure. This ongoing effort has resulted in a reduction in SG&A spending which we expect to continue for the rest of the year. Research and development expenditures were 26.4 million for the third quarter of 2006 and 67.1 million for the first nine months of 2006 compared with 19.9 million and 62.1 million for the corresponding periods in 2005 respectively. These spending levels reflect the timing of the initiation of various clinical programs including Phase III trials for BVF 146 and an increase in activity related to several high value development programs including the submission of an NDA for BVF 033, a new Bupropion sales.

With regard to the balance sheet, at September 30, 2006, Biovail had cash balances in excess of of 625 million. The Company's long term debt to equity ratio stood at 0.3 at the end of the third quarter of 2006 compared to 0.4 at December 31, 2005. Cash flows from operations were 81.4 million in the third quarter of 2006 compared with 122.4 million in the corresponding period in 2005. Net capital expenditures in the third quarter of 2006 amounted to 6.5 million compared with 12.9 million in the third quarter of 2005. This decrease reflects the completion of the expansion of Biovail's manufacturing facility in Ziabac, Manitoba. Biovail is continuing it's dividend policy. The Company will pay a dividend of $0.125 per share payable on November 30, 2006, for shareholders of record on November 22, 2006.

Turning now to financial guidance for the rest of 2006, as a result of this stronger than anticipated third quarter results, Biovail is increasing it's 2006 diluted EPS guidance excluding specific items to a range of $2.50 to $2.60 from a previous range of $2.30 to $2.40. In addition, Biovail is increasing it's 2006 cash flow from operations guidance to a range of of 460 million to 480 million from a range of of 400 million to 460 million. Biovail's 2006 financial guidance assumes that a generic formulation of Wellbutrin XL will not be launched in 2006 and as before, Biovail's financial guidance does not include the impact of new generic competition for any of the Company 's key products, any business development activities, any new supply and distribution agreements or acquisitions, restructuring or other specific charges.

For more comprehensive information pertaining to Biovail's financial and operational performance for the third quarter and first nine months of 2006, please refer to the news release distributed earlier this morning. That concludes my review of Biovail's financial performance. Ken?

Thanks very much, Charlie. I would now like to call on Doug Squires to make his closing remarks. Doug?

Thanks, Ken. In closing, let me reiterate that Biovail is a very strong Company. The value of the Company's business model is significant. It has resulted in excellent profitability and generates robust cash flow. We expect this to be the case even after the entry of generic versions of Wellbutrin XL whenever that may be.

As I've discussed previously, Biovail's executive team will implement a number of initiatives to significantly reduce operating costs and improve operating efficiencies without sacrificing our committment to our key development programs. Research and development has been and will continue to be the major growth engine for Biovail. We will continue to invest in R&D to ensure we can further leverage our value creating drug delivery technologies. This in turn will enable us to realize our short-term and long term business objectives and to maximize shareholder value.

This concludes my comments this morning and the formal portion of today's call. I will now turn the call over to the conference operator for questions. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Doug Miehm of RBC Capital Markets. Please go ahead.

Thank you, and good morning. Just a couple questions and first ones a housekeeping one with respect to Ultram ER. Could you tell me what the pipeline fill was for the quarter given that you did have the recall in Q2 tipped to the 17.6 that you put up?

Actually, off the top of my head I don't think I can do that, Doug, but we'll get that information for you and get it to you before the call.

Okay, great. In terms of SG&A, it was significant decrease from what we saw in Q2. I'm wondering if you can give me a bit more clarity on why it's actually lower and what the outlook could be given the changes you're expected to make over the next year or two.

Yes, I'm not going to be too specific as it relates to the next year or two, Doug, because this is really not the time to talk about that until we finalize that, but the reason that the sort of the run rate of current G&A expenses is lower is not accidental. It's as a result of being very prudent on what we spend as a result of what happened in the California Court in early August, so as an example of that, we did not restrain our R&D expenditures. We looked everywhere else, even just looking at '06 expenditures to make sure that we weren't adding people that would not be bringing near term value and might be longer term people that we could either delay or delay some programs, into '07 or even beyond that were critical to the success of the business, and that really is what's impacted the current G&A run rate.

It's things like doing some real reviews on hiring people, new people, making sure that it's looking at replacements, and who does what, and so on. So that's an ongoing operational process. Charlie you wanted to say something?

Doug, and there's a couple of other things too. A lot of our investments for Sarbanes-Oxley compliance and upgrading our infrastructure in IT and so fourth really all happened in the first half of the year, so that higher rate of spend is behind us.

Okay, great. And then just finally, Doug, just strategic initiatives, you've got got $625 million in the bank plus your lines available. When might we hear a bit more about this and what you might do with how you're going to reinvest or deploy those cash assets? Thank you.

Sure. We've gone back to this question a number of times over the call. We have a very active business development organization looking at a variety of opportunities and a variety of areas whether they're technologies or products for Canada and so on as I've described before. And we will announce those, in fact, as they happen in the coming months. I would just make an observation, however, one of the interesting observations that we've made in the past years for some of the areas that we look at, the valuations are extremely high, and we're -- I wouldn't say we're conservative but we're certainly not going to be over the top in anything that we acquire or any deal that we do.

Thank you. The following question is from Marc Goodman of Credit Suisse. Please go ahead.

I have a couple of questions. I guess first one is on the dividend. My understanding is that you put the dividend in place when you thought you were going to do this Legacy spin and that was temporary. I mean, can you comment on the dividend and how committed you are to the dividend over the next year or two? That's number one.

Number two, I don't understand why you have to put more marketing dollars into Ultram ER. I mean, as part of this deal, gave J&J a late stage product and I'm just kind of wondering why is J&J just not spending their own money? That's what I was to understand that this deal was and you get a royalty.

And then my third question has to do with two of the projects that you mentioned in R&D. One is a controlled release carvedilol, obviously Glaxo has a chloride controlled release already on the market and then you mentioned an enhanced absorption Venlafaxine and there's a second gen Venlafaxine on the market, so I guess I'm just wondering what the value is of those two projects, just given what the partner, obvious partner have their own projects, just wondered on that and when are we going to see clinical data on these combinations? I mean I know you got to do superiority versus the individual project -- products so it's very difficult to do that, doesn't matter what kind of product it is, I'm just wondering when will we see data to know that you've got these combos working?

Okay. Let me take the first of 18 questions you had there. On dividend, the Board approves the dividend at every quarter and I'm not sure the dividend policy was decided by the Board in the way that you've characterized it as solely an outflow of Legacy. I think it's a reflection of very significant cash flow and an opportunity to return some value to shareholders as that continues. It certainly doesn't inhibit our ability to do anything that we want to do.

You made a couple of comments I think on, you had some R&D questions on carvedilol and Venlafaxine. Carvedilol and Venlafaxine have been in our pipeline for quite awhile and of course we're well aware of the entry of the GSK product to the market and that in fact is part of the reason why this has potentially very significant value and there are partners out there that see huge value in this product. The Venlafaxine that we have under development, we think is also potentially highly valuable, not just for it's enhanced absorption characteristics but because it is significantly alcohol resistant and in psychoactive compound, that's not a trivial issue. The FDA is very active in this front and the product that we have is clearly -- does not exceed or result of rapid release in the presence of alcohol.

Data on Phase III programs, we're well aware of the issues of combination trials and combination of rule and so on, how difficult that is and that's one of the reasons why we brought Dr. Peter Silverstone on who has tremendous experience in these areas and knows them for both in pain and in depression, and often the complication and in turn something able to sort differences between the various groups is related to the skill of the investigators and the quality of the trial that's conducted as opposed to the rationale for the combination in the first place, and combinations do get approved and they do very well and we'll show the Phase III data when we have Phase III data to show. Peter did you want to make any additional comments?

No, thank you.

I was just wondering, can you comment on when those Phase III started and when you think they will be done?

Well, as I said earlier, the Phase III program has started. I'm not detailing at this time the individual data each of the elements of the Phase III program. The intention is to have an MBA in the third quarter of 2008 and obviously the trials will be done in time to allow that to proceed.

Marc , I'm sorry. I think I missed one question that you had. I'm looking at my list here which was about--.

Doug you had mentioned that you were going to put money in--.

Yes, that's the one I was thinking about about Ultram. Now, we look at this relationship with OMI as a partnership. We are very actively involved in discussing what works, what doesn't work. Our companies are all companies, right? They do their budgeting at certain times and as we looked at it, we saw there was an opportunity for us to increase beyond the contractual committment but we're not talking about reducing a contractual committment or supplementing what Ortho-McNeil has committed to. This is over and above the fact. The reason it makes sense sense for Biovail to do that now is that in 2007, we move the upper tier of our supply price which is we go from 27.5% to 37.5% so every additional unit we generate in 2007 is high value.

Okay.

The following question is from Christine Charette of BMO Capital Market. Please go ahead

Hi, thank you. You mentioned an R&D review. Could you give us some timing on that? Is it possible to get that before the end of the year? And can you update us on the exact status of XL and ER in Europe? And regarding the financials, they tend to stand a bit more the $40 million write down of the contingency for the Wellbutrin XL. What exactly was the accounting for this previously and is this a reduction of potential sample revenues that you have previously booked and can you give us some color of what the underlying accounting was for this?

Sure. Why don't we take the last one first and I'll ask Charlie to comment on that specific item.

Hi, Christine, this is Charlie. The question that you have on the sample allowance, the amount that was booked in the quarter really reflects the change in sample mix and forecasts of sample from GSK. If you recall in the previous quarter, we booked an amount for that and the big driver in that change was really evaluating the probability of when generics would come on the market and then also the significant change in sample mix that we received notification from from GSK. So that really drove those two amounts, the one being booked initially in the second quarter and now the additional 40 million this quarter.

Right. But I'm just wondering why you have to book this. Is this previous revenue that you recognized?

No, what this is this is just a loss contingency. It's non-cash. We may never pay this. If the generics are delayed and GSK continues to drawdown samples, we'll never actually make a payment to GSK. It's just part of the original contract that as they purchase the samples, this allowance would work down.

Okay.

Yes, and good morning, Christina, a couple of words, this R&D process and this R&D review that's ongoing as we speak and should be completed by the end of the year. What we can or will disclose about the out portion of that is dependent on the decisions that are made and what's added. We always have that dilemma about how explicit we can be on any of these and as much of these are related to proprietary technologies and ideas, but not necessarily related to composition of matter that provides the ability be disclosing, but we'll attempt to be as disclosing as we can, and as it relates to XL, Wellbutrin XL in other countries, Europe primarily, this is very active and files have been submitted I believe in Germany, Italy, and Spain and a variety of others are in preparation, so that's happening.

Ultram ER, with respect to other territories, were in sort of the final stages of discussion with OMI as to territories that they have and just in outside of the U.S, And that will be [Inaudible - audio difficulties], we'll be disclosing that.

Thank you. And one last question, you talked about potential outlicensing to accelerate the program. Is there certain programs that you're more likely to outlicense in others or is there programs that you would rather keep for yourself and generally, what would be your vision of what those outlicensing--?

Generally, how we look at it is we're very interested talking to partners who have interest in some of our projects that are either in or about to go in Phase III, and what we think as a viable model is we've already proved ourselves. We've already proved ourselves on the ability to formulate. Formulation is not a worry for me. Our clinical development is very expensive and historically, we've funded that clinical development and waited until the end to do our agreement.

We think now that for certain programs and one is a big Phase III and the Tramadol nonsteroidal would be an example of that and others where there's large Phase III trials, we can do an arrangement now if we have some cost sharing on the development side and preagree on a supply price that makes sense for both sides and we sort of bring maybe higher distant value into the near term, and preserve our ability to continue to drive forward our key program.

Okay, thank you.

Thank you.

Thank you. The following question is from David Lickrish of First Albany Capital. Please go ahead.

Thank you very much and good morning. A couple easy ones, first I guess, Doug. Can you give us a PDUFA date for BVF 033, and I'm also just based on the guidance that you've given for the remainder of the year, it looks like if you look at the expenditures split between R&D and SG&A, that you're anticipating some sort of a relatively significant rebound.

I'm wondering if you could itemize for me what the SG&A and R&D expenses look like on a quarter-over-quarter basis, that is Q4 versus Q3, and then I'm interested in knowing, if you guys are moving forward on Phase III development of the combination Tramadol program plus an inset, does that mean that you have deferred or delayed what you want to do with the combination antidepressant plus SSSRI, Wellbutrin, that is, and are you partnering that out, that's obviously the stated preference here but you are moving forward with Tramadol. Are you doing the studies in parallel or are you waiting to complete one before starting the other? How are you going to proceed there.

Yes, I'll take the last question first. The Tramadol combination in no way is related to the start time of the Bupropion combination so we will do those if we could do them contemporaneously, we would do them contemporaneously, so it relates to other things and the partner discussions and formulations and so on. It does not relate to that. Jumping back to your first question where you asked for the PDUFA date, I'm just going to ask Peter to state what that is because I can't read his writing across the room here. So he'll tell you.

July 28, 2007.

July 2007.

Right.

And your middle question, would you repeat that again for me?

Well, just based on the guidance that you've given for 2006, it looks like you are expending a bit of a rebound in expenditures of when you look at the combined lines of SG&A and R&D. I'm just wondering quarter-over-quarter what does SG&A look like? Is it relatively flat? Are you anticipating in the fourth quarter based on your guidance and is the preponderance of those funds all going to R&D? Just trying to get a sense of where we're going to exit 2006 for a run rate of 2007?

I got it. I'm going to ask Charlie to maybe make a comment first.

Yes, I think our R&D spending will go up in the fourth quarter, but as Doug talked about and I mentioned as well, we're expecting our other SG&A expenses to decrease or, at worse case you can model or maintain being flat with the third quarter because of the cost control initiatives that we've got in place. As Doug mentioned we're very, very prudent right now in filling open positions, initiating programs and projects, and as I also mentioned earlier on the call, in the first half of the year the run rate was higher because of all of the things we were doing related to governance, Sarbanes-Oxley compliance and some infrastructure upgrades.

All right I've got more questions but maybe I'll jump back in the queue and try and get in at the end.

Sure.

Thank you. The following question is from Andrew Swanson of Citigroup. Please go ahead.

Thanks very much and I apologize if you have addressed some of this already and we missed it, but I was hoping that we could walk through some of the Ultram revenue recognition. I know IMS I think reported sales in the quarter of something on the order of 28 million. Wondering what your view of end-user sales was and how that translates into what you're able to report and how we should think about that moving forward? I know there's a royalty step up in 2007, but even in the fourth quarter how we should think about revenue recognition for Biovail and then secondly, I was just wondering if you could comment on where we stand with partnering discussions on the new start for XL.

Okay I'll take the last one first and then I'll ask Charlie to comment on revenue recognition with respect to Ultram ER. There are partnering discussions ongoing with salt and hopefully we'll come to a good deal and then we will disclose it.

I'm sorry to interrupt but does Glaxo have any sort of right of first refusal or anything of that nature?

They have no right of first refusal in the contract. Charlie, do you want to comment on revenue recognition in the fourth quarter?

Yes, Andrew, I think I mentioned this on our earlier call when we set guidance for this year and so fourth. Our revenue recognition and our guidance for Ultram ER basically, we recognize revenue when we ship products to OMI and our guidance includes their safety stock, their inventory in the trade, and then what is also pulled through in the marketplace. So all of those things are reflected in our numbers because we don't manage that, OMI does, so we record the revenue when we ship to them.

I guess another way to ask the question would be--At what point, is it fourth quarter, is it first quarter, second quarter 2007, at what point, I mean ultimately if that's the case, your revenues should essentially track with end-user sales whatever those ultimately are. I mean, when do you think we get to a point where those two figures start to move in parallel?

I would say you could model first quarter of next year would be a good time because if I were doing a projection going forward, those would start to align very nicely.

Perfect. Thanks very much.

Okay.

Thank you. The following question is from Hari Sambasivam of Merrill Lynch. Please go ahead.

Yes, thank you. A couple of quick questions. One for Doug. Doug, in terms of the Ultram strategy at this point in time, I know you're increasing your investment in terms of advertising and promotion. Is that simply an issue of more money or is there a different positioning or a different targeting that is involved in this particular issue. That's the first question. Second question relates to essentially pipeline strategy.

I know you have a review ongoing but what I want to know is where are you sort of wanting to end up here? Is there still going to be a specialty type of approach in terms of what fits into your own salesforce or is this more opportunistic where we might see multiple different products come out of this pipeline review and an associated question is--What's happening to Ambien, the flash dose Ambien product? Thank you.

Okay, good morning, Hari. Firstly, Ultram ER, is it a question about money? It's not so much more money. It's promotion in areas that we seem to be effective and assisting OMI and providing more weight on that when we have an opportunity to do that. Just a couple of comments on Ultram ER, when we look at performance year-to-date. One of the interesting things maybe I'd suggest people look at is most of the analogs that we used and others have used, our products were introduced that had both an acute and a chronic claim.

And that seemed reasonable at the time and then we had some conversion stuff and so on, but as we've looked at it and as we've talked to patient doctors and seen the results, we begin to think that this chronic pain market is maybe a little different than that, and it's quite interesting if you go and look at drugs that have been introduced in the past few years that have a chronic pain indication only, and those would be things like Duragesic and Oxycontin and others, and look at their update rates, so an example of that would be Duragesic whose uptake -- we're way ahead of Duragesic's initial update rates, but Duragesic is a very significant, very high value drug and it's also an OMI drug, so it's interesting to think of it that -- so we start to think that getting the right patient in, getting that patient that's not got that sort of maybe intermittent pain that doctors aren't necessarily used to prescribing this once a day type of product or that that person that needs that medicine every day, the DTC is directed towards that. The sampling change is directed towards that and so on, so we're -- we're still -- we think the jury is still out here so we feel pretty optimistic about that.

Let's see, I have to read my writing here since I talked so long. Your pipeline is right and about just sort of maybe giving some sense of it, I think there's two things I'd say to that, Hari. One is that our pipeline, internal pipeline, will always be based or is intended always to be based on our difficult to manufacture, high-technology, value add additions to drugs. That is sort of an underlying core strategic platform of the Company; however, I think we certainly would look at this review that it's undergoing as being -- ensuring that we look at all of the opportunities in all of the spaces out there that are important, an example would be oh, I don't know, difficult to manufacture generics, for example, as opposed to taking an NC and making it once a day to three times a day. Both use technologies and so I think we would certainly maybe expand the base a little bit but it will always be based on the technology platform that we have. And your third question, Hari?

Was Ambien.

Yes. With Ambien ODT, we are in discussions with a potential partner for that product as we speak.

Thank you.

Thank you, Hari.

Thank you. The following question is from Jeff Elliott of UBS Securities. Please go ahead.

Thanks. I just had a quick question on the R&D. You guided to 110 to 120 million for 2006 on your last quarter and it looks like you're tracking well below that. Is that a timing issue, i.e. the fourth quarter will spike up and then you'll see more in the first quarter or does it have anything to do with the outlicensing strategy? Have you changed your view on the pipeline and the investment in that at all?

No, and I think it's fundamentally a timing issue. The big variables in that are generally things related to clinical Phase III, when they start and when the investigators come on board and when the patient is in that sort of thing and that tends to make it a little spikey.

Okay, great. Thanks.

Thank you. The following question is from John Maletic of Scotia Capital. Please go ahead.

Hi, good morning. Just a couple questions. First on the Wellbutrin salt, I understand that you're in discussions for partnering right now. Is that at all contingent on the timing of the generic release of the product and specifically, will a potential partner be willing to commit a salesforce to such a follow-on product once generic penetration has already started? And secondly, I didn't get the comments on the situation with Wellbutrin in Europe and I was wondering if you could just review that.

Sure. Firstly on the salt, clearly, it's not independent of the generic but we believe strongly that the salt has value in and of itself for some of the safety reasons associated with this formulation and some of which we haven't disclosed so we do believe it has legs on it's own and are confident that others will see it that way as well. In terms of Wellbutrin XL Europe, as I mentioned, the product has been submitted in Germany, Italy, and Spain, and other countries are actively in preparation for those.

Okay. And then just one more final question. For the major part of the intangible write-off, what was that related to?

The major portion of the intangible write-off was related to Vasotec.

Okay. Thanks.

Thank you.

The last question is from David Lickrish of First Albany Capital. Please go ahead.

Thanks for taking the follow-up, guys. I want to understand this because I think it's very important. Are you suggesting with the current ANDA with Wellbutrin XL that some of the amendments that were filed with respect to the generic caused the product to further infringe upon your formulations? And how is that process going to play out, because it obviously is going to impact the timing of generic.

I guess a fundamental basis of that citizens petition is that if you certify, you don't change the product. Historically there have been multiple examples because the first status is is so valuable from a generic perspective that they file as soon as they possibly can, even though one might not have a scalable product, a product that can be efficiently and effectively manufactured, and then you have a whole series of changes that in fact radically change the nature and whether that, those changes infringe the patent or not, it's certainly possible the changes that would be made subsequent and whether those changes result in actual changes in the release characteristics of the product or the release characteristics of the product in alcohol or whether they fundamentally might change the bioequivalents of metabolites compared to the XL and the SR and the IR. All of those things are possible and so that's why we feel strongly about our position on post-certification changes in manufacturing and formulation.

Okay. And then just finally I'll sneak it in. When you're going to partners with some of your combination products right now, can you maybe very generally describe for me the data that you're able to present to them in terms of validating, I think conceptually it's a very good idea but it's something to give them comfort around the feasibility?

Sure. I mean these types of presentations in a broadest sense contain two components. They contain our commercial assessment of the opportunity and we do a very rigorous commercial assessment and we have people inside that do that and we also use external people and external consultants and we make their commentary and so on available to the potential partner, so we don't ask them to say, do you think this has commercial value. We go in and present in detail and we did this by the way just a few days ago, in detail, what the commercial value-add is.

The second component is, and it depends on the product and where it is in our development, would be a review of the clinical development plan and that's where Peter Silverstone and others would be giving the details of the plan, the rationale for the plan, the size of the trial, location of the trial, et cetera et cetera. The timing of the filings, the timing of the analysis, and so on. So they are usually very detailed and two, three hour presentations and they are always well attended and the ones we've made recently have been well received.

Thanks very much.

Sure, David, thanks.

Thank you. This concludes today's question and answer session. I would now like to turn the meeting over to Dr. Squires for closing remarks.

Okay, thanks very much. Again, I Appreciate your attending this morning. I would like to take this opportunity to express my personal thanks to all of Biovail's employees whose hard work and diligent efforts has resulted in another exceptional quarter for Biovail. Thank you very much.

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time. We thank you all for your participation and have a great day.