Bausch Health Companies Inc (BHC) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2010 earnings conference call for Biovail Corporation. At this time, all participants are in a listen-only mode. This conference call is being webcast on the Worldwide Web at www.biovail.com. (Operator Instructions) As a reminder, a replay of the conference call will be available until 7 PM Eastern time on Thursday, August 12, 2010 by dialing 416-695-5800 for Toronto and international callers and 1-800-408-3053 for United States and Canada, using access code 5600465 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 Section 27A of the Securities Act of the 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended, and which comprise forward-looking information under applicable Canadian provincial securities laws. For the purposes of this caution, 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, estimates, expectations, outlook, guidance and other statements which contain language such as likely, should, guidance, believe, anticipate, expect, intend, plan, will, may, could, would, target, continue, 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 5, 2010 and available on the Company website, as well as its filings with the US Securities and Exchange Commission and the Canadian Securities Administrators, including the risk factors detailed in its most recent Form 10-K and its registration statement on Form S4 filed with the Securities and Exchange Commission on July 21, 2010, as well as other risks and uncertainties set forth from time to time in the reports filed with the Securities and Exchange Commission and the Canadian Securities Administrators.

The Company does not undertake to update any forward-looking statements, except as required by law. At this point, I would now like to turn the call over to Nelson Isabel, Vice President Investor Relations and Corporate Communications for Biovail Corporation. Mr. Isabel will moderate today's call.

Thank you, operator and good morning, everyone. On behalf of Biovail, thank you for joining us. On this morning's call, Biovail management will discuss the financial and operating highlights of the second quarter of 2010, as well as the proposed merger with Valeant Pharmaceuticals International.

Joining on today's conference call are Bill Wells, Chief Executive Officer of Biovail Corporation, Gilbert Godin, Chief Operating Officer and Peggy Mulligan, Chief Financial Officer. All will be available to participate during the question-and-answer session with research analysts immediately following our remarks. 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 calling 905-286-3000 and asking for Investor Relations. Bill, please go ahead.

Thanks, Nelson. Good morning, everyone. Biovail once again delivered solid financial results in the second quarter with revenues increasing 23% and adjusted cash EPS up 17% year-over-year.

We have clearly maintained the momentum from 2009, and assuming the proposed merger with Valeant closes later this year, we believe we will have succeeded in moving Biovail to high growth much more quickly than we would have been able to as a stand alone company.

The merger with Valeant will create a dynamic specialty pharmaceutical company diversified by product line, therapeutic area and geography and focused on growth and cash flow generation. The new Valeant will have multiple growth platforms, including specialty CNS, dermatology, Canada and emerging markets, all supported by strong cash flows from a broad portfolio of legacy products. Needless to say, we are excited by the value creation potential of the combined Company.

Two weeks ago, we received good news when we were informed that the Federal Trade Commission had granted early termination of the waiting period under the Hart Scott Rodino Act. This brings us one step closer to completing the transaction. In addition to Biovail shareholder approval, the merger is subject to approval by Valeant shareholders, consummation of financing and the satisfaction of customary closing conditions and regulatory approvals.

In the meantime, we continue to work on the integration planning process for the two Companies. 12 work streams have been created across multiple functional areas. In terms of senior management decisions, at this point, only the CEO and CFO positions have been confirmed. Mike Pearson will be the new Valeant CEO and Peggy Mulligan will be the CFO. As you know, I will be the new Valeant's Chairman. We continue to expect cost synergies from the transaction to be at least $175 million by the second year of operations. We also continue to expect a fall closing and to have the new Valeant hit the ground running immediately thereafter.

Let's talk quickly about Biovail's financial. Biovail delivered strong cash flow from operations in the quarter, $109 million on a GAAP basis and $94 million before changes in working capital and excluding costs related to the merger, once again demonstrating the strength of our operating business. At the end of July, we had cash balances of over $200 million and no outstanding borrowings under our revolving credit facility. Peggy will review the financial highlights of the quarter shortly. Our restructuring efforts are largely complete and as a result, we expect to reap the benefits of the bulk of our targeted annual cost savings of $40 million to $60 million in 2010.

Now, let's talk about Wellbutrin XL. Our targeted non-sales force program to support market share and patient and physician loyalty which we began late in the first quarter are now beginning to show results. We've now begun the third cycle of our sampling program, and over 70% of physicians contacted, representing 8,300 physicians, have requested sample packs. In addition, through mid-July, over 5,000 coupon redemptions have been processed. Recent IMS data continues to be encouraging as we have seen Wellbutrin XL's market share stabilize just north of 6%. The Wellbutrin transaction has so far provided much better financial returns than originally projected. Gilbert will now provide an overview of operations in the quarter. Gilbert?

Thank you, Bill and good morning, everyone. I will begin my remarks this morning by providing an update on Xenazine, which was launched to US specialists by Lundbeck in late November 2008. Through June 30, 2010, a total of 2,940 patients have enrolled or are in the process of enrolling with the Xenazine distribution center and 28,279 scripts have been filled. Approximately 20 months post launch, Xenazine continues to track to our 4,000 to 6,000 peak patient number. As we have discussed previously, the rate of enrollment has slowed as the initial migration of patients from the long standing compassionate usage program to the commercial program is largely complete. Our commercial partner, Lundbeck, is now focusing its marketing efforts on centers of excellence in the US and on helping a broader number of physicians fully understand the safe and effective use of Xenazine and the drug's REMS program.

Switching to the sale of non-core assets, in July of 2010, we completed the sale of our contract research division, or CRD, to Lambda Therapeutic Research for cash proceeds of approximately $6.8 million. Biovail no longer considered the CRD a strategic fit as a result of the Company's transition to its specialty CNS strategy. With the sale of the CRD, we have realized our target of over $70 million in total gross proceeds from the divestiture and monetization of non-core assets.

The CRD sale will also result in lower research and development revenues. Through the first half of 2010, the CRD generated revenues of $5.2 million, however, the transaction will benefit the bottom line as it will also eliminate CRD expenses, which are primarily included in Biovail's research and development expense line. CRD expenses were $6.7 million in the first half of 2010.

In Puerto Rico, our manufacturing facility in Carolina is now expected to be closed in the fourth quarter of 2010, after which time all manufacturing operations are expected to be consolidated at our Steinbach facility. We are continuing to actively market the Carolina facility.

I will now briefly discuss some of our product development pipeline assets beginning with Staccato loxapine. The FDA review of the product's new drug application is ongoing further to the October 11 action date. We continue to plan for an approval for inpatient usage, although the bulk of the anticipated spending will not occur until after the PDUFA date.

Turning to Pimavanserin, last week our partner Acadia announced the initiation of a new Phase III trial to evaluate the efficacy, tolerability and safety of Pimavanserin in the treatment of Parkinson's Disease Psychosis, or PDP. The new study is expected to enroll about 200 patients at clinical sites located in North America, randomized on a one-to-one basis to two study arms and will receive oral doses of either 40 milligram of Pimavanserin or a placebo once daily for six weeks.

The primary end point of this study is anti-psychotic efficacy as measured using a group of nine items from the hallucinations and delusions domain of the SAPS scale. This refined study design could help mitigate the placebo response seen in the prior trials, reduce vulnerability and enhance sensitivity in measuring the efficacy of Pimavanserin in PDP patients. Biovail is responsible for 50% of the cost of this study, which are expected to be between $10 million and $15 million.

In the GDNF program, in conjunction with our partner MedGenesis Therapeutics, we were pleased to announce a $2.1 million grant in the second quarter from the Michael J. Fox Foundation to further develop GDNF as a treatment for Parkinson's disease. The grant is payable over three years and subject to specific milestones. We expect to meet with the FDA late this year to discuss the required clinical program.

In June, we acquired the US and the Canadian rights to istradefylline, a new chemical entity targeted for the treatment of Parkinson's disease. We paid up front fee of $10 million and could pay up to $20 million in potential milestones through FDA approval. Istradefylline is a late stage product that represents a novel approach for the treatment of Parkinson's disease. We will be seeking a meeting with the FDA in the near term to discuss istradefylline's development path forward. This product could represent a near term revenue opportunity for Biovail.

The last product that I will discuss is BVF-324, a novel formulation of Tramadol for the treatment of premature ejaculation. Based on a reassessment of the commercial opportunity for the product and taking into consideration the slower than expected enrollment rate in the Phase III trials, the decision was made to terminate its development. A charge of $2.8 million was accrued in the second quarter for the expected wind down cost of the two European studies that were underway.

As a result of this termination and the sale of our CRD, research and development expenses in 2010 will be lower than we originally anticipated by approximately $15 million. We now anticipate R&D expenses for the year to be approximately $95 million, excluding up front and milestone payments.

In Canada, we were recently notified of an application filing with the Therapeutics Product Directorate, or TPD, for our generic formulation of Wellbutrin XL. We are reviewing the application and if appropriate, intent to initiate patent infringement litigation to enforce our intellectual property rights. This would preclude TPD approval until such litigation was concluded or the expiring of 24 months, whichever is earlier.

I will end my remark with a comment on US healthcare reform. We continue to believe our exposure is not material, given the nature of our commercial portfolio and the structure of our supply agreements. In the second quarter of 2010, the legislation did not have material impact on our financial results. That concludes my remarks. I will now turn the call over to Peggy Mulligan, Biovail's Chief Financial Officer.

Thanks, Gilbert, and good morning, everyone. In accordance with US GAAP, Biovail reported net income of $34 million, or earnings per share of $0.21 in the second quarter of 2010. These amounts include $10.2 million in acquired in-process research and development expenditures related to the transaction with Kyowa, $7.6 million in costs related to the transaction with Valeant and other specific items that in aggregate negatively impacted net income and EPS by $21.2 million and $0.13 respectively. Accordingly, EPS excluding specific items was $0.34 in the quarter.

In the second quarter of 2010, cash EPS was $0.54 compared to $0.59 in the second quarter of 2009. Excluding the merger-related costs and cash restructuring charges, cash EPS was $0.60, a 17% increase over the prior year period as similarly adjusted. A reconciliation of GAAP EPS to cash EPS, as well as a table listing specific items is provided in our second-quarter earnings release issued this morning. Total revenues for the three months ended June 30, 2010 were $239 million compared with $194 million for the second quarter of 2009, an increase of 23%.

Product revenues in the second quarter of 2010 were $231 million compared with $188 million in the second quarter of 2009, a 23% increase that reflects higher revenues from Wellbutrin XL, Tetrabenazine products, Biovail Pharmaceutical's Canada, the Zovirax line, the Company's generic portfolio and legacy products. Partially offsetting factors include lower revenues from Ultram ER and Cardizem LA as a result of the introduction of generic competition to both products.

Wellbutrin XL revenues were $54 million in the second quarter of 2010 compared with $37 million in the 2009 period. A 45% increase that reflects the May 2009 acquisition of the full US commercialization rights to the product, partially offset by the impact of the introduction of generic competition to the 150 milligram strength in May of 2008. The supply of Wellbutrin XL tablets to GlaxoSmithKline for distribution in Europe and other markets generated revenues of $5.4 million to Biovail in the second quarter of 2010 compared to $2.6 million in the prior year period.

Biovail's global Tetrabenazine franchise generated second-quarter 2010 revenues of $21.4 million In the US, Xenazine generated revenues of $16.3 million compared with $11 million in the prior year period. Biovail also recorded $4 million in revenues from sales of the product in Europe and around the world. In Canada, Nitoman generated revenue of $1.2 million, which is included in Biovail Pharmaceutics Canada's revenues.

Zovirax continues to perform strongly. Revenues for this franchise were $41.4 million in the second quarter of 2010, a 14% increase versus the prior year period.

With respect to Biovail Pharmaceuticals Canada, or BPC, second-quarter revenues were up 53% year-over-year, reflecting the strong performance of Wellbutrin XL and Tiazac XC, as well as the positive impact of fluctuations in foreign currency exchange rates. At constant exchange rates, BPC revenues were up 30% in the second quarter of 2010 compared with the prior year period.

Generic product revenues increased 52% year-over-year in the second quarter of 2010, reflecting higher prescription volumes for our generic formulation of Cardizem CD, partially offset by lower pricing and lower prescription volumes for other of these products. Legacy product revenues were also strong in the quarter, increasing 15% year-over-year to $46.5 million.

Turning to the expense side of the income statement, Biovail's R&D expenses in the second quarter were $37.3 million compared with $44.7 million for the second quarter of 2009. Excluding acquired IPR&D expenses associated with our now divest -- sorry, and expenses associated with our now divested CRD, with as well as a $2.8 million accrual related to termination of the BVF-324 program, R&D expenses were $20.8 million in the second quarter of 2010 compared with $10.7 million in the prior year period, reflecting increased activity across several pipeline programs. Looking forward, we now expect to incur R&D expenses of approximately $95 million in 2010, which excludes up front and milestone payments.

Biovail's balance sheet remains strong. At the end of July 2010, we had cash balances in excess of $200 million. The Company had $350 million in convertible notes outstanding and a $17.5 million obligation related to the acquisition of the worldwide development and commercialization rights of tetrabenazine in June 2009. There are no outstanding borrowing under its committed $410 million revolving credit facility.

Cash flow from operations was $109 million in the second quarter of 2010 compared with $97 million in the second quarter of 2009. Cash flow from operations before changes in operating assets and liabilities and excluding merger-related costs was $94 million in the second quarter of 2010, once again, demonstrating the strong cash flow generation of Biovail's businesses. For more comprehensive detail pertaining to Biovail's financial and operational performance for the three months ended June 30, 2010, please refer to the earnings news release distributed by the Company earlier this morning.

In line with the Company's dividend policy, Biovail's Board of Directors has declared the payment of a dividend of $0.095 per share payable October 4, 2010 to shareholders of record on September 1, 2010. The ex dividend date is August 30, 2010. Let me close by reminding everyone that following a $1 per common share dividend expected to be paid after the close of the merger with Valeant, the combined Company does not intend to pay dividends. That concludes my comments. Bill?

Thanks, Peggy. I'm pleased with the financial success of the second quarter of 2010 which once again demonstrated the robustness of Biovail's cash flow generation capabilities. The highlight of the quarter, however, was undoubtedly the proposed merger with Valeant. This transaction will accomplish immediately what we were working towards over a five-year period. We will have multiple growth platforms that we can leverage, including a second therapeutic area in the US, dermatology.

When we originally chose specialty CNS as Biovail's focus area in May 2008, you may recall that we did a deep dive into the six other therapeutic areas that we identified as being the most attractive. Dermatology was one of those six, and we are pleased to be adding our Zovirax franchise to Valeant's existing portfolio in this area.

The opportunity in Canada is also very compelling. BPC revenues in the second quarter of 2010 are up 53% year-over-year, and Valeant's Canadian operations posted a 44% growth rate in the same quarter. Together, we will be the largest Canadian pharmaceutical company, and the partner of choice for foreign companies looking to commercialize their products in Canada.

Importantly, the combined Company will likely not have any significant patent cliffs in the next several years. There few large specialty pharmaceutical companies that can make a similar claim.

The opportunities for growth are numerous and substantial, and the greater resources of the combined Company will allow us to pursue more and larger transactions. The business development track records of both companies over the past two and a half years speak for themselves and should provide comfort to shareholders that capital allocation decisions will continue to be made prudently and always with the over-arching objective of enhancing shareholder value. We'll now take questions, operator?

Thank you. (Operator Instructions) Our first question is from Annabel Samimy from Stifel Nicolaus. Please go ahead.

Hi guys. Congratulations on a good quarter.

Thank you.

Congratulations on a good quarter. Thank you for taking my call. I had a few questions, actually. Can you help us determine what the status of some of your programs may be? We saw -- we all saw the internal projections in your SEC filings, and we were curious to know what those projections assume in terms of pipeline programs.

We are conducting a pipeline review, together with Valeant, as part of the overall integration planning. No decisions have been made with regard to pipeline programs. We will be looking at the programs of both companies. I do expect we will probably see that some of those programs are canceled or partnered as we go forward from -- again, from both companies. Part of the synergies that we are planning to get are from the pipeline.

In terms of our projections, which were in the -- I think it's an S4 that went out. Those projections were based on the status quo of Biovail, assuming that our business was operating as it has been today. We don't want to get into any detail on the underlying assumptions around those projections. We have not given guidance in the past, and so we don't feel that we should delve into any great detail in those numbers. We were required to put them out as part of the legal and regulatory requirements around the merger, but don't intend to go any further than that.

Can you at a minimum tell us whether Staccato is assumed in those estimates, given that it is almost at the approval stage?

Staccato is obviously a program that we anticipate will be approved, and so Staccato would be a program that is in those estimates.

Okay, great. And then on gross margins, you had some pretty strong gross margins this quarter. Is that as a -- what is that a function of?

Annabel, it's Peggy. We did suggest that between 70% and 74% is fairly good run rate to always consider our margins at. Elements of mix come in there, but certainly, what you are seeing is the tremendous efforts on the manufacturing team's side of effecting most of the transaction over to Steinbach and the closure of the Carolina site. So, some positive pickup in margins resulting from those very strong activities.

And then one more question, if I may ask. Xenazine, we saw a nice uptick in that. Would you say that that's primarily a factor of Lundbeck's new effort to educate the broader physician population, or is there any price increases in that? Can you give us a little color there?

Good morning, Annabel, this is Gilbert. First, let me say we always try to report most recent numbers in the case of Xenazine, so, that would have been July. Unfortunately, while the numbers for July appear to be good, we'll have to wait a little bit. They are preliminary and they are being scrubbed at this point.

We have seen through -- over the last year and a half or almost two years now, typically some lumpiness, both in patient counts and in revenues number, but still, over the long term trending steadily. I think that what you have been seeing in the last quarter is more of that. It's been a good quarter, indicative of the steady progression, and we are confident that those trends are continuing to trend to our net/net, still tracking to the steady state number of 4,000 to 6,000 patients. So good outcome from our vantage point and more granularity to follow fairly shortly.

Okay, so there were no price increases in that at all?

There might have been price increases in the very recent past. I don't think that they would be of a nature to explain the good quarter, however.

Okay. Thank you.

Thank you. (Operator Instructions) Our next question will be from David Amsellem from Piper Jaffray. Please go ahead.

Hi, this is actually Misha for David. Just following along the question about your strategic options going forward, can you tell us at least if the R&D synergies, if you plan to get those mainly from the later stage assets or maybe some of the earlier stage pipeline assets?

Premature to say that. The pipeline review has not been completed.

Okay. Just thought I would try. And then last question, I guess Mylan got approval for Wellbutrin XL in July. Do you see that as any sort of competitive threat? Is that going to affect your sampling or couponing activities?

No. This is Gilbert. Good morning, Misha. I guess the generic marketplace as much as Wellbutrin is concerned is a market in itself. I think that our performance here is resulting more from our selectivities or tactical plans to support the brand. The actual battle within the generic players here is unlikely to influence the brand. I think it will -- you will see those players jockey for position as they take more and more aggressive pricing orientations, but that's about the net of it with respect to the brands.

Great, thank you.

We are seeing -- just to leap in there, we are seeing very good performance out of Wellbutrin, and I think it's fairly compelling that the actions we have taken on the marketing side with sampling and couponing are having an effect. That seems to be pretty clear from the IMS data. And so I personally am very encouraged by the performance of Wellbutrin, and as you know, the financial results versus what we had originally anticipated when we bought the assets are significantly better than the original projections.

Thanks.

Thank you. (Operator Instructions) Thank you. The next question will be from Doug Miehm from RBC Capital Markets. Please go ahead.

It's actually Fred calling in for Doug. Just a question on the generics and legacy portfolio. Was there some broad based pricing increases, or what's -- what -- could you add a little bit more color to that?

We have been continuing to manage the price, I would say judiciously, which means that nothing excessive, just what we think would be appropriate in context of a fully genericized marketplace. So, this is what -- this comment applies to our legacy product. With respect to the generic portfolio, as you know, these products are commercialized by our partners, and we are not, per se, a party to the pricing decisions. We benefit from those overall product revenues, but we are not a participant in the commercial decisions.

Okay, thanks.

Thank you. The next question will be from Greg Fraser from Bank of America. Please go ahead.

Thanks, it's Greg Fraser for Gregg Gilbert. Firstly a quick question on the pipeline. It looks like the decision to start the Pimavanserin study for PDP was independent of the pipeline review that you'll be conducting after the merger closes and that everything in the pipeline will be on the table when you conduct that review. Is that the case?

That's correct. Until the merger closes it's business as usual, and the pipeline review will be completed, I think probably shortly before the merger closes, but no decisions will be made or actions implemented until after the merger closes.

Okay. And then on Xenazine, was there any meaningful change in the dropout rate, either higher or lower, relative to the first quarter?

We have never reported dropout rates, however, I think I can comment that there were no meaningful changes. If one thing, it would be a positive sign on that front.

Okay. And is it -- can you say when it could be possible in the future that we may learn more about your -- more specifics about your life cycle management programs for Xenazine?

Well, we do have a program, which is BVF018, which is the modified release version of tetrabenazine which will be targeted at Tourette syndrome. So, that would be the program which is for life cycle management. We have had some recent communications with the FDA related to that program, and we are in conversations with them about the program and the best way to structure the trials going forward. So, it's a very active program.

Okay. And lastly, is it possible to quantify the positive impact that the competitor issues with [Tiltien] had on your Q2 sales? Thanks.

It certainly had a positive impact. It's not possible to quantify it, we haven't calculated that number.

Thank you. And there are no further questions at this time, so I will return the meeting back to you, Mr. Isabel.

Actually, this is Bill Wells. I will close the meeting. So I want to thank everybody for participating and for your interest in Biovail. I would also like to thank all of Biovail's employees for their continued hard work and dedication. We are in the midst of a very exciting chapter in Biovail's history, but I know it can be very stressful as we go through a process of this type with the merger. And your professionalism, dedication and focus on the business is greatly appreciated during this period. As I've said before, I'm very proud of all of you and very proud of everything that we together have accomplished. Thank you so much, and we look forward to your continuing interest in the new Valeant as we go forward.

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