Bausch Health Companies Inc (BHC) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter 2008 earnings conference call for Biovail Corporation. At this time all participants are in a listen-only mode. This conference will be webcast on the World Wide Web at www.biovail.com. (OPERATOR INSTRUCTIONS) As a reminder a replay of the conference call will be available until 7:00 p.m. eastern daylight time on Wednesday, August 20, 2008 by dialing 416-695-5800 for Toronto and international callers and 1-800-408-3053, US and Canada, using access code 3266755 followed by the pound key. On behalf of the speakers who follow, investors are cautioned that the presentations and responses to questions may contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 in which comprise forward-looking information under applicable Canadian Provencial Securities laws. For the purpose of discussion, we refer to such statements as forward-looking statements.

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 and actual results may differ materially from those expressed or implied in such statements. Forward-looking statements include but are not limited to our goals, targets, strategies, intentions, plans, beliefs, estimate, expectation, outlook, guidance and other statements which contain language such as guidance, 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 press release dated August 13, 2008 and available on the Company website as well as its filings with the US Securities and Exchange Commission on the Canadian Securities Administrators including the risk factors detailed in its most recent annual report on form 20-F item 3D. The Company does not undertake the update for any forward-looking statements.

At this point I would like to turn the call over to Nelson Isabel, Vice President Investor Relations and Corporate Communication for Biovail Corporation. Mr. Isabel will moderate today's call. Please go ahead.

Thank you, operator, and good morning, everyone. On behalf of Biovail, thank you for joining us. On this morning's call, Biovail management will describe the progress made to date with respect to the Company's new strategic focus, as well as discuss the financial and operating highlights for the second quarter and first half of 2008. Joining us today's conference call are Bill Wells, Chief Executive Officer of Biovail Corporation, and Adrian de Saldanha, Interim Chief Financial Officer. Both will be available to participant during the question and answer session with research analysts immediately following our remarks. Gilbert Godin, Biovail's Chief Operating Officer, is traveling today and is unavailable to participant on today's call.

We will try to get to as many questions as possible while limiting the call to approximately one hour. Other participants are encouraged to follow up with the Company after this morning's call by dialing 905-286-3000 and asking for investor relations. Before turning the call over to Bill, I'd like to draw everyone's attention to a short slide deck that is available for download from the investor relations page of Biovail's website. The slides provide additional insight into our new strategic focus and can be used for reference during our remarks this morning. Bill, please go ahead.

Thanks, Nelson. Good morning, everyone. Let me begin my remarks this morning with a brief overview of the key initiatives that have shaped the first half of 2008, an extremely active one for Biovail. In January Biovail's board established an independent committee to review all aspects of Biovail's business within a changing pharmaceutical marketplace, while we worked concurrently on initiating change to drive sustainable growth. The objective of these efforts was to identify strategies that would build Biovail's existing capabilities, focus in high value areas, drive efficiencies throughout the organization, and increase available capital. In May, shortly after I assumed the roll of CEO, we announced our new strategic focus, one that targets unmet medical needs in specialty central nervous system or CNS disorders, a $70 billion global market.

Specifically, we will be targeting high growth in niche market within CNS disorders, which are characterized by an attractive commercial, regulatory and reimbursement environment. I will highlight the progress we have made in the implementation of this new strategic focus in a moment, but before I do I'd like to spend a minute on our restructuring efforts. It is clear that Biovail's infrastructure was not property aligned with the Company's current revenues, which are under pressure as a result of the earlier than anticipated genericization of Wellbutrin XL. In May we took the first step to align our infrastructure, with the decision to close our two Puerto Rico manufacturing facilities. The decision wasn't an easy one, as over 250 employees are affected, but it was the right one. The larger facility in Puerto Rico was intended for the production of our orally disintegrating tablets, or ODT products.

However, to date we have not launched any of the four ODT products that have been approved by the FDA. The plants were running at only 25% capacity, the majority of which was packaging, which we intend to outsource, and losing approximately $30 million per year. Some of the activities carried out in Puerto Rico are being transferred to our Steinbach, Manitoba facility. We are on track with the closures, which should be completed within approximately 20 months. We are also in a consultation process with our employees in Dublin, Ireland with respect to the closure of our research and development facility there. Activities conducted at the Ireland facility, which was purchased in 2002 and currently employs approximately 50 people, will be transferred to our R&D facility in Chantilly, Virginia. The closure is expected to be complete by the end of the year and will not affect the development efforts of our ongoing pipeline programs, as the capabilities of the two sites are virtually identical.

The closure of these three facilities will result in a reduction in total headcount of about 300 employees, or approximately 20% of the Company's total work force. Importantly, this reduction is not expected to reduce existing or future revenues. Also, our targeted R&D investment of over $600 million through 2012 is net of infrastructure and cost savings within our R&D group. Accordingly, while the average annual R&D spending is not changing compared with prior levels, we expect the amount spent on actual product development will increase substantially. So, while we are cutting costs across the organization, it is important to note that we intend to increase our investment in research and development projects, which will remain the life blood of the Company. We have also made progress in our cost containment efforts as they relate to legal expenses. Since December, 2007, we have settled or otherwise resolved four legal matters arising from the 2001 to May 2004 time frame.

In December, 2007 we entered into a settlement agreement related to our US securities class action litigation. In March, we settled an investigation by the SEC that originally began almost five years ago. And in April, we settled the Canadian securities class action litigation, whose claims mirrored those of the US action. And lastly, in May we reached an agreement with the US Department of Justice related to their investigation into the 2003 commercial launch of Cardizem LA . We are working diligently to resolve the remaining legacy litigation actions. The final resolution of these and other matters should reduce associated expenses, reduce the distraction these items have on management and increase available capital. All of the initiatives I mentioned, once completed, are expected to result in annual savings of $30 million to $40 million. We continue to target over $100 million in total proceeds from the sale of non-core assets.

In the second quarter of 2008 we sold our interest in Financière Verdi, formerly Ethypharm, for $12.2 million and are looking to sell our equity investments in other development stage companies. We are also pursuing the divestiture and/or monetization of other assets, including our manufacturing facilities in Puerto Rico and our R&D facility in Ireland. We have also made progress in implementing our new strategic focus. Since our announcement in May, I have been pleasantly surprised by the number of actionable opportunities we have identified. If fact the volume of potential targets surpasses that in the assumptions used in the development of our new strategic focus. Our business development efforts are extremely active. We have narrowed down our target list of compounds in specialty CNS to several new chemical entities, or NCEs, for which we are now doing extensive due diligence.

All of these compounds are in Phase II or Phase III and target a variety of indications in specialty neurology, including Parkinson's related psychosis, Huntington's disease and multiple sclerosis fatigue. We are also actively evaluating a number of companies as potential acquisitions targets. Companies that would allow us to accelerate our targeted transformation to specialty CNS. While it is impossible to predict if and when any potential transaction may occur and while we won't commit to a specific time line, we are encouraged by the activity level we are seeing. We will of course be diligence and prudent in our investment decisions. I personally have been involved in many successful M&A transactions throughout my career and bring my own rigor to the table. I have three criteria I look for in any acquisition. One, the transaction must represent a good strategic fit. Two, the transaction must be accretive within a relatively short time frame. And three, the transaction cannot put undue strain on the Company's balance sheet. Sticking to these criteria mitigates the risk of any acquisition.

I'd now like to spend a few minutes discussing the risk profile of our new strategic focus, as there has been some confusion in the investment community since our announcement in May 2008. The slide deck Nelson referred to earlier is relevant to the points I will be making. It is important to note that pharmaceutical companies and products face a number of different risks, including developmental, regulatory and commercial risks. In aggregate, by focusing on niche and specialty CNS product opportunities, we believe that our new strategic focus reduces the overall risk involved in commercializing products in the US. Let me explain. There are two critical issues with respect to how Biovail strategy mitigates risk. First, the size of the clinical trials. In other words, the number of patients needed to support clinical trial process and to support the new drug application process with the FDA is relatively low resulting in lower financial risk.

Second, the clinical end point, or the benefit the trial is designed to confirm, is typically clear and well defined. The types of trials we will be looking to conduct require a low number of patients, on average 300 to 500 patients, and the end points are less subjective and more easily measured. For example, a study in specialty CNS designed to measure how quickly it takes for a patient to walk 25 feet and the improvement in that score following the dosing of a new drug is clearly measured and easy to analyze versus a typical CNS depression or anxiety trial that tries to analyze if a patient is more or less depressed or anxious, particularly given very high placebo rates found in these types of studies. Typically when defining CNS more broadly, people think of very large trial sizes with end points that are not very clear. For example, patients may be asked are you less anxious or depressed today versus the other day.

These types of studies do carry higher risk, which is why we are not looking at products requiring these types of studies as part of our new strategic focus. Now let's consider regulatory risks. Biovail's new strategic focus, built on our expertise and clinical trial design and knowledge of the required regulatory process. Biovail has developed and filed multiple drugs for approval with the FDA in the United States and the TPD in Canada. The clinical pathway and regulatory process for the niche CNS products we intend to develop under our new strategic focus is well defined and one we are comfortable with. Biovail has fully constituted regulatory affairs and clinical development groups, staffed by people that have extensive track records in taking NCE's to market with well known innovative pharmaceutical and biotech companies.

Lastly, with respect to commercial risk. Our strategy is focused on developing drugs that address unmet medical needs in the marketplace, which should result in a favorable reimbursement treatment from third party payers. When a drug gets favorable reimbursement treatment from third party payers, the cost of the patient for treatment is low. This has a dramatic impact on the market penetration for a new drug and therefore, the ability to achieve a favorable return on one's R&D investment. Our strategy also contemplates that at the appropriate time, we will make a prudent investment to build a small sales force that can readily call on the small number of doctors that participate in our respective niche market. This allows Biovail to keep 100% of all revenues associated with the sales of the product versus being dependent on and paying a significant portion of the sales to a commercialization partner.

Despite significant in-house experience and expertise in the broader CNS market, we do need to build on strength in our internal capabilities in specialty CNS and we have made progress in this regard in the past few months. In June, 2008, we appointed Dr. Robert Butz as Vice President Medical and Scientific Affairs. Dr. Butz brings over 30 years of experience in the pharmaceutical industry, including ten years at Burroughs Wellcome, Quintiles Transnational, Amylin Pharmaceuticals, Sensus Drug Development Corporation and MDS Pharma Services. Throughout his career, Dr Butz has been involved in the development of over a dozen CNS programs. We are currently recruiting a chief scientific officer and I have interviewed a number of highly qualified candidates over the last month. We have also identified a number of well qualified candidates for our scientific advisory board focusing on specialty CNS.

The efficiency initiatives I described and others that are pending will further support our financial strength and strength in Biovail's ability to invest in the Company's growth, while continuing to return capital to shareholders. Before I turn the call over to Adrian, I'd like to take the opportunity to publicly welcome the new members of our Board of Directors to Biovail. The five new board members are -- J. Spencer Lanthier, retired partner and former Chairman and Chief Executive Officer of KPMG Canada; Robert N. Power, former Executive Vice President of Global Business Operations of Wyeth; Mark Parrish, former Chief Executive Officer of Healthcare Supply Chain Services of Cardinal Health; Serge Gouin, Chairman of Quebecor Media Inc.; and David H. Laidley, retired partner and former Chairman of Deloite & Touche Canada.

Our board, which has been expanded to ten members, boasts an excellent mix of pharmaceutical, financial and corporate governance expertise and experience. I am also pleased to announce that Spencer Lanthier has been named as lead Independent Director of the Board. I would now like to turn the call over to Adrian de Saldanha, Biovail's interim Chief Financial Officer, who will provide a brief overview of the financial highlights in the second quarter

Thanks, Bill, good morning, everyone. I'd like to begin by quickly reviewing a few of the financial highlights in the quarter. Overall operating performance, excluding certain specific items in the quarter, was above expectations. Product price increases helped mitigate the impact from the genericization of Wellbutrin XL, while overall efficiencies improved versus the prior year period. Our net income and earnings per share in the quarter were affected by a number of specific items which negatively impacted earnings by $84.9 million or $0.53 per share. These items mainly relate to the Company's ongoing restructuring efforts, a legal settlement, management succession and the recent proxy contest. Total revenues for three months ended June 30, 2008 were $186.1 million compared with $203 million for the second quarter of 2007. Product revenues for the second quarter of 2008 were $175.7 million compared with $190.8 million in the second quarter of 2007.

An 8% decrease that primarily affects the introduction of generic competition for Wellbutrin XL and lower revenues for Cardizem LA. Partially offsetting these declines were increases in revenues from the Company's portfolio of generic products, legacy products, Biovail Pharmaceuticals Canada and Zovirax. Biovail's top-line performance in the second quarter of 2008 also reflects a 17% year-over-year decrease in total prescription volume for our overall portfolio. This decline, due to a large extent to Wellbutrin XL and our legacy products, was partially offset by price increases that have been implemented across a number of product lines over the past year. In comparison to the first quarter of 2008, excluding Wellbutrin XL, prescription volume was down 3%. Second quarter 2008 net income in accordance with the United States Generally Accepted Accounting Principals, GAAP, was a loss of $25.3 million compared with net income of $67.8 million for the corresponding 2007 period.

On a per share basis, Biovail recorded a GAAP diluted loss per share of $0.16 for the second quarter of 2008 compared with earnings per share of $0.42 for the second quarter of 2007. As I mentioned, EPS figures for the second quarter of 2008 reflect a number of specific items that in aggregate had a net negative impact of $0.53 per share. Biovail's balance sheet remains strong. At the end of the second quarter of 2008, the Company had cash and cash equivalents of $354 million and marketable securities of $23 million. In addition, the Company has no long-term debt and no balances against its $250 million credit facility. For more comprehensive detail pertaining to Biovail's financial and operational performance for the three and six months ended June 30, 2008, please refer to the earnings news release distributed by the Company earlier this morning.

With respect to the share repurchase program we announced in May, we have purchased 2.3 million shares at a total cost of $25.5 million from June 2nd to June 23rd, at which point we entered a blackout period. Our share repurchase program contemplates the purchase of up to 14 million shares, which represents approximately 9% of the total issued and outstanding. Our credit facility currently limits the amount we can spend on share repurchases to $50 million per calendar year. In line with the Company's current dividend policy, Biovail today announced that its board of directors has approved the payment of a dividend of $0.375 per share, payable September 3, 2008 for shareholders of record on August 25, 2008. The X dividend date is August 21, 2008. Following the payment of this dividend, Biovail will have paid a total of $4.125 in dividends pre share to its shareholders since commencing its dividend program in December, 2005. Bill.

Thanks, Adrian. Turning briefly to the Company's current pipeline, on April 23rd we announced FDA approval for Aplenzin, which was formerly known as BVF-033. Aplenzin is alcohol resistant, an important feature considering the risks of alcohol consumption associated with major depressive disorders. Aplenzin's active product ingredient is a hydrobromide salt of bupropion. It was approved in dosage strengths of 174-milligrams, 348-milligrams and 522-milligrams, which are equimolar to 150-milligrams 300-milligrams and 450-milligram strengths of the bupropion hydrochloride, the active ingredient in Wellbutrin XL. Aplenzin 522-milligrams is the only single-tab tablet product that contains the highest prescribable daily dose of bupropion. Aplenzin is currently protected by one granted US patent, with 14 other US applications under review by the US Patent and Trademark office.

It is clear that the delay in securing FDA approval for Aplenzin has impacted the commercial potential of the product. While we remain in partnership discussions with interested parties, we are also evaluating other commercialization options for the product, including co-promotion opportunities and the use of a contract sales organization. Other development programs, including those for BVF-045, BVF-324 and BVF-012, are ongoing and we are making progress moving these products forward. Turning to our ANDA portfolio, we have filed one application with the FDA thus far in 2008 and anticipate a second filing in the coming months. A third ANDA could be filed in the next nine months should our development efforts be successful. Before I conclude, I'd like to spend a moment providing you with a brief update on Ultram ER. As you known the sales of Ultram ER have not lived up to original expectations of our sells or those of our partner.

However, OMI remains committed to the product and is investing further in its promotion. In recent discussions they have confirmed, they will be building a dedicated pain sales force and significantly increasing the number of sales representatives detailing the product. Other initiatives are also being implemented, all of which we believe may lead to higher prescription volumes. To conclude, I'm pleased with the progress we have made in our restructuring efforts. Over a relatively short period of time we have taken decisive actions to align our infrastructure and improve operating efficiencies across the Company. These have already begun to produce results, although a more meaningful contribution will come once all initiatives are fully implemented. We have adopted a new strategic focus, one that builds a growth engine along side our long standing business model and drug delivery technologies. The implementation of this new focus is on track and we are encouraged by the quality and volume of business development opportunities we are screening.

Our long-term objective, and one I am confident we can achieve, is to become the commercialization partner of choice for all development stage and emerging pharmaceutical and biotech companies working in the field of specialty CNS. Returning capital to shareholders is also a priority for us, although our first priority will always be to prudently invest capital in our business in alignment with our strategy and at rates succeeding our hurdle rates. As Adrian mentioned earlier, since December, 2005 and including the dividend payable in September, we have paid cumulative dividends of over $4 per share. Our financial strength and ongoing cash flows provide us with the flexibility to maintain our capital allocation strategies and invest over $600 million in R&D through 2012. Our efforts to improve efficiencies across the Company and to monetize non-core assets will further support this flexibility. This concludes my comments, I will now return the call to the conference call operator for questions.

(OPERATOR INSTRUCTIONS). The first question is from Randall Stanicky from Goldman Sachs. Please go ahead.

Thanks a lot for the question. Bill, just a question first on uses of capital. You talked about acquisitions, we have seen some share repurchase and obviously the dividend has been a key part of the story here, how do we think about that going forward in the context of what's close to $400 million in cash that you currently have on the balance sheet.

We are trying to take a very balanced approach to this. We have laid out our plan so that we can invest $600 million in R&D over the next five years. That's what we think is necessary to achieve our goals with our strategic focus. That, we think, will allow us to bring four to five new products into this specialty CNS pipeline that we are creating. In addition, we believe that we will have the strength to continue paying our dividend through that time period and to maintain the Company debt free. So that's how we built the financial model to support our strategy. Now we are also looking at some acquisition opportunities. Those acquisition opportunities would accelerate the strategy and so we would be able to accomplish it in a time frame which is faster than the five years that we have been looking at. If, if we do some acquisitions and are successful in that, we may have to take on some debt in order to accomplish those acquisitions. But that is something that we will just have to see as we go forward.

So dividend in tact, share repurchase remains something that you may continue from time to time. Should we be thinking about any potential deals as part of that $600 million in R&D cash that you put out there through 2012?

The way that we laid out the $600 million is that that would include all of our in licensing activities and our R&D spending on the existing pipeline. And on development of the products that we end license, but it would not include the acquisitions.

Got it. Okay. And just one follow up. Aplenzin, what is holding up or how do we think about the partnering for that product? What are the discussion points that you are having or what is holding back, I guess, the ability to announce a partner for that product?

Well, we are looking for ways to see if we can leverage Aplenzin to start moving down the path toward achieving our strategy. One of the thing that we want to do is to establish a commercial presence in the US with a small specialty sales force dedicated towards the specialty CNS area. So we are looking to see if the product introduction of Aplenzin might be a way to help us to do that.

A couple of the things that we are looking at include co-promotion of other products which are complimentary with Aplenzin which would allow us to start building a small sales force or possibly going the route with the CSO, which would mean that we would have a sales force which is handling Aplenzin and then we would transition that sales force into our own people over a period of time as we bring more products on. So, the partnering option is clearly the best economic option in the short-term for us and there still is a good option there that we are discussing. However, we are considering whether it makes sense to make some economic sacrifice in the short-term in order to get strategic benefit in the longer term. That's the trade off that we are currently discussing.

Is there a certain number of products that you need for to build out a specialty sales force for that to make sense from an ROI perspective.

Yes, just handling one product with the sales force really is not efficient. And so you need a portfolio of products. Usually you are going to want to have that sales force handling at least two or three products. And so that is one of the issues of just launching Aplenzin on its own with our own sales force it that it is not economic and I don't think it is a prudent way to approach it. Co-promotion is an interesting idea because that way we get a basket of at least two products that we would be taking forward with our sales force that have two products in the bag and so you are spreading the cost of that sales force over multiple products. So we are trying to find smart ways of doing this that are economically efficient and at the same time are moving our strategy forward.

That's great. I will stop there. Thanks very much.

Thank you. Your next question is from Lennox Gibbs from TD Securities. Please go ahead.

Morning. Thank you, just with respect to the new R&D strategy and the perspective project mix, is it your intention to pursue a 100% NCE strategy or are we more likely to see a broader approach that could include perhaps clinically differentiable reformulations and perhaps new indications for existing drugs? Can you just provide a more, a clearer sense with respect to project mix?

Let me talk a little bit about what we are targeting with this new approach. We are looking for compounds, first that are within this specialty neurology space. We are looking for compounds that have a sales potential, $100 million to $300 million, although of course if there's one comes along has greater sales potential, we would certainly be interested, but we are really looking in that $100 million to $300 million niche. We are looking for compounds which are in Phase II or Phase III. We are looking for compounds that have relatively small patient populations in terms of trials. We are looking for compounds that hopefully will get fast track status through the FDA and may qualify for orphan drug status. We also are very focused on trying to find compounds that have already been in the market and in humans somewhere.

So if we can find compounds that have been marketed outside the US and can be brought into the US and registered in the US or, alternatively, compounds that have been in humans but for a different indication that we can then target towards an indication in specialty neurology, that is going to be of great interest to us. Totally unique NCEs that is have never been if humans before are something we are much less focused on. I'm not going to say we will never do it, because there may be some circumstances which are interesting, but our preference is all about controlling risk. This whole process is designed to try to control risk by eliminating safety concerns as much as is possible, by reducing trial size as much as is possible, by accelerating time to market as much as is possible and by having the minimum amount of money at risk as we go through this process.

If I understood correctly, are you saying then that true NCEs are a lower priority.

They are a lower priority, yes, they are a lower priority for us. I think our preference would be for molecules that have already been in humans and so that the safety considerations are far less.

Already been in humans commerciality or in the context of clinical trials?

Already been in humans typically commercially outside the US or in other indications.

Thanks very much.

Thank you. Your next question is from John Maletic from Scotia Capital. Go ahead.

Hi, just a quick question on the legacy brands. Was there a significant inventory shift in the quarter or was it really just pricing that caused the sales to jump like that?

The biggest impack was pricing.

And were there any other inventory moves across the broader product groupings?

The biggest inventory affect would have been in Cardizem, but it was actually an inventory affect from last year. So the decline in sales in Cardizem is actually driven a lot by the comparability against the period in last year. Last year sales were higher due to a $10 million impact in the prior quarter related to an inventory adjustment and back orders.

Okay. That's good. Thanks.

Thank you. Your next question is from Christine Charette from BMO Capital Markets. Please go ahead.

Hi. Thank you for taking my questions. When I talk to investors a lot of people refer to Biovail as a blind pool, a lot of cash but not quite sure what they're going to do with that cash. And you give us some criteria as to what you would follow to do in acquisition and one of the statements that you make is that you wouldn't stress the balance sheet. Could you, to give some people some, people some sense of comfort regarding that, can you expand on what you mean by not stressing the balance sheet? You talked about the willingness to take on debt. Is that so that you would be able to continue paying the dividend? How far are you willing to go to continue on paying that dividend? If you would just comment on that.

Our first priority is always going to be investing in the business in a prudent way and in ways which are above our cost of capital and give a good return to shareholders. However, we are very focused on returning capital to our shareholders. We understand how important the dividend is to our shareholders and we also understand that there are many of our shareholders who are interested in share buyback. That's why we initiated the program in the prior quarter. So we are attempting to strike a balance as we go through this. We have laid out an investment program that we think is achievable and at the same time, we can return a significant amount of capital to shareholders.

With regard to acquisitions, if the right acquisition comes along, there's a good strategic fit, it is accretive within a reasonable time frame, and it doesn't put too much pressure on the balance sheet, then we will certainly consider it. My definition of too much pressure on the balance sheet, I don't want the Company to become over leveraged. I am not going to give you a hard number on that, but I certainly have no interest in seeing this Company struggling to make, to make debt payments as we go forward. I have always been regarded as a very prudent financial manager and I want to see this Company maintain plenty of financial capacity as we go forward and just not put it under too much stress.

Okay. Regarding potential for co-promotion on Aplenzin, how big of a sales force would you be willing to build at this point in time to be able to do the co-promotion and what is your time frame in making that decision?

Yes, the opportunity that we are looking at with regard to co-promotion, there is a specific opportunity. Would involve us building a sales force of about 50 or 60 individuals and time frame to make that decision is within the next couple of months.

Okay. I have some more detailed questions on the financials. Give us some idea of what the decrease in inventory reserve was in the quarter so and give us a sense of the cost of goods going forward, because they were quite low. Is this -- was this totally due to that inventory reserve or can we model that low of cost of goods going forward. And also if you can speak to the tax rate because it was a bit higher than normal this quarter.

Okay. I'm going to ask Adrian to take those and I may step in as well.

Let me start with the tax rate. Certain charges including settlements and restructuring activities are not deductible and so they did not affect the tax erosion. That's one of the reason why you see a different tax rate that you normally expect. Also, there are certain components of the tax provision, including withholding taxes and provisions for uncertain tax positions, that do not vary with our pretax income. Turning to your next question regarding inventory reserve reductions and impact on margin, there were not significant reductions. I think that the main driver of the margins would relate to the impact of price increases and also other cost containment initiatives.

So we can expect this level of gross margin going forward?

I think that you can expect to see somewhat improved gross margins going forward compared to last year, but I don't think we want to give you any specific numbers.

Okay. One final question regarding the cost savings, you refer to a total of $30 million to $40 million in cost savings going forward. How much of that do you expect from decreased legal costs as opposed to closing the various plants?

Yes, I think the majority of that is going to come from our closing the two Puerto Rico plants and closing down Ireland. There will be a piece of it which comes from reduced legal expenses, but let's say maybe 85%, 90% of it will come from the plants.

Okay, thank you.

Thank you. Your next question is from Maxime Paris from CIBC World Markets. Please go ahead.

Good morning. Thank you for taking my questions. First as a follow up to previous questions, if you were to come across an attractive acquisition target that promised to be accretive or that would adequately address some your pipeline needs and fit your other selection criteria, what do you think would be your potential total estimated spending capacity for such an acquisition?

I don't think I'm going to answer that question, Maxine. We obviously have a very strong balance sheet. We have a lot of fire power available to us. The targets that I am seeing out there -- first, I must admit I am very impressed with how many opportunities there are. I'm surprised by how many opportunities there are out there and actionable opportunities at this moment. When we started out with this strategy we were confident that we would see plenty of things that would be interesting for us, but over the last three months what has developed has been surprising to me. Many of those opportunities are right within our target space in specialty neurology with the types of products that I have just been talking about in their pipelines. And several of them actually do have some commercialization capability in the US as well. So, there is some interesting stuff out there. In terms of size, a lot of them are smaller and so, who are clearly easily within the capable of Biovail to do the deal within our existing -- excuse me -- within our existing financial capacity and not overstress the Company.

Okay, good. Then on Ultram ER, which as you said has not really lived up to expectations, I'm not asking for exact guidance here, but how do you see this product evolve over let's say the next 12 to 18 months and would you be able to comment on your position as it relates to Par Pharmaceuticals intention to launch a generic version of Ultram ER by the end of 2009? And on the litigation related to Ultram Er between J&J and Impacts, how solid do you view your IP position on that one and what do you think is the likelihood of seeing Par launch at the end of its 30 month stay period given the new like regulatory landscape in which the FDA seems to be facilitating the entry of generic competition.

I had lunch with J&J last week talking about exactly these issues and first J&J is totally committed to the product. They have assured us that they are substantially increasing the amount of sales effort they are putting behind the product. They're also reorganizing their marketing efforts so they have a dedicated pain sales team and Ultram is going be one of the lead products for that team. So they're stepping up their effort. And they also detailed to us some of the other marketing initiatives that they're going to put in place that sound pretty impressive. So I'm hopeful about the evolution of the product as we go forward.

There is no question, we have been disappointed. J&J has been disappointed as well. But it is great product and we, together, believe that it has a good future. Now with regard to genericization of the product, we have reviewed the patent estate that J&J has done that as well. We have taken a look at the legal action which is ongoing. Our belief is that we have a very strong case and that we should be able to defend the patent estate. Obviously, once things get into the courts you never quite know how it is going to turn out, but our evaluation is that we have got very strong, very strong footing.

Great. Then on the pricing environment and on your pricing power you have talked about having raised your prices, mainly on the legacy portfolio. Do you think you have the ability to raise your prices further and then will you be able to provide some comments on your cost of raw materials, the labor or in our other inputs have you been feeling some pressure on that side like, like some of your competitors seem to have?

Yes, in terms of price increases we have a little bit more runway there. So I think that we can push things a bit more in price, but it is not infinite. It reaches a point to where it becomes counterproductive. And so we are being very careful about that trying to make sure that we don't damage the long-term brand value of these products by pushing price too hard. But I think we have a little bit more ability to go to price. On the cost side, one of the things that we have been doing over the last three months is we are telling you now about the closures of the plant and the closure of Ireland, but in addition to that, we have launched a major initiative within the Company looking at costs.

And a big piece of that is cost around procurement. The good news is that the opportunities are greater than what we had originally anticipated. And so we are in the process of establishing targets, putting teams against all of these opportunities, starting to see some results. So, while I know that there is price pressure out there on raw materials within the industry, I am confident that our efforts in terms of procurement and the increasing efficiency in the other areas we are looking at will offset that and in fact we should see reductions in cost.

Great. Then one final question. I believe you have said in the past that you wouldn't consider selling revenue generating assets. Is this still the case?

That is still the case.

Great. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS). Your next question is from Marc Goodman from Credit Suisse. Please go ahead.

First question is on R&D, $22 million in the quarter. If there is no in-licensing in the next couple of quarters is this the new run rate? And second of all, can you help us understand just legal expenses? You might have mentioned it before but I missed it, how much legal expenses are going to be in '08 and how much of that goes away such that in '09 they're not there? Thanks.

Yes, on R&D, since we are closing down the Irish facility and so we are reducing the overhead cost in R&D and consolidating those activities in Chantilly, over time I expect that R&D number to actually trend downward until we start getting new products in-licensed and then we will begin spend on those new products. With regard to legal expenses, we obviously did see a decline in legal expenses this quarter, I think the numbers are down from $13.8 million to something like approximately $8 million to $9 million. And I would definitely consider that trend continuing as we go into next year. And as we settle some of the, the additional litigation we should see it drop even further. The difficulty in giving you any kind of hard feeling about next year's number is that the timing on the settlement of some of these issues is undetermined.

Thanks. Thank you.

There are no further questions registered at this time. I would now like to turn meeting back over to Mr. Wells.

Thank you very much, operator. Well, thank you all for listening. I think our overall message here today is that the business is doing well. Actually better than our expectations after you strip out some of the unusual specific items from the numbers in this quarter. So we are quite pleased with how things are proceeding. Also very pleased in how our restructuring efforts are going. We are getting good traction on that. And in fact, again, are moving a little bit faster than we had originally anticipated. Same is true on executing our new strategy. We are seeing more opportunities out there than we had originally anticipated and are working hard to bring those opportunities home and to start giving you more feel for exactly what those are. I would also like to take this opportunity to thank our employees who are the people who are really doing this. They are out there working long hours in difficult circumstances to make it happen and they are a great team and are doing a great job. So with that, let me thank you all.

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