Bausch Health Companies Inc (BHC) 2010 Q4 法說會逐字稿

Good morning. My name is Sean and I will be your conference operator today. At this time I would like to welcome everyone to the Valeant Pharmaceuticals 2010 fourth quarter financial results conference call. (Operator Instructions) Ms. Little, you may begin.

Thank you, Sean. Good morning, everyone, and thank you for joining us for Valeant's fourth quarter 2010 financial results conference call. Joining us on the call today are J Michael Pearson, Chief Executive Officer; Rajiv De Silva, President and Chief Operating Officer of Specialty Pharmaceuticals; and Phil Loberg, Chief Financial Officer. In addition to a live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section.

Before we begin, please let me state that certain statements made in this presentation today may constitute forward-looking statements, including but not limited to; statements regarding guidance with respect to expected, non-GAAP cash earnings per share, cash tax rates, organic growth, and adjusted cash flow from operations and integration related activities and benefits, and strategies and expectations with respect to acquisitions by the Company. Forward-looking statements may be identified by the use of the words anticipates, expects, intends, plans, should, could, would, may, will, believe, estimates, potential, or continuing variations or similar expressions. These statements are based upon the current expectations and beliefs of management and are subject to certain 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 discussed in the Company's most recent annual or quarterly reports filed with the Securities & Exchange Commission and other risks and uncertainties detailed from time to time in the Company's filings with the SEC and the Canadian Securities Administrators which factors are [incurred herein by] reference. Readers are cautioned not to place undue reliance on any of these forward-looking statements. The Company undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of the presentation, or to reflect actual outcomes. In addition, this presentation contains non-GAAP financial measures. For more information about non-GAAP financial measures please refer to slide one.

Finally, the financial guidance in this presentation is effective only as of today. It is our policy to update or affirm guidance only through broadly disseminated public disclosure. And with that I will turn the call over to Mike Pearson.

Thank you, Laurie. Good morning everyone, and thank you for joining us. We are pleased to be able to discuss our results for the fourth quarter, which is the first full quarter of the new combined Valeant. On today's call I would like to first, discuss our fourth quarter results; second, discuss our recent acquisitions; third, update you on our integration status. And then I will turn the call over to Rajiv to provide you with an operations report, then Phil will provide some more details about our financial performance. And finally, I will briefly discuss our new guidance for 2011 and update the status of our securities repurchase program.

Our business again delivered another solid quarter on both the top line and bottom line. On the top line we delivered revenue of $515 million right in the middle of our estimated guidance range provided on our last call. Our cash EPS for the fourth quarter came in at $0.51, higher than our original expectations of $0.44 to $0.48. Finally, our adjusted cash flow from operations, excluding working capital changes was $188 million, as compared to the range of $170 million to $190 million for the year projected. Including working capital adjustments, cash flow from operations was $209 million.

As this is the first quarter of as a combined Company, most of our focus was on integrating the two companies and achieving our synergy targets. Heading into 2011, our focus is on growing our business organically and pursuing attractive business development opportunities. With the exception of our Neuro and other segments, each of our segments demonstrated solid growth in the quarter. These numbers do not include service or alliance revenue. Neuro was impacted by the arrival of a generic entry for Diastat which was previously Legacy Valeant's largest product. Diastat saw a large decrease in the quarter and made the year-over-year comparison difficult. Keep in mind that these growth rates do not adjust for acquisitions or currency fluctuations, which did impact the foreign businesses.

Turning to organic growth, as most of you know, one of our key operational objectives is to deliver strong organic growth. With our merger with Biovail, a much slower growing company, this is one of our biggest challenges for 2011 and beyond.

On the next slide we detail our organic growth for both the full year 2010 on a pro forma basis and for Q4 adjusting for Diastat and Efudex which both went generic. While the story is a little mixed, we feel good about our organic growth results in four of our five segments; US Dermatology, Canada-Australia, Brand Generics Europe and Brand Generics Latin America.

Our challenge is and will be in our Neuro and other business, which is largely a collection of legacy products including our largest, Wellbutrin. While this segment generates a huge amount of cash flow, we are committed to working hard to reverse the decline of the Legacy Biovail brands, and at minimum produce a flat organic growth rate for Neuro and other in 2011. In aggregate, we reiterate our guidance of at least 8% organic growth rate for the entire Company in 2011.

Turning to our acquisitions, we are pleased about the recent transactions we announced, beginning with our acquisition of PharmaSwiss, which we expect to close either in March or early in the second quarter. This acquisition is critical to our plans to become one of the leading branded generic companies in central Europe. Not only do we build critical mass in this region, but we should realize significant synergies in our overlapping countries such as Poland, Hungary, Czech and Slovak. Once the deal has closed, we will have the ability to cross-sell current our products into each other's territories and be an even more attractive partner to other pharmaceutical companies who would like a commercial partner in this region of the world. Additionally, we will now have an important supplement to our current Legacy Biovail corporate structure, as we will be able to access PharmaSwiss' corporate structure in Zug, Switzerland.

Zovirax. Our Zovirax transaction with GSK was both a strategic and financial transaction. First, we were able to dramatically reduce our COGS on Zovirax from greater than 45% to less than 10%. We also now have an unencumbered sales and marketing strategy and execution. We have eliminated our obligation to return the compound to GSK in 2020. As part of this transaction, we also pick up the Canadian rights for Zovirax, which we did not previously own, where Zovirax has approximately $10 million in annual sales. Finally, we now have the ability to engage in life cycle management strategies for this compound.

Turning to our merger with Biovail, in November we provided updated guidance that we expected to achieve over $300 million in annual run rate synergies by the end of 2012, with $200 million achieved in 2011. We updated you in January that we expected $250 million to be achieved in 2011. We now expect that the final tally of annual run rate synergies from the merger to be $270 million in 2011 and approximately $310 million in 2012. As mentioned in the press release, we realized over $50 million in synergies in the fourth quarter of 2010 alone. Now let me turn the call over to Rajiv.

Thank you, Mike. Let me begin this update with some details on the key Legacy Biovail products in the US.

As Mike mentioned, Zovirax is a strategic asset for our US dermatology business, where our degrees of freedom have been significantly enhanced by the recent transaction. We have an extensive action plan that has been implemented to grow this brand. First, we have optimized our contract sales organization and are currently contemplating an expansion to reach additional petitions in areas such as OBGYN and primary care. Secondly, we are utilizing our core area dermatology sales force to increase awareness of Zovirax among dermatologists. These fuel force efforts are being supplemented by non-fuel force strategies to increase awareness among physicians that we do not call on. And finally, we launched a 30 gram ointment tube this week, which is double the size of the current product in order to maximize its utility for patients.

This next slide illustrates the impact these strategies are already having on Zovirax. In the fourth quarter of 2010 we saw a crossover to positive growth for the brand. Zovirax is now growing in terms of total prescriptions year-over-year.

Wellbutrin is another important product for Valeant in the US. And we are pleased to see that our market share continues to stay relatively flat, around 6% over the last several months. As we have mentioned in the past, we continue to optimize several targeted non fuel force strategies to support this brand. While this product is clearly our biggest challenge in the US, we're hopeful that we can continue to stabilize prescription volume.

Moving now to Legacy Valeant in the US, the US dermatology business continues its strong growth trajectory. Our key acne brands, Acanya and Atralin, which we have highlighted in prior calls, continue to show strong year-over-year growth. By turning to our flagship consumer dermatology brand survey, we have continued to see strong growth from this brand throughout the full year of 2010.

And in the fourth quarter of 2010, retail drug store scans grew almost 100% versus 2009. New distribution in Wal-Mart, as well as three new product launches have enabled this growth. Of course none of this success would be possible because of the support of dermatologists and dermatology nurses. A recent online survey was performed asking 2,800 dermatology nurses which skincare moisturizing product they most recommended for their patients. CeraVe was ranked number one by over 70% of survey respondents, demonstrating the value of the brand to one of our most important stakeholders.

Moving now to the next slide, I would also like to highlight our performance in Canada. Both companies, Legacy Biovail and Legacy Valeant, had strong operations in Canada prior to the merger and it is a testament to our Canadian employees that they have managed to stay on track through the extensive integration activities over this past few months. In fact, our performance in 2010 when compared to 2009 shows the strengthening of the business over that of the historical growth rates of both businesses. We moved very quickly to integrate the commercial operations in Canada, finishing up our activities by the middle of December. We have also been hard at work generating new deals to grow this business, completing three deals last year and two so far in 2011. In addition, we have several new product launches planned for 2011, including Ziana and Opana, which have continued to sustain our strong performance.

The next slide shows a quick snapshot of our three largest products in Canada, and the growth, both the fourth quarter as well as for the entire year. As you can see we had double-digit prescription volume growth in all three, including very strong performances in the fourth quarter. With that, I would like to turn the call over to Phil.

Thank you, Rajiv. Good morning. Today we reported our fourth quarter 2010 results. Mike already touched upon our top line growth, but I wanted to provide further detail as to some of our other P&L items.

Our cost of goods sold percentage for the fourth quarter was 43%. Our cost of goods this quarter was impacted by a $53 million fair value inventory step up of the $7 million amortization step ups that arose from Biovail's acquisition of Legacy Valeant, as well as a contractual increase in Zovirax cost of goods sales that occurred in the first quarter of 2010. Excluding the purchase price adjustment, COGS for the fourth quarter would have been 31%. We expect that in the second half of 2011, COGS will be back to Legacy Valeant's historical levels in the 25% to 27% range.

We continue to maintain a tight reign on our expenses. SG&A expenses were less than forecasted due to the acceleration of synergy capture, as Mike mentioned earlier. The G&A this quarter was impacted by a $16 million step up in stock-based compensation that was a result of the merger. This is in addition to the traditional stock-based compensation that we record each quarter. The impact from this accounting treatment will be seen going forward as we will continue to expect to exclude this from our cash EPS calculation, while still including the normal stock-based compensation allocations in the calculation.

Bottom line, we achieved cash EPS of $0.51 and cash flow from operations before restructuring, legal settlements and other charges of $209 million. Excluding working capital changes, adjusted cash flow was $187 million as compared to our guidance of $170 million to $190 million.

Turning to taxes, in the fourth quarter we recorded a tax provision benefit of $102.6 million, reflecting primarily the usage of previously unbenefited losses and credits in our Canadian operations, and the benefits in fourth quarter US losses not subject to evaluation allowance. We currently have US NOLs of approximately $480 million and Canadian NOLs and research credits of approximately $433 million. Our cash tax rate for the fourth quarter was approximately 8%, primarily due to the acceleration and the implementation of our tax strategies, as well as the acceleration of costs related to our integration activities and the additional interest from recent borrowings in high tax rate jurisdictions.

Now, to briefly touch on our leverage ratio and our commitments under our current debt covenants. Our current credit agreements permit a debt to EBITDA ratio no greater than 3.5. We currently stand at approximately 3.05 at the end of 2010. Our interest coverage ratio must not be less than 2.5 and we are at 5.1 as of the end of the year. Our business continues to generate strong cash flow, which is the basis for a strong balance sheet. Now I will turn the call back over to Mike.

Thanks, Phil. This leads to our updated financial guidance for 2011. Our cash EPS is now expected to be in the range of $2.45 to $2.70 for the full year. Although we do not normally provide quarterly guidance due to the lumpy nature of our business, we do expect that the first quarter of 2011 will look very similar to the fourth quarter with earnings approximately $0.50 per share.

Our performance will obviously be affected by the timing of when the PharmaSwiss deal and the Canadian rights to Zovirax close. The first quarter will also be affected by the SG&A wind down costs associated with the integration, as the final step of the integration will occur in the first quarter. In addition, the borrowings we made to finance the 2 acquisitions, we're incurring those costs before we get the benefits of those acquisitions, so that will also have a negative impact.

Finally, I would like to alert you to the fact that in the first quarter our revenues in Latin America will be down about $10 million to $15 million. We are implementing an SAP system in the three acquisitions we made in previous -- last year and the year before, the Tecnofarma, Bunker, and Delta, and as a result of changing over to the new system there will be delays in shipments anticipated in the first quarter.

We previously provided guidance on our expected cash tax rate for 2011 in the range of 10% to 15%. We now believe that our rate for the full year 2011 will be less than 10%. We announced back in November that our board had approved a $1.5 billion securities repurchase program. Under this program, last fall we purchased 2.3 million common shares at an average share price of $26 as well as $138 million face value of our 5.375 converts. We announced today that we have agreed to acquire $275 million worth of common shares from ValueAct at a 5.77% discount on a 20-day trading average ending today. This was calculated in a similar manner to the Company's previously negotiated share repurchase from ValueAct completed in May 2010.

In conclusion, the results from our first quarter as a combined Company exceeded our expectations. We are pleased to see that the integration is primarily behind us and we are moving forward as one entity. We look forward to sharing our future successes and challenges with you in the quarters to come. With that, operator, we'll take any questions.

(Operator Instructions)Gary Nachman, Susquehanna Financial Group.

First question, Mike, what's the cash balance currently after buying back shares? And what types of debt finance are you considering? Would that include taking out enough so you have greater flexibility potentially with M&A going forward?

Let me answer the second first and then I will let Phil answer the first. We are contemplating a number of different financing alternatives. Our lawyers are suggesting to me that we don't give any specifics this call, but clearly one of our objectives will be to increase our flexibility in terms of implementing our strategy. Phil, cash?

Current cash balance is over $300 million and that reflects the recent purchase of Zovirax and does not reflect the buyback from ValueAct.

And, Mike, also just on the debt, would you want to pay down the 4% converts that are coming due in May? Is that also a consideration in terms of I guess the new debt financing that you are considering?

Yes. Our current plan is to a minimum pay the face value of the converts that's in our assumptions in our K, so minimum we'll be paying our face value of I think it's about $225 million of those converts in May.

And could you give updates to some of the other guidance ranges that you had given, the total revenue and the breakouts of some of the individual businesses in light of the 4Q results and also the PharmaSwiss deal?

We do have a slide in here that shows if you annualize the fourth quarter where you get in terms of revenue. You can see that we're if you assume that we continue to grow comfortably within the ranges we provided, it is important that we don't have sort of the alliance and royalty revenue and that. It's just product sales. Product sales, in fact in Canada and Australia we're already ahead of what we suggested.

The issue in terms of updating total revenue guidance is we're just not sure when PharmaSwiss is going to close, and that's a significant business for us so it makes it difficult. But clearly even without either of these acquisitions we are comfortably marching towards well over $2.1 billion, which was the low end of our forecast assuming no [reticulating] payments or anything else. So we're feeling quite confident with our revenue guidance and we'll probably update it next time once we have the closing dates, but we feel good about the progress.

But the EPS guidance, the new range clearly includes both of those deals.Right? And assuming that you would have them for probably close to three quarters of the year? And then for the first quarter, your $0.50 guidance range; I'm assuming that does not include PharmaSwiss at all. Is that fair?

That is correct. That's correct. We're assuming that will close in the second quarter in terms of our guidance assumptions. We just don't know when we'll hear.

Okay. But you're assuming close to three quarters of the year for the other deals; for PharmaSwiss and Zovirax in the full year EPS guidance.

Yes, as you know, we tend to try to be prudent in any guidance we give, so we certainly feel comfortable even if there is some delay that we will achieve our guidance.

Alright. Thank you.

Your next question comes from Doug Miehm.

Mike, just with respect to the new guidance, does it include the ValueAct buyback at this point?

Yes. We assume that we would close that transaction as announced.

Okay. Great. Can you tell us what's driving the cash tax rate to even be below your most recent guidance of close to 10% but now we're going to be below that?

Yes. Well, we were again we tried to be prudent when we give guidance, and we kind of expected it would be less than 10%, so it is not a huge surprise to us, but it required certain things to -- you know, execution. There's a number of things we were doing. We had to set up a new structure in Canada which would allow us to sort of fold in the Legacy Valeant business and take advantage of lower tax structures up there. Obviously borrowing more money in the US shields more income there. So, there is a number of factors, but quite frankly the less than 10% is not a surprise to us. It is just a sign that we weren't communicating until we were sure.

Okay. That's great. And then two other questions. Just with respect to PharmaSwiss, you said that there is obviously going to be some significant cross-selling potential there. Could you maybe provide a little bit more guidance with respect to what the dollar value of the drugs involved might be there? And then also perhaps you can just speak to how Tecnofarma is going this year relative to some difficulties you had last year? It is obviously performing better, but any further visibility, that would be great and I will leave it there.

Sure. So we had about a $200 million business in central Europe prior to the PharmaSwiss acquisition, and basically all the products that we sell, very few, the overlap is I think less than 10%, substantially less than 10%. So the majority of those products we will -- we have registrations available and rights, so we will move those into all of these other countries that we don't currently occupy. So most of our products we can sell there and the market potential in those countries is at least what our current footprint has.

In reverse they have a number of products that we can bring into our territory. That's a much smaller number as a percent of their revenue base, so it is more of a one-way transfer, but it will be some opportunities, but it should be substantial, but it's going to take time. We're not going to see it the first quarter after close, but it is going to provide a lot of growth for us over the next few years.

In terms of Mexico, as you can see from our Latin America results for the quarter, they were actually quite strong in terms of total growth and organic growth, and Tecnofarma is now in our organic growth calculation because it has been past a year. We're please to the say that's actually going quite well and the organic growth in Tecnofarma is quite strong, so we feel quite good about that performance right now.

That's great. Thank you very much.

Your next question is from Louise Chen.

I have a just few questions. First question I had was do you still expect to make four additional OUS acquisitions in 2011 and was PharmaSwiss the larger one you mentioned of the five, or could there be larger ones than that?

Well we're never going to say never, but that probably does tick the box on the one larger acquisition outside of the US. And yes, we still intend to look for other add-ons outside the US. We announced a number of licensing deals in to Canada. I guess we didn't specify whether those count or they don't count, but probably don't count. So you should expect us to continue to be active in terms of some smaller tuck-in deals over the course of the year outside the US.

And the second question I had was on the tax rate. How low could it go? Could it go down to 5%? What is the range that you're thinking of below 10%?

I will say Biovail had a historic tax rate of cash taxes 6% to 8%, so that's probably not an unreasonable place to think we could get to at least. The other nice thing about this PharmaSwiss is it gives us the Zug tax structure, and PharmaSwiss was paying 6% cash tax. We would plan to basically integrate our business into the Swiss entity in Europe, which obviously helps Europe but also provides a backup tax structure if anything were to occur in Barbados.

Okay. And then just last question, on the revenue synergies, do you have any better sense of where those might occur? Could you give us more color on that? On the Biovail?

We never count revenue synergies when we talk about deals and we talk about synergies, we never talk about revenue. Revenue synergies are just upsides, and so I think I detailed the PharmaSwiss revenue synergies which have not been counted in anything; those will just be upsides. I think Rajiv did an excellent job talking about some of the Zovirax growth plans that we're already starting to see nice impact from, which arguably are synergies by taking sort of our derm business and using that to help accelerate sales and quite frankly some of the rate of approaches that Rajiv's team has to growing products.

Thank you.

Your next question comes from Corey Davis.

I've got two questions. The first one, given that Canada is now an important growth driver for you-- I know you highlighted some new launches there, but are there any products that are at risk, any major products at risk of going generic in Canada?

Yes. It is obviously less of an issue than 2 years ago when I joined, but Cesamet in Canada is a product that lost its patent life, I think, almost 5 years ago. So, there has not been a competitor. Every year we sort of let you know that we feel comfortable for the following year. So we feel comfortable in 2011 that there probably will not be a generic, but we're not going to state beyond that. So that one is at risk and there is no patent protection. It is a very difficult product to make and difficult product to get approval on, but it could happen. And I think Wellbutrin, what year is that, Rajiv?

We have Wellbutrin XL and Tazorac XC, both of which still have patent exclusivity in Canada. And we expect to see potential generics sometime in the 2 to 3 years. Now as we have seen in the US, in the case of Wellbutrin XL, the generic erosion curve can be different from the typical generics, but both those two products also would fall in that category in the next 2 to 3 years.

Corey, that's one of the reasons our strategy in Canada is a little different than our strategy in some of our other parts of the world, so it is one of end licensing products from both US and European companies that don't have a strong presence in Canada.We have done a lot of deals and will do a lot of deals, so that in a sense our pipeline, which is really other companies products is quite robust. So, our intent is to continue to grow that business even recognizing that over time some of the products will diminish.

Thank you. My second question is can you describe whether or not the PharmaSwiss acquisition was a competitive one? And if so, how did you win it? Was it strictly on money or are there other intangibles that allowed you to win that one that we can then apply to future deals and say, here is why Valeant is going to continue to win these type of acquisitions?

It was not competitive. We do not do competitive deals. We walk away from them. We do not -- we believe the competitive deals lead to higher prices, and I think one of the keys to our acquisition strategy is the price we pay. We've walked away from a couple of deals already this year, and one that the price just got too high and another that became competitive. So, you should not expect us to be in any competitive deal.

Obviously you have been successful so far, but the lack of competitiveness to a deal seems like it is going to get less and less, but can you give us more confidence that there will be similar types of deals in the future? These companies are seeing prices get higher and higher, why wouldn't it become a competitive process?

First of all, I think the type of assets that we look for is not in anyone else's natural sweet spot, so other pharmaceutical companies tend to be looking for --. Again, we do not mind buying businesses with some warts on them, because paying the warts off actually is how you create value. I think many companies like wart-free businesses. I think that's one thing. I think second is we love the private companies, which obviously have some more risk, but we have a pretty extensive due diligence process. The private companies allow us to sit face-to-face with an owner and get a deal done quickly, and we love deals where there is no bankers involved. I apologize, for those of who you are bankers, but bankers tend to lead to a more efficient process which we like to avoid.

So it is the age-old question can we keep finding these kinds of deals? I think that what I can say is that we have never had more opportunities than we see right now. I think our teams are actually getting better at finding them. I guess the world could change but right now I don't think the constraint on our strategy is availability of assets.

Great. Thanks, Michael.

Your next question comes from Lennox Gibbs.

With respect to the Biovail cost synergies; you're already running at $200 million. What remains to be done to hit the $270 million target and then the $310 million target for 2012?

Sure. There is still, as we mentioned last November, there is still some R&D costs in the first quarter that winding down, as in clinical trials and that type of thing, that we were obligated to do. So, that again, is why our first quarter numbers will probably look a little bit like the fourth quarter. We are still consolidating our financial system and our IP system. So, there is extra costs of running duplicate systems and some extra personnel cost that are still there. So, It is mostly corporate functions at this point than R&D.

All the operations have been completely integrated, as Rajiv said, basically in the middle of December. All the work was done there, so anything that affects the revenue generating activities is behind us, and what we're working on is sort of the activities recording that revenue and profits so there is a little bit left.

Okay. Then secondly, just with respect to Latin America SAP rollout that you mentioned, is that $10 million to $15 million hit basically par or were there delays or other deficiencies in implementation? Perhaps if you can step us through the timeline for that rollout.

Yes. Beginning of the year, January, we trained up and we put in SAP, which we had in Legacy Valeant. We have not moved SAP into Bunker, Delta or Tecnofarma. We had to get Tecnofarma sorted, which took a little bit longer as I think Doug pointed out earlier in the call, but now that's running well. We also mentioned we bought a facility as part of the -- in the spring in Brazil, and we need to get that facility up and on SAP. So, what we're doing is automating basically what had tended to be a manual process in all of these private companies, in terms of the billing and the invoicing and all of that type of thing.

So we have the orders, but we're in delay in terms of shipping some of the orders and we anticipate that some of these orders will end up slipping to the second quarter, and we just wanted to alert you to that. It should have zero impact on full-year results, but we certainly didn't want any surprise at the end of next quarter. We're anticipating that there could be as much as $10 million to $15 million in certain delayed orders as we get the system in place.

Okay, good. And then finally Australia where obviously there has been some extreme-- and I know the commercial offices are leagues away, but can you tells us whether or not there was any business disruption maybe to the overall operation as a result of that natural disaster?

It is a good question. I think you're referring to the two cyclones that hit Queensland. We did see some slowness in the first quarter and the first part of the first quarter, but it has basically picked back up.

Fourth quarter, this year, yes.

This year, so we don't really expect any major impact on the first quarter results. And we do have a business in New Zealand. We're still evaluating the impact that the earthquake will have, but it is a very minor part of our Austral-Asian business, so it should not be material.

Thank you very much.

Your next question comes from Annabel Samimy.

Can you clarify with the share buyback that you got from ValueAct, could you give us some guidance on what the share count is going to be for 2011?

We're still working through those numbers, because of all of the converts, and rather than give you a wrong number-- we just entered into this transaction yesterday. So, I would rather -- why don't we get Laurie Little to get that number out to you guys when we have a solid number. I just don't want to give you a sign that might be even a little bit off.

Okay. How about on Wellbutrin. You gave us a pretty good idea of what you're doing for Zovirax in terms of your plan to optimize that product. Can you give us a little bit more color on Wellbutrin and what you had in mind there?

We'll tell you next quarter. What we did is a bunch of things with Zovirax, and we started to see, as we shared with you, some nice results. So, we are equally active on Wellbutrin, and we would rather share that with you once we start to see some results.

Okay. Maybe I am batting zero here. Can I try for COGS? You had mentioned the impact from COGS, and I missed this, but what did you expect for COGS and for 2011 after this one-time issue you had for fourth quarter?

The one-time issue is it wasn't a one-time. Basically there was a deal that-- the Legacy Biovail deal with Glaxo had a step up in COGS that occurred in the first quarter of 2010 which was sort of amortized over the course of the year, so you didn't see the full impact in the financials. So, COGS went up dramatically to over 45%. Quite frankly, COGS was based on a gross price not on a net net price in the old contract, which created all sorts of problems, and the gross prices increased much higher than net prices increased. So, it was a really bad contract from our vantage point which is why we eventually were able to negotiate purchasing it. So now it is like a normal product; we own it. So, COGS is going to be less than 10% on that product.

Unfortunately, we still have inventory which we purchased under the old arrangement which we have to flow through the system, which is why we won't get to a normalized COGS level until we still after the second quarter. What we're saying is after the second quarter we will get down to -- historically Valeant's been somewhere between 25% to 27%. We'll get down to at least that level starting in the third quarter, in terms of total COGS for the Company.

Now, when you do an acquisition, and Biovail bought Valeant, you also have an inventory step up which every other acquisition you look -- the Merck Schering deal, the Pfizer-Wyeth deal. So, again that inventory has to flow through from a GAAP basis as well. But again, that will mostly flow, but by the second half of the year you will see a normalized COGS for the Company which will be in the 25% to 27% range or possibly better.

Okay. Great. Thank you.

Your next question comes from Scott Hendrickson.

Question for you, Mike. Share repurchases are clearly a top allocation capital allocation priority. Would you mind kind of walking through how you think about the opportunity costs for the capital versus acquisitions and why you believe buybacks kind of remain attractive after pretty strong share performance?

Sure. We, just like probably most of you who invest in us or choose not to invest in us, have built a model in terms of what you think our cash flows and value will be. We obviously have our own model and I think we have the advantage of some inside information. We probably put a higher probability on our ability to execute than you would, which I think is very fair. We should put a high probability on it or we shouldn't be in the job that is we're in. And we have this ongoing model which tells us what we believe our share price should be. We do not include any acquisitions or deals that we have not done in our model and our internal model continues to suggest that our shares are very under valued, that they should be well over 2 times what their current price is, and therefore if you do that calculation it is a good use of capital.

I do think if you look at our history of share purchases over the last 3 years, that I think most of our investors would agree that that's been capital that has been well deployed. We do think a lot of the deals we also deploy get a high IRR on that as well. Given our cash flows, we actually think we're not constrained in terms of continuing to do deals and buying back shares.

The reason our leverage is a little bit higher than it was had to do with the structure of the merger where we had to shrink the old Valeant to be bought and there was a major dividend. So, that's what created the leverage and with our strong cash flows we should be able to reduce our leverage quite easily over time and continue to do both share buybacks and deals.

Makes perfect sense. Thanks a lot.

Your net question is from David Amsellem .

This is actually Misha Dienerman for David. Regarding the opthalmology business that you acquired from Aton, or that you got through your Aton purchase. Do you have any additional thoughts on what you might do with the business and is keeping it still in the cards?

Last part of the question again? Keeping it?

Is keeping it still in the cards?

Well, we certainly own it until we don't own it. We have said that we like opthalmology. It has many of the similar characteristics as dermatology, and in fact much of our work at Dow laboratories which is (inaudible) is in the area of opthalmology because a lot of products are topical. Topical products are very attractive. They tend to be smaller. It is much harder-- you have to do clinical trials to bring on generics. So, I would say our bias now is keep it and grow it and maybe add to it. But again, that depends on our ability to find assets at the right price to add to that business.

Thank you. And then regarding Poland, I think you mentioned previously that the government was undertaking a review of drug pricing? Any new color on this and what assumptions are regarding potential price erosions over the coming year?

There is an act of industry association working with the government. My most recent understanding-- I was in Poland I think about 10 days ago, and they had a discussion on this. I think they decided to defer any significant changes for at least 2 years, so fortunately their government kind of works like ours.

Okay. Great. Thank you.

Your next question comes from Craig Fraser.

This is Craig Fraser for Greg Gilbert. Can you describe the pharma business in some more detail and just expand on the financial implications of leveraging their corporate structure in Switzerland to your overall business in Europe?

The first part, describe their business in more detail?

I guess maybe focus more on the how you're going to leverage their structure and what the implications are I guess for your European business and for perhaps your businesses outside of Europe?

Sure. Just like Barbados or any of these, there is an advantageous tax structure in Switzerland. In fact, the one in Zug that we have is one that most major pharmaceutical companies or many major pharmaceuticals companies have. If you go to Zug, you will see an awful lot of pharma companies with little headquarters there and now we'll have a little headquarters there, too. Just like anything else you can leverage that to have a favorable impact on your cash taxes that you pay. So I don't think it is -- it is not unusual. What we like about it, it is easier to use in Europe than Barbados, so that implementation is easier. And second, it is always nice to have back ups and back ups on back ups.

How quickly can you integrate your European business into the PharmaSwiss structure after you close the deal?

It is a set of legal documents. It is not an operational -- there is no operational impact.

Okay. And on the ValueAct deal, who approached whom? Can you give us any more color on how the agreement came about?

Sure. ValueAct approached us. They run a very successful portfolio, and have I think given great returns to their shareholders. I think our stock has been one of their better performing ones, and it has been one of the largest holdings. So, if we grow disproportionately versus the rest of the portfolio which has also done well, obviously all you guys who run portfolios have certain limits to value of any one company can be in their holdings. So for the second time we sort of exceeded their limits and so they're just pairing it back to get to the limit. You have to talk to them, but I think their intent is to continue holding, so I think it is just purely a portfolio rebalancing.

Okay. That's helpful. What was adjusted cash EPS in 3Q that would compare to your $0.51 in 4Q?

Again, we never went through audit processes for the combined Company, because we were a single Company. We were Biovail at that point. We talked about that on the third quarter, so to tell you the truth, I have no idea.

Okay. I guess if we backed into a number based on your full year 2010 of $2.05, would that be a fair way to approach estimating the 3Q number?

I would have to think about it and look at it, so if you think it is a fair way, then go ahead and do it. I don't have a number for you. We go through a cash adjustment and quite frankly we're more interested in looking forward than looking backwards, but maybe we can work with you off line. We're not trying to avoid any questions. I just honestly have no idea.

Okay, just last question on the tax rate. Have your assumptions on how much of your US NOLs can be utilized changed since you laid out the 10% to 15% range for 2011? Thanks.

How much of our US NOLs changed from November? Do you have that number, Phil?

Yes. It increased primarily because of the additional synergy costs that we incurred through the acceleration and also through the additional interest.

Do you have a sense what it increased by? $50 million or $100 million?

It was more like $100 million.

So, it went up $100 million.

Approximately.

Your next question comes from Jason Adler.

Just a quick couple of housekeeping questions. Can you provide the components of the leverage and coverage ratios for the covenants and then also maybe just a quick rundown of the components of the debt outstanding? I just want to make sure I've got the right numbers with all the repurchases. Thanks.

The leverage ratio component is EBITDA, right?

Yes.

EBITDA, your debt divided by your EBITDA, so it can't be any greater than 3.5. That's the maintenance covenant on an occurrence basis. If you're incurring new debt it can't be greater than 3.25.

Right. What about the numerator and denominator to those, the actual numbers?

The numerator actually is based on a defined amount in combination with our actual performance, and assumes synergy benefits -- assumptions that actually roll out over time. So, the bankers give you credit for hard cost savings that are identified at the beginning of the process. We don't release those credits that are within the calculation, but you can take -- you can calculate our EBITDA despite going back from our cash earnings backwards reversing out interest and tax and depreciation and amortization.

Okay.

It is over a billion.

Okay. And what about the components of the debt outstanding?

The debt outstanding has gone up from I think that's public, it's $3.6 billion to $4.2 billion with the additional borrowings of the $650 million that we just did. The components I think you're aware the converts are $212 million of the Legacy Biovail converts in $225 million of the Legacy Valeant converts and then you have the term A of about $975 million and then the balances are fixed debt bonds at various rates and maturities.

Okay. Thank you very much.

Your next question comes from Burt Hazlett.

General question. Could you just remind us how foreign exchange changes effect the top and bottom lines of your business and then what your expectations for foreign exchange effects are for 2011? Thanks.

Sure. They weren't huge in the last quarter. We were helped in Canada and Australia and Latin America. We were actually hurt in Europe. It worked the against us.

How we budget for it is we always take the 6-month forward rate, so halfway and use those as what our assumptions are. And in our range of guidance that accounts for currency fluctuations unless something hugely unusual or dramatic happens, then we might have to revise guidance. The next thing is we're in lots of different countries with currencies going different directions so they usually more or less even out to some degree. Sort of normal currency fluctuations we are comfortable with within our guidance on both top and bottom line and if we have something highly unusual we may have to come back and revise upward or downward.

Okay. Thank you.

Your next question comes from David Dew.

You had reported on amortization of over $100 million for the quarter, and I was just wondering is this the rate that we should expect as we go forward in the year or how do you actually see this playing out?

Yes, that's right. It will be in the $450 million range on an annualized basis.

$450 million. Great. Okay. Thank you.

Your next question is from Bill Tanner.

Just comment you made at the outset on SwissPharma making Valeant an attractive company with which other pharmaceutical companies could partner in the region. I wonder if you can just maybe elaborate a little bit on how to think about that and, understanding that the deal is only recently been done, any kind of timeline to think about when something could emerge?

Sure. Part of PharmaSwiss' strategy which is one that we like and we'll adopt it ourselves is to have a number of partners in terms of their products. So, they were working with about 11 companies. Most of them tended to be smaller companies. Some were larger in terms of selling their products and in this part of the world, because PharmaSwiss had a very good infrastructure. I think the fact that it was headquartered in Zug and followed a very strong financial and compliance and everything else, it was an attractive partner, so those partnerships become one or two forms. One was representation business, where they just have a contract and sell products for a number of years, and the companies have the rights to get them back or actual licensing of the products in those territories.

So, we have been talking to all of those partners and we feel quite good about-- most of them feel that this actually strengthens the business in this part of the world. They like the fact that we're American, or Canadian, but also American in terms of the compliance and how we run our Company, and that makes it even more attractive. And there has been a number of inquiries already from other companies that have approached us about taking their products in. So, we would hope quite frankly to start signing deals and in fact some of the deals may get signed before we actually close in terms of bringing in new products. So we're cautiously optimistic that this will be another form of growth for the Company.

And then I am guessing that other deals were not really contemplated in occurring in terms of how Valeant was valuing Swiss pharma, or PharmaSwiss?

No. We assumed nothing in terms of -- we're pretty conservative in our approach. We assume that there was no new contracts signed and in fact we assume that we would lose some of the existing contracts in terms of our base case. Obviously that's not what we plan to do.

Maybe just a last question. I am sure you contemplated it before but thoughts on implementing that strategy in other parts of the world where Valeant is?

Yes. I think it is an interesting model, and I think as we begin to gain critical mass in Latin America, that it might make sense there. And in a sense in Canada it is just another flavor of it. There tends to be more licensing, but there is not a lot of specialty pharma companies in Canada. It is really us and Paladin are kind of the only real independent companies. And there is an awful lot of smaller companies that have great products that it doesn't make sense to build infrastructure in Canada for a single product or even two. I think the increase in the number of deals that you're seeing in Canada is partly a function of how well that business is performing and what we have been able to -- what Rajiv and his team have-- People see that we're growing our products quite well in Canada, so that makes us a pretty attractive partner in terms of other people that have product rights but don't have the infrastructure.

Okay. Great. Thank you.

Your last question comes from Gary Nachman.

Mike, you still have pretty low gross margin in Latin America and Europe. Could you remind us what you're trying to do to prove that? Will that help drive better gross margins in the second half? Is that part of the equation? So are you thinking about and I don't think you said this but when will that new plant in Brazil be ready?

The new plant is ready. We're moving lines into it now. Also, there is new plant in Mexico which we're moving lines into it.So, how we came up with the 25% to 27% is purely Zovirax arithmetic. So to the extent that we improve which we are expecting to in our two brand generic businesses that will be a positive on that. Those things are moving. But 25% to 27% was just purely doing the arithmetic around Zovirax, the change in COGS, and running through the inventory that we had to purchase at a higher price.

Okay. But these new plants in Brazil and Mexico, they obviously would help improve gross margin?

That's correct.

Okay. And then last one. The new product launches in Canada, can each of those contribute roughly $5 million to $10 million annually? And Rajiv, I think you mentioned Opana and Ziana, but also Aczone just licensed from Allergan. Is that another one you should launch this year? Thanks.

That's correct. I am not sure I fully understood the question. Is it about the relative size of the product launches?

Yes. How should we think about them? In the past I think you said in the $5 million to $10 million range per product on an annual basis. Is that sort of a good range to think about for these three specifically? At what point do you have a full year of sales for them?

Once we ramp up, I think you should expect products like Opana to be bigger, following the $10 million to $15 million range, and the dermatology products like Ziana and Aczone I think as a starting point looking at a $5 million to $10 million range is a good starting point.

Okay. When this year could those be launched?

We are looking at the second half of the year, so probably late third quarter, early fourth quarter.

Alright, thank you.

Alright, thanks everyone for listening in and we'll look forward to talking to you next quarter.

This concludes today's conference. You may now disconnect.