Bausch Health Companies Inc (BHC) 2010 Q3 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant third quarter 2010 earnings 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. Laurie Little, you may begin your conference.

Good morning and welcome, everyone, to Valeant's third quarter 2010 financial results conference call. Joining us on the call today are Mike Pearson, Chief Executive Officer, Peggy Mulligan; Chief Financial Officer; and Rajiv De Silva, President and Chief Operating Officer Specialty Pharmaceuticals. In addition to this live webcast a copy of today's slide presentation can be found on our website under the Investor Relations section within this webcast event details.

Before we begin, please turn your attention to the slide containing our cautionary statement regarding forward-looking statements. Certain statements made in this presentation and other statements made during this call in the Q&A session afterwards may constitute forward-looking statements.

In addition, to supplement the consolidated financial results prepared in accordance with Generally Accepted Accounting Principles, the Company uses non-GAAP financial measures that exclude certain items. The company has provided guidance with respect to adjusted non-GAAP cash flow from operation which is a non-GAAP financial measure that represents adjusted cash flow from operations. The Company has not provided reconciliation of this forward-looking non-GAAP financial measure due to the difficulty in forecasting and quantifying the exact amount of the items excluded from the non-GAAP financial measure that will be included in the comparable GAAP financial measure.

Statements made on this call do not and will not constitute and offer to sell and the solicitation of an offer to purchase common shares of the Company. Valeant intends to file a registration statement, including a prospectus, with the Securities and Exchange Commission for the offering of the common shares pursuant to the special dividend reinvestment plan. Before investing, an eligible shareholder should read the prospectus in that registration statement, and other documents the Company has filed with the SEC and with the CSA for more complete information about the Company and the offering. You may also obtain these documents free of charge from Valeant's website or by directing a request to Investor Relations at our corporate headquarters. Information related to the special dividend reinvestment plan is being provided here pursuant to and in accordance with Rule 135 under the Securities Act of 1933, as amended.

And with that, I will turn the call over to Mike Pearson.

Thank you Laurie. Good morning, everyone, and thank you for joining us. This quarter is an unusual quarter from a financial reporting perspective with the merger of Valeant and Biovail closing three days before the end of the quarter. Up to the close, the legacy Biovail business continued to be managed by legacy Biovail management, and the legacy Valeant business continued to be managed by the legacy Valeant management. Since September 28, the combined business has been managed by the new Valeant team. Due to GAAP requirements, reported third quarter results reflect the full third quarter financial results of legacy Biovail and the last three days of legacy Valeant. However, to allow for a less complex operational transition, legacy Valeant product shipments were cut off anywhere from three to 13 days before the end of the quarter depending on the geographic market. As a result, reported legacy Valeant revenues only represent a partial quarter, and reported new Valeant revenues only contain legacy Biovail revenues.

Finally, a large portion of all integration costs, including all severance costs, flow through the third quarter income statement. Therefore the third quarter performance of the new Valeant is difficult to assess based on reported numbers. Although I will attempt to make some sense of the numbers on this morning's call.

On today's call I plan to, first, discuss our operational results for the third quarter, second have Rajiv update you on our integration efforts, third have Peggy provide you with a financial overview, and finally I will come back and discuss high level elements of our fourth quarter financial outlook.

Turning to the operational results. First for legacy Biovail. Legacy Biovail results for the quarter, especially top line sales, were poor. This was primarily due to the fact that most line manager in legacy Biovail knew they would not be continuing in the new Valeant and their hearts and minds were clearly not focused on the business. However, there is a silver lining. The underlying scrip trends for the most important Biovail products, Wellbutrin XL, Zovirax, Xenazine, continued their historic trends so there's been no change in trajectory from an overall market demand standpoint. I'm also pleased to note that the Biovail Canadian business continued to perform well, showing 32% quarter-on-quarter growth. Since the end of the quarter, we have also seen an uptick on Wellbutrin XL weekly scrip trends. More important, as new Valeant management begins to familiarize itself with legacy Biovail's businesses, we see many of the same opportunities to improve performance that we saw two-and-a-half years ago at old Valeant. By restructuring partnerships, optimizing the marketing mix, cutting spending and through innovative managed care strategies we feel cautiously optimistic that we can significantly improve the already strong cash flows being generated by legacy Biovail products.

Turning to legacy Valeant. Third quarter performance of the legacy Valeant business remains strong, but due to the early cut-off of product shipments quarter to quarter comparisons are difficult. This slide provides the sales shipment cut-off dates, that is, the last day products were shipped out of our warehouses for each of legacy Valeant's businesses.

The next slide shows the growth of each of the segments of the old Valeant businesses despite these early cut-off dates. I would like to point out that the US neuro excludes Diasta sales which, as we have frequently guided the investment community, saw the entry of an authorized generic from Teva on September 1. I would also like to point out that Europe's growth, as you can see , was 5% in US dollars for the partial quarter. On a constant currency basis in Q3 this growth would have been 13%. Our European business continues to outperform the market as the market in constant currency dollars grew about 7% over the prior year, according to IMS data. I would also like to highlight the continued strength of our US dermatology business. Acanya NRX scrip volume among dermatologists surpassed BenzaClin by 8% in September and Atralin TRX across all prescribing physicians was up over 70% over September of 2009. [Daravay] continued its growth trend into the quarter. In total our growth in retail drugstore scans increased by over 80% when compared to 2009. In addition, we launched two new SKUs, a facial moisturizer with 30 SPF for morning use, and a foaming cleanser.

In summary, despite the unavoidable distractions of integrations, the legacy Valeant business continues to perform well. Our overall approach to integration can be characterized as fact based and fast. A great deal of research and my own personal experience at McKinsey suggest speed of execution is the single most important determinant of success versus failure in a transformational merger. And we have applied this principle to the Valeant Biovail integration. From the outset, we made clear to everyone in the organization that the strategy of the new company would be the old Valeant strategy and the operational philosophy would be the old Valeant operational philosophy, and we have proceeded quickly and decisively from the onset.

Rajiv will take you through the details of the integration execution. But the overall philosophy was to put in an industry leading, lean cost structure, minimize the Company's development in risky programs, organize in a decentralized approach, and maintain a diversified product and geographic footprint, and take advantage of Biovail's attractive corporate structure and strong cash flows. And as important, as the Company is fully integrated as possible by year-end, so line management can refocus efforts as quickly as possible on generating cash and growing the business. I am pleased to report this morning we are well ahead of schedule.

Let me ask Rajiv to give you some of the

Thank you, Mike. Although just over a month has elapsed since the merger closed, we have accomplished a great deal in a short period of time and our synergy capture is well underway. We have completed our R&D pipeline review and notified all of our counterparties as to the decisions that have been made. All North American employees have been informed as to their employment status, and those being terminated have been provided termination dates that are either immediate or provide for a transition period. We have identified the facilities that will be closed or consolidated. And finally, we are working on additional action plans to capture other synergies in areas internally identified. Our number one objective is to move quickly and protect our business units from prolonged distractions and being able to put their full attention on running operations.

We have moved quickly to identify R&D programs that will not fit within the new Valeant strategy from both a development perspective as well as a financial perspective. We have notified all of our counterparties, some of whom you may have seen issue announcements regarding our decision. We expect the vast majority of the transition activities to become completed by the end of the year, but a few wind down activities will continue into 2011. As a result, while most of the restructuring expenses associated with the transition will be borne in 2010, some expenses could slip into the first quarter of 2011. In total we expect exit costs of approximately $15 million to $20 million due to these actions.

As this next slide illustrates, Valeant will continue to remain in a robust development pipeline in four key areas. Dermatology, ophthalmology, neurology and our often and other drug category. Our portfolio will consist of lower risk programs, primarily listed compounds and life cycle management of existing products. We will continue to pursue partnering relationships in order to maximize the value of our compounds and find other pharmaceutical companies that will help fund our development program. In particular we will continue to build upon our core competency in dermatology in topical compounds. We anticipated that our total R&D spend in the future will be less than 4% of total sales. Although that is not a metric that we will use to evaluate our portfolio. Rather, this is to provide you with a basic estimate to understand what will drive our financials in the future.

As mentioned previously, we have made significant strides in communicating with the workforce from both companies as quickly as possible. We began with a headcount of approximately 1,725 people from the combined workforce in the US and Canada. Manufacturing personnel were exempt from the exercise which accounts for about 675 people. Out of the roughly 1,050 left, we terminated about half, most of who will be leaving by the end of the year, and some who will be retained for a period of time thereafter, mostly in areas such as finance and IT for transition purposes. But the end of 2011, we should have about 550 employees in North America. Excluding manufacturing, our personnel costs after the reductions are roughly equivalent to legacy Valeant alone.

With the merger now complete, we have taken the opportunity to consolidate our non manufacturing sites into a more efficient and manageable number. Many of these sites came about through various acquisitions. Most of the sites will be shut down, while a few will be downsized. Going forward, we anticipate maintaining three primary locations in the US -- northern New Jersey, Petaluma, California, and Durham, North Carolina. With a small transition location in Southern California. We expect to save over $10 million from the closure and restructuring.

Finally we have also identified several additional areas of cost savings from both the commercial organization and overall G&A. These costs are anywhere from duplicative corporate expenses to external consulting costs, data acquisition costs, distribution costs as well as general spend rationalization across the two companies in areas such as travel and other procurement. All these decisions and actions bring us to our estimated synergy (inaudible) with the previously disclosed achieving a full year run rate of $300 million in synergies by the end of 2012, with $200 million of this achieved in 2011. Additional synergies are anticipated from longer term projects such as manufacturing optimization.

With that I will turn the call over to Peggy.

Thank you, Rajiv. From a financial reporting and presentation perspective, this quarter is quite complex and, I suspect, will be confusing to many. I will do my best in the next few minutes to cover the key elements which should help clarify a number of points. First, let me remind you, as required under Generally Accepted Accounting Principles, the merger transaction has been accounted for as a business combination, with legacy Biovail determined to be the acquirer. Accordingly, the third quarter results reflect the full third quarter results of legacy Biovail and only three days results of legacy Valeant. As Mike has already explained, legacy Valeant effected an early shipment cut-off so there are effectively no results for legacy Valeant included in the operating results reported other than three days of costs which are principally interest expense and amortization. The balance sheet reflects the recognition at fair value of the legacy Valeant assets and liabilities acquired under the merger.

Not surprisingly, there are a number of items that impacted our bottom line results this quarter as a result of the merger. Let me first address restructuring costs. We originally estimated and communicated that restructuring costs would be approximately $130 million to $150 million. In concert with the detailed synergy analyses, we have also more thoroughly assessed the one-time costs of achieving these synergies and now estimate that restructuring costs will come in between $135 million to $180 million. Of this amount, approximately $50 million to $60 million is expected to be noncash, with $46 million of that attributable to share-based compensation programs. Merger related restructuring charges of $95 million were booked in the third quarter, virtually all of which were employee termination costs and include the $46 million in respect to the share-based compensation. Acquisition related costs associated with the merger of $28 million were recorded in the quarter. This represents primarily investment banker and legal fees. The quarter also reflects the writeoff of deferred financing charges in the amount of $5.8 million. This noncash charge arises from the cancellations of legacy Biovail's prior credit facility. I will discuss our overall financing in a moment. Finally, Mike will speak to the legal settlement charges in the quarter of $38.5 million later in the call.

Turning to the financial recording of the transaction, Generally Accepted Accounting Principles require the recognition of legacy Valeant assets and liabilities in the accounts at their value. The concept of fair value is determined by the consideration given, which in this case was the value of the legacy Biovail shares exchange. Of course the share values of both legacy Biovail and legacy Valeant increased significantly from the date of the merger announcement through to the effective merger date. An increase of approximately 80%. We believe this increase was reflective of the market's assessment of the enhanced value of the companies on a combined basis and was driven significantly by the expected synergies and overall effective tax rate announced. As a result, the balance sheet at September 30 reflects a net increase in intangible assets of $5.1 billion, reflecting the current estimates of the fair value of legacy Valeant's brand and product rights of $3.8 billion and its in-process research and development of $1.4 billion. Goodwill of $2.9 billion has been recorded in the third quarter in respect with the merger.

Other merger related accounting matters include the write up of inventory by $72.1 million to fair value. A noncash charge of $20.9 million in operating expenses related to the valuation of replacement sought based awards. And a number of complex tax results that I will speak to in a moment. I would briefly remind you that at this time the allocation of the purchase price is preliminary and may be subject to change.

In the third quarter of 2010, our income tax expense reflected the following largely merger related items. First, we recorded a valuation allowance against a portion of the legacy Biovail's net deferred tax asset in respect to its US tax laws carry-forward. This arose from the merger triggering the ownership change limitations of Section 382 and the relatively low tax valuation of legacy Biovail in the US. Second, GAAP requires us to record taxes throughout the year at a rate that reflects the expected effective annual rate. The addition of legacy Valeant's fourth quarter results at their higher tax rates will result in an overall higher blended rate for the year. The step up to this higher annualized rate is recognized in the quarter but without the benefit of the inclusion of legacy Valeant's results in reported income. The tax expense also reflected the non deductible portion of the acquisition related costs and charges for legal settlements in jurisdiction with lower statutory rates, or in Canada where a full valuation allowance exists for tax loss carry-forwards available.

Our cash position at September 30 was $598 million, including $6 million of marketable securities. Reported cash flow from operations for the quarter, which I'll remind you again, represents only legacy Biovail, was a very strong $110.9 million. Financing on our balance sheet includes $1 billion of term loan A, $500 million of term loan B, $1.2 billion of senior notes at 7% and ten years, the legacy Biovail convertible note of $350 million face value, and the legacy Valeant convertible note of $225 million face value. We also have an undrawn resolver of $125 million.

We are pleased with the ultimate results of our merger related financing. Overall, we reduced our funding by $72 million due to strong cash flows, and moved $1.2 billion of that to an unsecured basis. In addition, our overall effective borrowing rate is 5.79%, as compared to the expected 6.1% on the merger related financing. This reduced debt load at reduced rates, coupled with our strong cash flows, provide a balance sheet well positioned for future growth and capital management.

Finally I would like to go over a few important calculations that should help you in modeling our new combined company. Our total shares outstanding are currently approximately 300 million. Our fully diluted share count using an all-in-the-money assumption is estimated to be approximately 339 million shares. Of course, both of the converter notes are significantly in the money due to the significant run up in the stock price. This created a big swing in the overall dilution to the tune of 18 million shares. We utilized our strong cash position to help mitigate some of the diluted effect expected from the merger as we net share settled for any sought based compensation units that were required to be issued, and for which the Company was subject to requirements to withhold income tax on. This avoided the issuance of approximately 3 million shares.

As we discussed, the third quarter results reflect a significant number of one time charges and effectively include only the operating results of legacy Biovail. At the same time, the weighted average number of common shares outstanding is distorted by the inclusion of three days of post merger share exchanges. Because of this distortion of both the numerator and denominator in the calculation of earnings per share, we have determined it would not be of any value to report cash EPS this quarter under either the legacy Biovail or the legacy Valeant methodology. We are currently assessing the most meaningful adjusted EPS calculations to assist management and our shareholders in measuring the Company on a go forward basis. We will advise this measure at our 2011 guidance call and begin reporting this measure in Q1 of 2011.

Mike, back to you.

Thank you Peggy. In addition to synergy savings we have been actively looking for additional cost savings opportunities to improve our P&L and to create increased cash flow for our shareholders. I would like to highlight one of those today. Legal spending or litigation. Similar to when I first arrived at Valeant 2.5 years ago, legacy Biovail's litigation docket is both expensive and expansive. In the last month we have settled three of the most expensive cases. Our Adalat class action suit and our malicious prosecution cases with FAC and Gradient.. These alone should reduce our legal spend by over $10 million next year and we will continue to actively resolve the remaining litigation, wherever prudent.

Because this quarter was primarily a legacy Biovail quarter from a reporting perspective, we did not make any changes to our segment reporting but we will now be making changes to our segments beginning next quarter to better reflect how we plan to run the combined base business. We expect to have four major operating segments -- US neuro and other, US dermatology, Canada and Australia, and finally branded generics. Using the last 12 months as a basis, the combined company would have had approximately $1.9 billion in total revenues broken down into these four operating segments plus an alliance and royalty revenues segment.

Today we announced that our Board of Directors declared the payment of the $1 post merger special dividend. This dividend will be paid on December 22, 2010 to shareholders of record on November 15, 2010. Importantly, shareholders will be given the option to receive their dividend in cash or to reinvest the cash amount in shares of the new company. As a reminder, after the payment of this dividend, it is the Company's intention to cease payment of any future dividends. We believe more value is delivered to our shareholders through the investment of our cash resources in growth investments, debt repayment or returned to shareholders by the repurchase of shares. In this regard, I am pleased to announce the Board of Directors also approved a $1.5 billion securities repurchase program. Over the foreseeable future, we plan to deploy our cash in a similar fashion as the past -- on acquisitions, on debt reduction and on share repurchases.

Finally, while this quarter was a difficult one to quantify and compare due to all the transactional activity, we are already one month into the fourth quarter and looking towards the future. Each of our business units are now being run by general managers who are fully committed to remaining true to our growth strategy and philosophy. We run lean organizations with an emphasis on growth and cash generation. We expect that we will see improved results from this operating approach in the fourth quarter and beyond.

I do want to point out four items which will have a negative impact on our reported revenues on a going forward basis. First, under purchase accounting, legacy Valeant, GSK's alliance revenue will not continue going forward. Second, Diastat sales will continue to erode given Teva's entry into the market. Third, legacy Biovail's contract R&D business was sold and we will no longer be recognizing those revenues. Finally, Ribavirin royalties are greatly diminished, they were less than $5 million in the third quarter and will soon be immaterial. In spite of these negative events, we currently expect to have total combined revenue of approximately $500 million in the fourth quarter and adjusted cast flow from operating activities of approximately $200 million in the fourth quarter.

Finally, we expect to be in the position to provide financial and strategic guidance to everyone in early 2011. We will again hold a conference call and provide more updates at that point.

In closing, while we cannot provide the same level of detail about our third quarter performance as usual, our business continues to deliver solid operating performance, generate strong cash flows, and produce significant value for our investors. The integration is moving quicker than expected and we remain quietly confident about our future.

With that we will now open up the call for questions.

(Operator Instructions) Your first question comes from the line of Randall Stanicky from Goldman Sachs.

Great, thanks, guys, for the question. Mike, in light of the R&D spend levels at 4% of revenue going forward, can you just talk a little bit about business development, how you're thinking of that in terms of deal size and productivity or activity per year? And then maybe give us your pro forma debt level, comfort on that front. Thank you.

In terms of business development, I think as evidenced by a couple of deals we announced in the last week, we are gearing up that side of the activities again. We will continue to be looking for both the small tuck-in acquisitions that we've been historically doing at Valeant. But we are also looking at somewhat larger but still what I would view as tuck-in acquisitions, given the increased size of the Company. Again, one cannot forecast exactly when and what those deals will be, but that's clearly a key part of our growth strategy going forward.

In terms of debt levels, I think the board is comfortable at about three times EBITDA in terms of coverage. But given our strong cash flows we will bring that number -- we're already below that that number and we'll continue to bring that down. We have a fair amount of capacity in the war chest for business development deals.

This may be a question you will expand on in early '11, but are you able to walk through some of the projects in the pipeline that you've thus far eliminated?

The R&D projects?

Yes, exactly.

I wasn't planning to. If you any questions you can ask me now.

What legacy Biovail projects have you eliminated or killed thus far?

If you look at slide 15, you can see the six major projects that we've decided to terminate. We had a series of portfolio reviews. These were Barbados assets and our Barbados subsidiary made the decision to terminate all these. There's a few others that may also be terminated. But any project that we were incurring no costs on, we decided not to terminate yet until we get to the next phase in clinical development. The review was based both on strategy but actually a rigorous financial assessment where we did a risk based MPV, and all of these deals, we did not feel the investment, from our perspective, was warranted.

Great, thanks guys.

Your next question comes from the line of Gregg Gilbert from Bank of America Merrill Lynch.

Thanks, I have a few. Starting with Peggy. Can you give us the sales impact? I'm sorry I don't have access to the slides, they're tough to get. But what was the sales impact for the three to 13 days for legacy Valeant? And amount of Valeant costs were in COGS, SG&A and R&D?

I'm going to take that question because it's unfair to Peggy given she was not part of legacy Valeant. What we do is, we have a slide that shows product sales growth by segment. We also tell you the precise date by market that we last shipped. You can do your own calculations in terms of, if you want to try to sort it out, but it's almost an impossible exercise because you're trying to predict something that actually never happened. But if you do your own rough calculations, it should give you a pretty good number. We are not providing more details below the top line sales number in our Q or in our presentation.

Can you describe why, Mike? Why would you not try to help us understand the reality of the business in the quarter?

There's a few reasons. One is, they're really not audited. We avoided having to do that and so the numbers we give you are not there. Also, quite frankly, the costs are a little bit distorted given the different sales cut-offs in the different markets and the expenses continued. So they're not representative of where the business has been historically or going forward. I think what I can say is that if you look at our numbers in the legacy Valeant in terms of how is the business doing versus second quarter, and what you will see in the fourth quarter is the general trends in terms of COGS, SG&A, et cetera, are either the same as the second quarter or perhaps even some improvement.

Okay. When will the 10-Q be filed and will there be revenue detail in there by product or by product area?

The only revenue required under GAAP regs is the total revenue. The 10-Q should be filed either tomorrow or Monday.

Looking ahead, then, on the fourth quarter, the $500 million you expect in Q4, what's the split between legacy Valeant and legacy Biovail? I think it's fair to ask that at least one time before we get into several quarters of history. And then the three to 13 day issue, Mike, does that factor in, in any way, to the $500 million you expect to report in 4Q?

Sure, it's fair to ask anything and I guess it's fair to answer anything. Quite frankly, we've reorganized into our new segments, and once we get there, we may choose or may choose not to, to break it out by the different segments. So we are running this business as an integrated company. I couldn't even tell you what the expectation is across the two companies. I can tell you what Neuro will be, I can tell you what Derm will be, I can tell you what brand generics will be, I can tell you want Canada and Australia will be, although I'm not going to give you that precision on this call. Clearly, if we stopped shipping products early in the third quarter, that will have an impact on the fourth quarter.

So the $500 million in actuality is actually lower than $500 million in terms of real normalized sales?

That would be correct.

Thanks, I'll get back in line.

Your next question comes from the line of Mark Goodman from UBS.

Two things. One, Peggy, can you talk about, just from legacy Biovail, what is left with respect to the legal expenses? Just give us an annualized type of run rate there. Second of all, Mike, maybe you can just dive into the Poland, Mexico, Brazil a little bit, just gives some color on what happened in the quarter and maybe quarter to quarter or year over year, whatever would be helpful. Thanks.

Mark, on the legal, as usual the 10-Q disclosure has an extremely robust -- would be the best way to describe it -- legal note. So good detail will be in there. But from a litigation standpoint, with these three settlements in the quarter really what remains is primarily IT related litigation from the old Biovail side.

In terms of the brand generic businesses, I talked about Europe which showed a 5%, although it's not a full quarter comparison, which really translates into a 13% growth on a constant currency versus the market at 7%. So we actually feel quite good about our European business. It's regained full momentum so results are very strong.

In terms of Latin America, it grew 27%, very little currency fluctuation in the last quarter. So again, the business is continuing to perform quite well down there. The integration of Bunker and Delta is on schedule. The Brazilian market is clearly stronger in terms of the underlying market in the Mexican market, as we speak. Mexico continues to suffer from all the issues down there including crime and the economy. Brazil is very robust underlying market growth, which we are the beneficiaries of down there. So we feel those businesses are quite solid. The integration had zero impact at all on them. So, those results, we think, will continue to be quite robust. We obviously can't control currency but as we speak, we definitely have tail winds this quarter in terms of currency.

As far as Mexico, you mentioned crime and things like that. Are you able to quantify how much you're losing and is this just temporary?

We're not losing particularly. It was a comment on the market. Historically, Mexico has grown from a pharmaceutical market standpoint 7% or 8% a year, constant currency. This year the growth is lower single digits, and how much you can attribute to the economy and how much you can attribute to the US economy, how much you can attribute to tourism, how much you can attribute to oil prices and how much to crime, I'm not smart enough to figure that out. But the net effect of all that is a slow down in the overall pharmaceutical market in the country. Again, it's not unusual in these emerging markets that sales growth tends to be a little lumpier. We had the same issue earlier on in Europe where actually the whole market in Poland and Hungary and Czech actually declined in the first quarter. Now, it's again growing back where it used to be, about 7%.

Thanks.

Your next question comes from the line of Corey Davis from Jefferies.

Thanks. Mike, I don't know if I missed it in your opening remarks, but in the press release your quote was that you were disappointed with the Biovail performance in Q3. I'd ask if you could elaborate if that was more on the revenue or product side, on more on the profitability side because one of those two are obviously much more fixable than the other.

I actually think they are both quite fixable. Quite frankly, it was more on the revenue side. If you look at the growth, it was actually negative growth on a quarterly comparison basis. Actually the growth of the business was quite strong the first two months of the quarter and the final month there was a significant dropoff. I think at that point people knew what was happening. People knew, we were early to communicate, and I think people just didn't manage the business as carefully and closely at the end which is just human nature and fine. That's why I pointed to the scrip trends. The actual underlying market demand for the product, there's been no change. If anything, there's been a bit of an uptick. It was just sort managing the quarter and making sure that you make the numbers that you say you're going to make.

At this point in the US for most of your businesses, how would you characterize your inventory levels, are they higher, lower or about normalized?

I think our inventory levels, our internal in the plants, they are about where they have been historically. One can always improve and we'll look at that. In terms of distributor inventory levels, they are below a month. One of the things we're doing is renegotiating contracts with all our major distributors in the US and Canada given our increased volume which we believe will lead to lower costs. We're also exploring with them whether we want to take inventory levels down further, down to three or two weeks in these two markets, and that's one of the reasons in terms of our outlook for the $500 million, we're taking that into possible account.

Last question on the future of our Retigabine, how would you encourage us to model that, not in terms of the numbers but any change in your thinking as to whether or not you'd like to continue to participate with the deal as it is, or possibly restructure that? Just if anything has changed in that front with respect to the regulatory progress.

As you know, we have our PDUFA date is now November 30. Our fingers are crossed, as are Glaxo's and I think also the prospective patients. We can't predict what's going to happen. We remain cautiously optimistic that this product will get approved, we're hoping sooner rather than later. In terms of how we might restructure any kind of agreement, I would say you should be open to that happening but I can't say anymore at this point.

Thanks very much.

Your next question come from the line of Douglas Miehm from RBC Capital Markets.

Good morning. Just a couple questions about the international markets. You'd indicated you were going to be launching a number of products in the EU, Brazil. Maybe you can just tell us that that is all on track and how things look in that regard?

Yes, we actually had our colleagues from both Europe and Latin America with us last week as we were working on the 2011 budget. The product launches that we talked about at the beginning of the year are largely on track. So a number of products have been launched in each of the three markets, Europe, Brazil and Mexico. Nothing ever gets launched earlier than people predict. But overall, we're staying with our plan.

Okay, great. Secondly, you talk about the $500 million in Q4 and $200 million in cash flow coming out of that quarter. Is that a good guideline for looking into the future or would you expect that cash flow coming from that type of revenue number, the ratio, to remain constant or improve as we look out to 2011?

We're not going to give any guidance on 2011 on this call. But, certainly we would be highly disappointed if all a sudden we stopped growing or we stopped becoming more efficient.

Okay. Finally, just recently, Pfizer went ahead and bought a Brazilian company, Teuto. Do you think that has any impact on your business down there? Or what are your thoughts on what they're up to in that market given how fast it's growing for you right now?

It's a very large market. We have a very small share. Pfizer did not have as strong a presence in Brazil as many of the other markets, being the largest pharmaceutical company in the world. I think what they were looking to do was establish a real presence there and so they bought this company. I think certainly a lot of pharma companies are looking at Brazil now. Sanofi bought Medley last year. It was a significant acquisition. I think companies will continue to focus on Brazil given the intrinsics of Brazil. I think our strategy will continue to be looking at acquisitions that are probably below the size of what these larger companies are looking at. We're looking at acquisitions that have revenues less than $100 million and in some cases less than $50 million. So far, in terms of the discussions we're involved in, we're not competing against any of these larger companies in the discussions.

Great, thank you.

Your next question comes from the line of David Amsellem rom Piper Jaffray.

Just a few. A lot has been made about pricing pressures in European markets. Can you talk specifically about what kind of pricing trend you're seeing in your Europe business, specifically Poland? Is there any hint that we may see any belt tightening by governments with respect to pricing going forward?

I hesitate to predict the future, especially where governments are involved. I can talk about what we've experienced. Last year, basically in central Europe, the Polish government and the other governments review prices every year and there was a net decline in price on average about 3%. That's been pretty constant over the last, at least the last decade. Our net price in Poland last year increased 1%. That would be in 2009. So far, in 2010 after three quarters, our net price increase has also been right around 1%. One achieves this through mix, so introducing the newer products and starting to prune some of the older products. We do not expect any significant price increases at all in Europe. We continue to plan for a 3% decline year on year, but then we work like crazy to try to keep changing our mix. The Polish government did issue a couple statements a few months ago about looking at pharmaceutical pricing. We are involved with the meetings that are currently happening with the administration. So who knows what will come out of it, but we feel, we do not anticipate, a major change like one observed in Turkey or some of these other countries over the last couple years. That being said, governments can do what they want.

That's helpful. Switching gears with a Xenazine question, I'd like to get your thoughts on the product, specifically are you still planning to take the controlled release formulation into Phase II for Tourettes with Biovail that you'd planned to do earlier this year?

I mentioned, the slide mentioned that we're in discussions with many of our partners in terms what we might do with products. Lundbeck is one that we're in discussions with. We've had some discussions and we actually will be meeting with them in Barbados next week to talk about a full range of opportunities. That asset is managed by our subsidiary in Barbados and so they will be taking the lead on that discussion. But we will be joining down there and discussing different ways of potentially restructuring the arrangement and also talk about that particular program. So no decision has been made yet at this point in time.

Okay, got it. One last question, just coming back to your comments on Mexico, and given the instability, can we assume that on the acquisition front, that it's unlikely that you'll see brisk deal activity in Mexico and with the idea of focusing more on Brazil? And just maybe talk about your acquisition strategy down in Mexico given your commentary.

My commentary would have been the same commentary I had last quarter and last quarter and last year. Mexico has been not performing as well as a country in terms of the pharmaceutical market for some period of time now. I actually do believe the fundamentals are actually quite strong in Mexico. As you guys know better than I do, everything depends on price. So, if you can pick up a great asset that's a lot less expensive in Mexico because of the current economic conditions, we are quite willing to do that because we do think the market over time will improve. Brazil is super robust right now. The pharma market in Brazil is growing over 15% of the market a year right now. But in two years, that might be down at 7%. These are very lumpy, they're going to go up and down. We looking to build long term in these markets. It's a long winded way of saying that we think that central Europe, Mexico and Brazil in the long term represent great pharmaceutical opportunities. The underlying growth, even in a bad year, is much higher than some of the more developed countries, and we continue to be active looking for acquisition opportunities in all three. And while it's always, on one hand, better to buy a company in a market that's growing really fast and everything is going well, unfortunately the price is usually higher, as well. We are always looking for opportunities to create value and sometimes creating value is finding really good assets that are under managed in countries where there's problems. So I wouldn't rule out Mexico.

Thanks.

Your next question comes from the line of Annabel Samimy of Stifel Nicolaus.

Hi, thanks for taking my call. Just a little bit curious, you've got a tremendous amount of cash flow coming from the Biovail assets, you've got a much more favorable tax rate, you're getting rid of dividends. So you've got some significant cash flow coming into this combined entity, and I'm a little bit surprised that business development strategy is going to just stay with these small add ons. Can you just tell us, should we just assume that the priority right now is debt pay down, or is the strategy going to be changing over time because that's a lot of cash to be sitting on and generating, and not really doing much with, other than add-on, bolt-on, small acquisitions?

I think we have lot to plan for our cash. As we talked about, we have the ability now to buy back shares, buy back converts and reduce debt. That's clearly one of our priorities. But if you look at our history, we've been pretty acquisitive. If I just reflect back at the prior Valeant, we did 18 or 19 acquisitions in about a year-and-a-half. They ranged in size from less than $10 million up to $300 million. I think that you should expect the same. I think with the higher cash flows, the 300 million number might go a little bit higher. But what we're not looking to do is do another Biovail type deal in the short term. We want to get this new company completely integrated. Again, we will continue to be focused on trying to create value for our shareholders. We will never rule anything out, but our current things that are in our business development pipeline look a lot like the things we've done historically

Are there any particular geographies that you're interested in entering that you aren't already in?

No. At this point in time we do not want plant any new flags. Part of our strategy in creating value is through cost reductions. That's why we always focus on that first -- let's get the costs out and if we can get the costs out, that will pay for the acquisition, and then growth will be an upside. It's a lot easier to get costs out in geographies that we're already in. Our market share in each of these geographies, while growing, there's still an awful lot of room. So don't expect that you will wake up one morning read about us making an acquisition in a geography that we're not already in.

Thank you very much.

Your next question comes from the line of Lennox Gibbs from TD Securities.

Good morning. This is is just back to the post merger integration. What level of cost savings do you expect to achieve by year-end on a run rate basis? I'll go with that for a start.

Rajiv will take that one.

As we have disclosed in the past, our expectation is that we will end up with a run rate (inaudible). For 2011 we expect about $200 million of gross savings, so we expect to end this year certainly at that run rate.

You expect to end this year with a $200 million run rate, is that what you're saying?

No. We expect to end this year at a run rate that will allow us to achieve $200 million of savings in 2011.

Part of it, as we've said, I would not take 200 and divide by four because some of it will ramp up over the year. As we've talked about, most of the development expense will be gone this year but there's some that may trail into next year, the trials have to be wound down and that type of thing. Most of the people will be gone by the end of this year but some in IT and finance will continue to be with us. We're working actively on getting out facilities but some of that may linger. If you expect $200 million next year, each quarter we'll save more. You can put whatever slope on that curve you want. We'll move as quickly as we can to get there but it won't be at the full $200 million run rate on January 1.

Good. And then with respect to R&D capabilities, the facilities and competencies, can you clarify what stays and what goes?

Sure. R&D we're going to have, in US and Canada, the R&D capabilities that we're going to have, we will have Petaluma, which is our dermatology and topical development activity where we have a cadre of over 100 people working on development there. We also contract that out to the outside, so part of that is internal, part of that is service based. We also have our neuro team that's down in North Carolina, in Durham, North Carolina. Those two remain and everything else goes. We do obviously have R&D capability. It looks a little different, it's generic R&D capability, but we have that in Poland and Mexico and Brazil, as well.

So all the Biovail competencies are gone, is that correct?

No, there are some people in the R&D organization that have come from Biovail, so some of the competencies remain. But the buildings will be eliminated.

Thanks very much.

Your next question comes from the line of Michael Tong of Wells Fargo.

Good morning. Mike, I thought you said this, but I just want to make sure I heard you correctly. With respect to the $500 million in the fourth quarter, that includes the catch up sales related to the early termination of shipment in the third quarter? Is that right? Is that the right way to think about it?

That is correct. We also, just to be clear, we said approximately $500 million. We're just getting our arms around this business. We wanted to give some sense of what we expect to do in the quarter. But, yes, to the extent that we stopped shipments early in different parts of our geographies, which we did, obviously those products have now been shipped and have now been sold. In a sense, looking over performance, obviously our growth rate on our products in the ex Valeant side should be higher in the fourth quarter than the third quarter because, in a sense, we'll have longer quarters for most of those businesses.

When you say ex Valeant, do you mean legacy Valeant?

Yes I'm sorry, the legacy Valeant.

Secondly, could you help us think a little bit about what that tax rate for 2011 might be? I know you're not providing guidance, but what's a good way to think it?

I think about it an awful lot, and as soon as I find it -- as soon as I figure out a good way to think about it, I'll tell you. We're not giving any guidance right now. I'm sorry. Just can't. It'll be lower -- I guess we can tell you it will be lower than Valeant's tax rate would have been, and higher than Biovail's would have been. That's the range.

Fair enough, thanks.

Your next question comes from the line of Harry Sambasivam from National Bank Financial.

Thank you. Two questions. First of all, could you kindly explain how you're thinking about Biovail's, the legacy portfolio and the generic portfolios? I'm just wondering, these are historically declining assets with declining prescription trends and so on. And I'm just wondering, do you continue with the pricing strategy that Biovail took or do you have a different strategy to manage these two lines? The second question I have is in term of your manufacturing assets, do you have a broad sense of what facilities might be consolidated and what a broad range might be in terms of your manufacturing synergies over, say, a two or three year period? Thank you.

Sure, in terms of the legacy, I think you pointed to two legacies. I assume you're talking about Wellbutrin.

There's [Vesatac], there's a number of old products in there in the legacy portfolio in addition to Wellbutrin.

For each of the products, we are taking a hard look at what, if anything, we can do, that we do have some different ideas that we've already started to implement. Again, we're cautiously optimistic. As I mentioned, when I first joined Valeant, we had a similar set assets that had been in decline for a number of years. Maybe we were a little bit lucky but we were able to grow those assets, return them to growth. That's the objective. Whether we will be able to achieve that objective, we will see, but we're certainly going to try our hardest. We do have some ideas. We do think there's some life, but we're not providing any guidance on what that might be.

In terms of manufacturing, if lesson number one in integrations is to move quickly on rationalizing the things you can rationalize, lesson two is be careful with manufacturing. An awful lot of pharma companies have gotten into a lot of trouble from a manufacturing standpoint, and given the margins we have on our product we're being very, very careful. So certainly we will look at manufacturing, certainly we will look at trying to continue to achieve synergies, and certainly that exercise has already started.

When you hide off those 675 people, effectively, for the time being, there are going to be no major changes in that particular line for the time being.

No, I think what we said is, when we talk about our $200 million and $300 million of synergies, none of those people are included in those. That's all we're saying.

Thank you.

Your next question come the line of Johann Tanaka from Tanaka Capital.

Related to the last set of questions, is there an organic growth rate we can understand for the existing operations? I know it's hard to put the two pieces together but and average organic growth rate beyond which you will then supplement with acquisitions?

We're not prepared at this time to talk about one. What we said, we will have a guidance call, I think it was early in January last year and roughly in the same time frame. We're still putting together our budgets, our forecast, our work for next year and it would be premature to answer that question at this point, so we're working hard to get a sense for what that might be.

Related to that, the R&D that's going to be remaining, what kind of a source of growth is that, do you have in your mind that might provide future growth? Are there any hills or valleys in that pipeline in the next few years?

We have one which we hope is a significant hill and that's Retigabine, so we keep our fingers crossed there. If it gets approved and it's as successful as we hope, it should be a significant source of cash growth. The top line will be largely booked by Glaxo under the current arrangement. It will be more of a cash flow infusion as opposed to a top line infusion. We remain, again, cautiously optimistic about a lot of our derm pipeline and some of the others. Again, it's a lot of singles, maybe a double or two. Again, in the brand generic business, we're launching 10 plus parts a year per market. All of them are small but they add up.

Yes, we do have from our pipeline around the world, we will continue to have growth but it's not lumpy, it's not blockbuster-ish. Retigabine is the only thing that has the potential to be a true blockbuster, I believe. We are launching products in the US. We talked about launching two new SKUs, which make three SKUs for the year in CeraVe. CeraVe is growing quite nicely. Part of that growth is because of the new launches we are putting into the market. So, yes, there's an element of organic growth that needs to come from our R&D because even though we spend less than other people, we expect that to be productive and if we don't get growth out that R&D we will get rid of the rest. So yes, we do assume that we'll have productive R&D spending.

Thank you. The last is on acquisitions, what kind of EBITDA multiples are you seeing out there? And what is the picture as far as accretion, are your views on accretion or not?

We don't worry too much about EBITDA multiples. We look at the existing EBITDA because the question is what can we do with this assets once we have it. We just picked up an Australian asset, that was at about one time sales. It wasn't making a ton of money but basically we took the asset, and took none of the expenses and put it into our organization, so on day one, it starts making money. BLS was able to acquire that so we were able to enjoy the Biovail corporate structure in that field, as well. What we're looking for is under managed assets that don't make a lot of money but have the potential to make a lot of money. Eliminate the costs and put them in and try to buy them as inexpensively as possible. We do MVP models, we have IRs and rates of return but in terms of classic EBITDA multiples, that's probably less relevant for the kinds of acquisitions that we do.

Thank you very much.

Your last question comes from the line of Juan Sanchez of Ladenburg.

Good morning, most of the questions have been asked. I have just a couple. From the 18 million shares convertible debt, how many of those are attributed to each one of the two converter debt facilities? The second question would be in expected future dilution coming from options given to management and employees, how should we think about that? Like 1%?

I will let Peggy answer.

Sure, if you flip back to one of the slides I spoke to, our current issued and outstanding share count is 300 million. If you were to look at our existing options, converts, et cetera, all on an in-themoney assumption for options, and using the convert to today's market price, you would have a fully diluted count of about 339 million shares. Of that 18 million of the dilution comes from the converts and it's frankly fairly even between the legacy Biovail and the legacy Valeant converts. And of course, the convert dilution can continue as the share price moves.

Is there new options on your shares?

So currently we have not issued any new options or shares. As a Company, we will, in the normal course of business, do so. But, nothing has been granted or issued at this point.

Got it. Thank you guys.

All right, thank you very much, and we will look forward to talking to you in a few months.

For those of you who are looking for the slide presentation, you need to go into the event details through our website under Investor Relations and there should be a PDF file. Please let me know if you have any other issues. Thank you very much.

This this concludes today's conference call, you may now disconnect.