Bausch Health Companies Inc (BHC) 2008 Q3 法說會逐字稿

Good morning. My name is Leslie. I will be your conference operator today. At this time I would like to welcome everyone to the Valeant third quarter 2008 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you, Ms. Little, you may begin your conference.

Thank you, Leslie. Good morning, everyone and welcome to Valeant's 2008 third quarter financial results conference call. Joining us on the call today are Mike Pearson, Chairman and Chief Executive Officer; and Peter Blott, Chief Financial Officer. Before we begin, I would like to call your attention to the fact that this conference call may contain forward-looking statements including but not limited to expectations and plans related to Retigabine and ribavirin, cost reduction, sales growth, restoring [mix sales] and other aspects of our restructuring plans, the effects of financial markets and foreign exchange impacts, and the benefit of these efforts we expect to see in 2009. These statements are based upon current expectations and beliefs of management and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include but are not limited to risks and uncertainties related to our ability to carry out our restructuring program, our relationships with our existing and future partners, and our ability to manage exposure to changes in foreign exchange rates and other risks and uncertainties discussed in the company's filings with the SEC. These risks are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements. Undue reliance should not be placed on any of these forward-looking statements. Valeant undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this call or to reflect actual outcomes. Certain figures discussed in today's presentation will be based on adjusted or non-GAAP information. A reconciliation of historical GAAP to non-GAAP results can be found in the tables to the company's press release issued earlier today and on Valeant's website at www.valeant.com. And now I'd like to turn the call over to Mike.

Thank you, Laurie. Good morning, everyone and thank you for joining us. Today I would like to update you on our six key initiatives, most of which are nearing completion, and then have Peter discuss our financial results in further detail.

Our first initiative was to sell our IPO Europe. We announced our plans to divest the majority of our European operation in July and successfully closed the transaction in September. We sold these operations for $392 million and after normal closing adjustments we received $428 million in cash from Meda. We feel that we were very fortunate to have completed this transaction when we did as credit markets are definitely not as favorable today as they were a few short months ago. While we continue to work through some transitional matters, this business is now under Meda's leadership and they are working diligently to integrate our employees and products into their operations. As for the possible IPO or sale of our remaining central European operations we are no longer considering a near-term IPO due to current market conditions. While an IPO or sale does remain a possibility down the road, the business continues to deliver double-digit growth and strong cash flows from operation and our current plans are keep it as part of the Valeant business. Now that this business has been separated from the previous operations, we will better depict the strength of this business and its solid growth prospect. We will be renaming these operations as our Europe business and our financials in upcoming quarters.

Our second initiative was to fix Mexico. I'm pleased to say that Mexico continues to show strong signs of improvement as the turnaround continues. We have completed the inventory drawdown process that we began in the second quarter and we are keeping a close eye on wholesaler inventory levels. We are now able to track wholesale inventory levels at five of our largest wholesalers, who account for roughly 60% of our sales volume. Wholesale inventory levels are now at 30 to 40 days, a vast improvement from the three plus months of inventory held by wholesalers when I arrived at Valeant. To demonstrate the improvement we are seeing in our Mexican business, let me fill you in on the sales that we have received so far in 2008. Sales in our first quarter were $17.3 million. Second quarter sales in Mexico were $29.9 million, and third quarter sales were $36.4 million. Corresponding income from operations has also showed sequential improvement. In the first quarter we launched $800,000 in Mexico. In second quarter we earned $4.3 million in Mexico. And in quarter three we earned $9 million in Mexico.

As we mentioned on our last call, the increased sales team of over 350 people that we have put in Mexico has now been in place for several months and is actively calling on both doctors and pharmacists. We have shut down our headquarters building and moved our operations to the plant headquarters and have captured those savings. We will soon be coming to a close in our efforts to fix our Mexico operations as we are on track to conclude this initiative by the end of 2008.

Our third initiative was to partner our pipeline assets. Our partnership for the development and commercialization of Retigabine with GlaxoSmithKline has gotten off to a very good start. While the deal was officially closed in October, planning between the two companies began soon after the deal was announced in August. Our R&D team has been working closely with the GSK R&D team to bring everyone up to speed on the Retigabine program and we feel very good about the progress we have made towards our NDA filing. In addition, our commercial group continues to work on prelaunch plans for the coming year as there is much to do. Both GSK and Valeant are very committed to achieving as much success for the Retigabine program as possible. We have recently identified those Valeant employees who will be moving to a location near GlaxoSmithKline's offices in North Carolina and hope to have them relocated early next year. GSK has been very helpful to us through this process and we look forward to a strong partnership.

You also saw the news that we have augmented our collaboration effort with GSK and entered into an agreement for the promotion of Diastat and Diastat AcuDial through the GSK sales force. This is a one-year agreement with an option to extend. This is an agreement that should benefit both the patients we serve and both parties. With at least twice as many sales reps as Valeant, more doctors and patients will be mare away of the benefits of Diastat for patients who suffer from breakthrough seizures. While the current formulation, a rectal gel, is primarily used in the pediatric population, we believe there could be tremendous potential to in older children and adults if another delivery system were available. We have made significant progress this year in developing a nasal separation delivery system we think could gain wide acceptance. We have gotten promising results from our clinical feasibility studies and expect to move forward with development in 2008.

Turning briefly to taribavirin, we continue to have discussions about outlicensing taribavirin. We have both the 12 and 28-week data in hand and should have 48 week data before the end of the year. That leaves just the important 72-week data or the relapse rate still to come. We are having discussions with potential partners and a possible deal could come before the end of the year, although we are still open to the possibility of waiting for the 72-week data.

Our fourth initiative was to file the NDA for Retigabine. At this point Glaxo has been through all of our documents, clinical tests, and development work for the Retigabine program. Both teams are firmly focused on being NDA filing complete, expected to occur in early 2009. While it is in everyone's best interest to get this filed as quickly as possible, our first priority is to ensure a high quality submission. We believe that a high quality submission has the potential to deliver a more timely approval. All of our required testing is complete and we are in the final stages of compiling the enormous amount of required documents for FDA review. We are also leveraging and fortunate to have Glaxo's considerable expertise and capabilities to support us in this endeavor there. Their input is proving to be invaluable as we prepare the documents for discussions with the FDA.

Our fifth initiative was to restructure our organization. Over the past few months, we have put significant attention and effort towards this initiative. For us to begin to deliver acceptable results to all of you in 2009, we needed to drive cost reduction in four different ways. The first was to eliminate our international and European infrastructure. The second was to reduce our corporate G&A. The third was to bring our R&D costs in line and the fourth was to right-size our US business. I am pleased to report this morning that we have made significant progress against all four objectives.

In terms of the first, the elimination of our international and European infrastructure, through the sale of WEMEA, we have sold our European headquarters and in parallel we have eliminated our international headquarters staff and exited our headquarter building for the international operations in Mexico City. Beginning next quarter, we will see a reduction of ongoing costs of approximately $5 million because of the international reduction.

The second piece is reducing the corporate G&A. In 2007 we spent $112 million in overall G&A of which $76 million was corporate G&A and encompassed over 200 people. This was built under the assumption that we were building a global company. We have now adopted a very different philosophy -- a lean corporate center and largely independent decentralized business units. As a result, we have reduced corporate staff to 100 people and reduced corporate expenses by over $20 million. These savings will begin to show up in our 2009 results.

The third initiative is bringing R&D costs in line. As you know, over the last few years we have been spending over $100 million a year in R&D. We have examined our headcount and spending carefully and aligned it with our new strategy. Going forward, we will continue to invest in R&D, particularly as we find new opportunities through end licensing and acquisitions. However, we are targeting a 50% reduction in R&D expense for 2009 compared to 2008 levels.

The fourth initiative is rightsizing the US business. As part of our strategic review, we announced and we are focusing our efforts in neurology and dermatology. In neurology, as a follow-up to our partnership with GSK on Retigabine, we entered the promotional agreement for Diastat. This will allow the GSK neurology salesforce to continue to call on the key epilepsy prescribers, until Retigabine is approved, while at the same time, it has allowed us to restructure our neurology franchise. We will be relocating our neurology business to North Carolina, and last week we eliminated our neurology sales and marketing structure by more than 100 people. In the short term we will realize significant increase in profitability and in the long term we will invest in new product opportunities in the therapeutic [market].

In dermatology we completed the acquisition of Coria. We have restructured our physician facing sales and marketing and relocated the dermatology business to Fort Worth. In doing so we consolidated our Valeant direct to physician sales force with the Coria sales force, holding steady at approximately 60 sales reps for this business unit. Finally, we created a separate Kinerase business unit focused on the retail channel, and we will have approximately 30 sales reps dedicated to this business. As a result of all these changes in our overall US business, we have reduced our US business headcount by over 40% and have created these three distinct units. And finally to briefly mention Efudex, we remain pleased that the deterioration of this product has been slow and we still maintain an overall market share of 6% for branded business, and 64% for authorized generic. Pricing on the generic has come down about 25% to 30% as expected and Spears has been holding with the 30% market share as of now.

Our final initiative was strengthening our balance sheet. With that current financial and credit markets dominating the airwaves, investors are scrutinizing the balance sheets of the companies they own. I want to assure that you that Valeant is in a very solid position as we have a strong cash position and manageable debt. I will let Peter talk more about our financial specifics, but we are committed to maintaining a strong cash position. By close of business today, we will have come to the end our $300 million authorized repurchase program which could incorporate -- $300 million repurchase program which the board authorized in 2007. The Valeant board of directors has authorized a new program and Valeant may now purchase up to $200 million more in future purchases of common stock or debt. By the end of today, Valeant will have approximately 80 million shares of outstanding, having roughly purchased 11 million shares in 2008.

Finally, while we have been focusing our efforts this year on completing our fixed initiatives we have also been working diligently on developing a growing profitable base business for 2009. Let me turn the call over to Peter to discuss our financial performance in more detail, which I believe is beginning to show the results of these efforts. Peter.

Thank you, Mike. You have all had the chance to read the press release that went out earlier today. While I will try to refrain from repeating that content, there are some items I'd like to discuss further. Let me start by turning to product sales. (inaudible) of our returned model in the third quarter. Our policy in the US is to accept returns only in the period six months before or 12 months after product expiring. We've recently seen returns on some product launched three or four years ago which are now entering their returns window which are greater than anticipated when they were sold. We have increased our returns reserve by $7.7 million in the third quarter to cover all future periods. This was accounted as contra revenue and goes against this quarter's product sales. Excluding this adjustment, our North American product sales would have increased by approximately 9% quarter over quarter. Quarter over quarter comparisons of product sales were also impacted by divestments incurred since last year. In total, revenue from the business in Asia Pacific and Argentina have been sold with $6.4 million in the third quarter 2007. Our product sales in the quarter did benefit from currency movements of $10.7 million. I will talk more on currency later. Overall I'm happy to say the [countries we are attaining] starting to respond to our new promotional approaches, which is a good indicator that we can achieve top-line growth.

As we look towards our future segment reporting, we will no longer have the three regions represented as in the past. We are still finalizing our organization but when we report our fourth quarter numbers and deliver our 10-K for the 2007 year end, we expect we will change our financial presentation to reflect how we intend to run the business. This will entail three segments. Specialty pharmaceutical operations, covering the US, Canada, and Australia, branded generics Latin America, and branded generics Europe. We hope this will provide a much clearer portrayal of our business's growth and profitability.

Operating expenses are slightly down on the same quarter last year, for the full effect of the restructuring efforts has not yet been seen in these historical results. G&A expenses in the quarter included a $1.8 million charge related to historical unrecoverable VAT, value added tax, in Mexico. Restructuring expenses recorded in the third quarter was $3.5 million, including professional and legal fees, contract cancellation costs, and employee costs such as severances. As announced in June, we redeemed the entire face amount of the $300 million 7% senior notes for $310.5 million on July 21st, 2008. Along with the redemption of the notes, we also terminated the related interest rate swap. The total accounting loss for early termination, the $14.9 million, has been excluded from our non-GAAP earnings per share measure in the quarter.

I would now like to make a few comments about taxation. Valeant has US net operating losses primarily due to historic R&D spending and corporate expenses. Prior to the sale of the WEMEA business and repatriation of certain foreign earnings, Valeant's NOL was approximately $370 million. Due to certain tax regulations, we can only utilize a portion of the NOL per year with certain adjustments. However, I'm pleased to report that we have sufficient credits, primarily foreign tax credits, such that we do not expect to pay US cash taxes in 2008 other than withholding tax, and we expect to have an NOL carryforward at the end of 2008 net of FIN 48 liabilities of approximately $230 million remaining, which we plan to utilize in 2009 and 2010. We estimate the total tax provision related to the sale of the WEMEA business is approximately $35 million, which is offset by foreign tax credits and other benefits. The difference between the $50 million on WEMEA taxation reported earlier is primarily due to additional basis calculations performed during the third quarter.

Now let me turn to our balance sheet. Cash and marketable securities increased $22 million in the 2008 third quarter to $571 million. Since the end of the quarter, we have received $125 million up-front payment from GSK and have paid out $95 million for the acquisition of Coria. As Mike mentioned, we have also been active on our share repurchase program. We have essentially completed the $300 million share repurchase program authorized by our board in June 2007 and extended into June 2008. As of last night, we have spent about $298 million buying in a total of 17.5 million shares across 2007 and 2008, including approximately $107 million since September 30th. Our current cash balance remains at approximately $480 million at present. We also announced this morning that our board of directors has approved a new $200 million program of security repurchases. We continue to believe this is a very good use of funds in terms of shareholder value while also retaining sufficient cash for operational needs and to allow for potential acquisitions to support the execution of our strategy.

Due to the current economic environment, several questions have been asked about Valeant's investment policies, hedging arrangements, and the impact of currency fluctuations. I would like to take a moment to discuss these issues. First, I am very pleased we completed the WEMEA sale at the time we did. Overall (inaudible) cash positive position during this time of upheaval in the global credit markets. Also, I'm pleased that we revoked our [ATB 23] representation and repatriated cash during the second and third quarters this year when foreign currencies were stronger. We have approximately two-thirds of our cash balances in the US. This is mostly invested in money market accounts supported by US Treasury guarantees, and until the financial and credit markets improve, we will continue to invest our cash conservatively and only in very short dated and highly liquid instruments. The cash abroad is mostly in Poland and Mexico. We have taken measures to ensure this money is invested in secure local banks and government securities. As an international group, we have also add degree of natural hedging against exchange rate changes with a reasonable proportion of our expenses and the cost of local manufacturing coming in the same foreign countries where sales were booked. However, along with all other similar companies, the recent large changes in exchange rates will affect us, notably the deterioration of the Polish zloty and the Mexican peso. It's not possible to be precise, but if the current exchange rates are maintained throughout 2009, the impact on our earnings would be expected to be on the order of $5 million to $10 million.

I also wanted to say a few words about the accounting treatment for our upfront collaboration payment of $125 million from GSK. The accounting rules for collaboration of this type are very complicated and are dependent upon a number of future factors, but I think the key point to explain is that the $125 million upfront payment is initially capitalized on our balance sheet. It is then released as a credit in our P&L account over the next few years as we fulfill our participatory obligations for the collaboration. This will be shown partially as an offset to R&D and sales and marketing expenses and partially as alliance revenue. Future milestones, profit share, and royalties are likely to be recognized as alliance revenue in the period earned. Now I will turn the call back to Mike for closing remarks.

Thank you, Peter. As we near the completion of our six initiatives, we are turning our focus to growth in 2009 and beyond. We believe that we are building a solid base business through our dermatology and neurology franchises and in our branded generics operation. Our business is strong, our revenue growth is promising, and our cost reduction strategies are beginning to take hold. I believe that Valeant is well positioned for a strong 2009, and we expect to be providing some guidance for 2009 on our fourth quarter earnings call early next year. Thank you for your attention this morning. We will now take any questions you have. Operator, can we have the first question, please?

(OPERATOR INSTRUCTIONS) Our first question comes from Michael Tong of Wachovia. Your line is open.

Hi, good morning. Just a more philosophical question. I've heard a lot of companies talk about preserving cash because there are a lot of depressed assets out there for acquisitions or end licensing opportunities. So I was just wondering about your thought process regarding the new $200 million share repurchase agreement in the current environment. Would it not be better to use that for product acquisitions or end licensing opportunities?

Thanks, Michael. Actually, we expect to do both. We do expect to continue the repurchase program of our securities because we believe that shareholders will get an excellent return on that investment. But we are also -- I think we have a roughly $500 million of cash now. This business continues to generate cash and will generate more next year once cost reduction efforts are behind us. So we believe we have adequate cash flow to continue to make acquisitions like we did with Coria. So we will plan to be active in making smaller acquisitions as well as continuing our share repurchase. I think we feel we're in a fortunate position that we can do both and we're not limited only one of the two strategies.

Just a quick clarification. I wasn't sure if I heard you correctly, but when you talk about the R&D reduction that you expect for '09 was that 15% or 50%?

50%. So we would expect it to be $50 million or less.

Thank you.

Next question comes from Jonathan Aschoff of Brean Murray. Your line is open.

Hi, thank you. What was your average cost in the almost $300 million that you spent for the R&D -- I'm sorry, for the share buyback?

If you just give me a chance to look that up, I've got it here somewhere.

You mentioned 11 million shares. That sounds to me more like the net share change from issuance and buyback, right, for '08?

So the 11 million that we mentioned was in 2008. The total share repurchase program commenced in 2007. So the 17.5 million is the total. I think the 11 million is the 2008 number.

Okay, great.

And the average price is in the $16 range. Between $16 and $17.

Will we to have wait for further guidance in '09 like you alluded to, to understand how will you account for Retigabine?

Oh, I think Peter explained what we'll do is use it to offset future expenses until the product gets to market, as well as recognize some as alliance revenue because -- so you will see it in those two things. Yes, in terms of the actual numbers, you will to have wait for guidance at the end of the fourth quarter.

Okay. Thanks.

Next question comes from Gene Mack of Lazard Capital Markets. Your line is open.

Thanks for taking the question. Do I understand now that you have decided that you are going to retain the Poland business and is that right?

Yes. The Poland business, which we refer affectionately to Poland is actually more than Poland. It's the central European business, which we're renaming the European business. They sell into a number of markets that are adjacent to Poland. At this point in time, we were thinking about an IPO, doing an IPO. Obviously given the credit markets does not make sense. As you will begin to see in some of the attachments that we sent with our press release, the business is doing extremely well. I think it was an increase from $30 million to $40 million quarter on quarter, in this quarter, so it's growing quickly. It's generating a lot of cash. There's a lot of opportunities to, quite frankly, expand its presence in Europe, and at this point in time we're planning to keep that business.

Okay. And then just on -- looking at the press release and the 12% growth projection that you guys put in there, I'm having trouble just understanding exactly how to get to that number, because we -- when we put in the additional $7 million reserve, we get to about 7%.

In the press tables, under table 3, we actually put in that reconciliation, so that you can see in the middle of that table there's a calculation that shows the 12%. The 12% is not a projection. That relates to the third quarter, so the three months ending September 30th, 2008. So I'd just ask you to look at the middle of the press table.

What we dis in that calculation was two things. One was, the returns adjustment that you made, the second piece is, we eliminated the sales from the business these we have now divested. So what we're trying to do is give you a sense of our face business, the business that we're keeping, how that is performing. In the third quarter, the business, the footprint of the new company grew at 12%.

Then I got disconnected from the call for a few minutes. Wondering, just because there's so many moving parts, if you could just give us a little bit more detail on how you are prioritizing the share repurchase, the growth of the underlying business through acquisition, and then the debt that you are going to need to repay in the outyears. I'm just trying to understand how priorities are being set, in terms of, what's the main priority -- is the main priority to get us -- I know all these things are priorities, but are you trying to get efficient and look for assets at the same time while also holding off on paying debt? What's the right way to think about this?

I think we're hopefully trying to maintain a balance. We are planning to continue to buy shares, because we think that is a very good investment. We are accumulating the cash we need to take care of the debt, which the first payment due is 2010.

The first redemption on the convert is 2010.

But we also want to keep a certain amount of powder in our keg so that we can continue to make acquisitions. So again, we feel that we're in a pretty strong cash position with about $500 million. We think there's a lot of assets out there. Many private companies that are having cash flow problems, we're in active discussions with a lot of smaller companies that we would continue to look to help build our base business, but we're not planning -- we think it's a good strategy, a good financial strategy and good for our shareholders to also continue to improve our balance sheet, in addition to making these acquisitions.

So for 2008 your prior guidance has been, I think that you will exit the year with about $600 million in net cash, looks like you will get to that point. With the payment that you will have in 2010, maybe you could remind us how much of that will -- how much will you need to -- how much that redemption is?

I don't think we've ever given any guidance on ending cash balance in 2008. But --

The other question we have on the two converts, $240 million of one of the converts is due in the back end of 2010 for maturity. The other one, $240 million, is in 2013. So there is a maturity in 2010 which we need to consider, and that's incorporated into our plans going forward.

Okay. But just looking mechanically, even if you generate about $100 million in net income next year, in 2009, which is, I think, hard to see, given the Retigabine development cost, it seems like you will start to run low on cash at some point -- going into 2010, on the debt repayments, and what sort of size licensing deals -- I guess you are not looking to do anything transformative but more small product acquisition.

We'd be delighted to talk off-line in terms of how you are thinking about our business. We do not think we will run into cash problems. We structured the Retigabine deal such that it have only a positive impact on our P&L, so it will not after negative impact. So I think we are in good shape there. We do have a reserve of cash to make the acquisitions, but you are quite correct that for the foreseeable future what we are doing is smaller deals. We want to demonstrate that we can deliver on a very good P&L before we think about any kind of transformational transaction.

Okay. I'm hogging up the call, but one last thing I wanted to ask about was taribavirin and what the outlook was there in terms of partnering and if there's any update on the timing you could give us?

I'd rather not give a direct answer to that question other than it could happen by the end of the year or could happen next year.

Can you remind us what sort of data presentations might be left after ASLV?

Yes, there will be 48 weeks data that will be coming out before the end of the year, and then also the 72-week data which will be in the spring of next year.

Great, thanks so much.

Next question comes from (inaudible). Your line is open.

Hi, Mike, Peter, thanks for taking the question. I was just wondering if you could comment on what you are seeing in the markets in some of your emerging markets in Mexico and Brazil and Poland and what the impact there is, not necessarily on FX, but more so just underlying demand, given some of the macro economic conditions that are going on these days? Thanks.

Well, we're keeping our fingers crossed. I was in Mexico last week and Poland three weeks ago, and quite frankly, our business is very strong. In fact, continues to improve. So obviously we'll see what happens in terms of the global credit crunch. I think in Mexico, our belief, and in talking to Dr. Revalo and our management team there, what people may do if the economy goes down there will probably spend less time going to doctors and will actually go to pharmacies and get their advice from the pharmacist, so it puts a premium on making sure that we're covering the pharmacy chains as well, which consistent with our expansion of the sales force. Again, in Poland, the business is strong. So we'll keep our fingers crossed, but based on my visits over the last month, and I look at our October results, which we just got, everything seems quite robust.

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just another moment.

Okay. Well, thank you very much for listening to the call, and we'll look forward to talking to all of you next quarter. Thank you.

This concludes today's Valeant Pharmaceuticals conference call. You may now disconnect.