Bausch Health Companies Inc (BHC) 2011 Q1 法說會逐字稿

Good morning. My name is Sara and I will be your conference operator today. At this time I would like to welcome everyone to the Valeant Pharmaceuticals first-quarter 2011 results conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Ms. Laurie Little, Vice President of Investor Relations. Ms. Little, you may begin.

Thank you, Sara. Good morning everyone and welcome to Valeant's first-quarter 2011 financial results conference call. Joining us on the call today are J. Michael Pearson, Chairman and 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 update the forward-looking statements. Certain statements made in this presentation today may constitute forward-looking statements including, but not limited to, statements with respect to guidance for 2011, the approval and launch of Ezogabine/Retigabine, future acquisitions and expected benefits from acquisitions by the Company.

Forward-looking statements may be identified by the use of the words anticipate, expects, intends, plans, could, should, would, may, will, believes, estimates, potential or continue and variations or similar expressions.

These statements are based upon the current expectations and beliefs of management and are subject to risks -- 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 report filed with the Securities and 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 incorporated 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 this presentation or to reflect actual outcomes.

In addition, this presentation and call contains non-GAAP financial measures. For more information about non-GAAP financial measures please refer to slide one of the presentation. Non-GAAP reconciliations can be found in the press release issued earlier today and posted on our website.

Finally, the financial guidance in this presentation is effective only as of today, May 9, 2011. It is our policy to update our firm guidance only through broadly disseminated public disclosure. (technical difficulty) I would like to turn the call over to Mike Pearson.

Thank you, Laurie. Good morning everyone and thank you for joining us. We are pleased to discuss our strong financial and operational results for the first quarter of 2011.

On today's call I would like to first review our first-quarter results. Second, update you on several select operational areas, including Ezogabine and Retigabine, our M&A, the PharmaSwiss transaction, our progress with Tecnofarma, our Australian business and Wellbutrin. Then Phil will provide some more details about our financial performance, and then I will come back at the end and discuss our updated guidance.

Our business again delivered another solid quarter on both the top line and the bottom line. On the top line we delivered revenue of $565 million, which included approximately $36 million from the out-license of Cloderm that occurred in March. Excluding that one-time payment, our revenue would have been $529 million in the first quarter.

Our cash EPS for the first quarter came in at $0.52, although if you exclude the impact from Cloderm our cash EPS would have been $0.56.

It is important to note, however, that our business model includes in-licensing and out-licensing of products. In fact, we have completed over 15 such transactions since I joined Legacy Valeant. However, since the Cloderm out-license had a material impact on our revenue, cost of alliance and cash EPS this quarter in the spirit of full transparency we wanted to identify the impact for all of you.

Overall, our (technical difficulty) results reflect our diversified decentralized model, which allows us to continue to deliver strong performance, even in the midst of engaging in large transactions.

Finally, our adjusted cash flow from operations was $204 million. The Cloderm out-license upfront payment was received in April and did not impact cash flow in the first quarter.

Each of our segments continues to perform very well. On a pro forma basis each of our segments delivered significant topline growth. With the exception of US Neuro and Other segment, which carries the headwinds from the historically declining Biovail tail products, and the entry of a generic for Diastat, all of our segments delivered double-digit growth.

The last time we provided revenue guidance back in January we highlighted each segment and our expectations for the year. Using our first-quarter 2011 segment revenues, you can track our progress against our goals.

With 25% of the year now gone, we have achieved approximately 26% of our revenue target for the year. It is important to note that $5 million to $10 million in revenue in Brazil was pushed out of the first quarter's results due to shipment delays as we implemented SAP in the main [faction] and facilities of this business. Had these shipments been made, Branded Generics Latin America would have been at 24% of forecasted 2011 revenues.

Perhaps the most important growth metric is the overall organic growth rates for the Company. These rates represent our management team's proven ability to take declining products and to reverse the trend.

We first began with Legacy Valeant and demonstrated our ability to deliver sustained organic growth from previously declining products. We have now begun to deliver the same with the formerly declining Biovail products, which in total for the quarter were largely flat.

With a goal of getting back to a 10% overall organic growth rate in future years, and a target of 8% organic growth for 2011, our operations delivered 7% organic growth in the first quarter of 2011 over the same quarter in 2010.

Once the negative impact from the generic erosion from Diastat and Efudex are factored in, the base business actually grew 11% on an organic basis. We will have one more quarter of tough comparisons with Diastat and Efudex going generic.

In the US our promoted Legacy Valeant dermatology brands, Acanya, Atralin and CeraVe, continue to deliver strong growth. Zovirax, which is now also promoted by our dermatology salesforce, grew 38% this quarter. However, it is important to note that part of this growth was the introduction of a new 30 gram SKU, and the true organic growth of this brand we estimate to be closer to 15%.

We are also very pleased to see the increased momentum in Xenazine, which has resulted from a greatly improved relationship with our partner Lundbeck. In Canada Tiazac XC, and Wellbutrin XL showed strength, while Cesamet continues to grow.

Turning now to some selective updates on our business. First, on Ezogabine/Retigabine, we are especially pleased to update you on the exciting events surrounding Retigabine. In the US we have now responded to the FDA Complete Response Letter for Ezogabine dated November 30, 2010, and have recently received a Class I review, putting our new PDUFA date at June 15, 2011. We are hopeful to be in a position to launch in the US later this year, assuming a positive review by the FDA in June.

In Europe the product is sold under the brand name Trobalt and now had its first commercial sales in Germany. And we expect to receive a $40 million milestone and to begin booking royalties in the second quarter of this year. We also expect to launch Trobalt in the UK, Denmark and Switzerland later this month.

This has been a very long journey for this compound, dating back to before I joined Valeant. We have a very dedicated R&D team that is working closely with our partner GSK to ensure this significant drug will eventually become an important option for epilepsy patients who do not adequately respond to current therapies.

While I will discuss our proposed transaction with Cephalon in a moment, I wanted to first summarize the transactions that we announced in the first quarter. A few of the transactions, the product purchases from Aspen and the purchase of [Gain Health] were not of a size to warrant press releases, but they are indicative of Valeant's ongoing M&A activities. Both of these acquisitions involve products in Australia that will supplement our operations in the region.

Turning to Cephalon, while we were disappointed in the final outcome of our efforts, we believe it is more important to remain disciplined to our acquisition strategy of not overpaying for assets. As spoken to many of you since we made our offer, and received your feedback that you support this discipline, $81.50 was higher than our internal walkaway price.

I would like to again congratulate both Cephalon and Teva on their agreement, and we wish them much success on their transaction. As Cephalon shareholders ourselves, we also benefit from this transaction have already sold a majority of our shares that are priced over $80, turning a very nice profit, which will more than cover any transaction expenses that we incurred. I do want to thank all of our shareholders for their continuing support throughout this process.

The number one question I am getting is, what is next for Valeant? As demonstrated by the previous slide, there is no shortage of exciting opportunities for us to deploy our now freed-up capital. We continue to be in active discussion with potential targets in various geographies, and we will continue to look at assets of all sizes, looking for deals that will impact each unique business unit. There is no urgency to pursue another deal the size of Cephalon, although if the right one comes along at the right price, we will obviously engage.

In the end our preference is to conduct friendly transactions rather than ones that are perceived as hostile overtures. We have now completed over 20 transactions, and the Cephalon deal is the first where we bought our offer to the attention of shareholders. As a publicly traded company we feel strongly that shareholders should be able to decide if a reasonable offer is compelling enough to engage.

Our recent acquisition of PharmaSwiss is proceeding according to plan. And we currently anticipate that synergies in the first 12 months should be in the range of $10 million to $20 million.

A few weeks back I attended an integration planning session where we settled on the senior management team and determined with each country head. I also reviewed the back-office consolidation process, which is well underway, as well as the plans to integrate Legacy Valeant into the PharmaSwiss operating structure.

Through this transaction we currently operate in 19 countries and have become one of the leading specialty companies in Central Europe. We are especially excited about the opportunities for 2012 and beyond as we look to exploit the pipeline activities between the two entities, providing us with significant potential for continued organic growth.

I also wanted to touch on our acquisition of Tecnofarma, which was completed in the summer of 2009. Although this integration has taken a bit longer than expected, I am pleased to say that the business is now delivering solid results. Tecnofarma delivered 58% year-over-year growth this quarter and 50% organic growth once the effect of currency is excluded.

The salesforces between Tecnofarma and Valeant have now been integrated into four separate field forces -- primary and specialty care, generics, hospital and strategic customers such as Wal-Mart. On the manufacturing side we have now gone from five manufacturing plants at the (technical difficulty) transaction to three plants, with the expectation to be at most two plants next year. This provides us with opportunities for increased efficiencies as excess capacity is shut down.

I will now turn the call over to Rajiv to talk about Australia and Wellbutrin.

Thank you, Mike. Let me turn now to our business in Australia, which is a very good illustration of how we have transformed what was once a very small business of Valeant into one that is robust and growing.

This business has (technical difficulty) approximately $20 million in 2008 to $60 million in 2010, tripling in size in just two years. And this year we expect double-digit growth from our Australian business.

In addition, the business has been transformed from one dependent on the highly seasonal and unreliable cough/cold market to one focused primarily on consumer dermatology. This has been accomplished through the successful integration of several new acquisitions, which have brought us many iconic Australian skincare brands such as Dermaveen, Dr. LeWinn and Invisible Zinc to Valeant.

As you will see on the next slide, these acquisitions have transformed us into a leader in both skincare and sun care, particularly in the important pharmacy segment in Australia. By the end of the first quarter of 2011 we were the number two company in pharmacy skincare and sun care, with double-digit marketshare in both.

We continue to build on this leadership position with new acquisitions, such as [Gain Health], which brought us the leading chemical-free zinc oxide-based sun care line, Invisible Zinc, in the first quarter of 2011.

Beyond the success of the brands we have purchased, Australia is fast becoming a source of innovation for our consumer dermatology businesses, not only in Australia itself, but also in other parts of the world. A good example is the (inaudible) of Dr. LeWinn, an iconic Australian pharmacy skincare brand acquired through the acquisition of Private Formula International, in 2009.

This brand has been launched in the first quarter of 2011 as Dr. LeWinn's Synergize in the Australian grocery channel, as well as Dr. LeWinn's by Kinerase in the US in the retail drugstore channel initially at Wal-Mart, Walgreens and Duane Reade.

Turning now to Wellbutrin XL. We are pleased with the recent performance of Wellbutrin XL, as our goal has been to stem the decline in XL. Our net sales in the first quarter actually showed growth of 2% over the previous year, a very nice start to 2011.

This marks the first quarter that the brand has grown since Legacy Biovail acquired Wellbutrin XL in 2009. And in addition, we are also seeing a decrease in the decline of prescription volume as well.

We are currently ramping up several strategic initiatives of Wellbutrin that we hope will continue to stabilize this brand. These initiatives include an online co-pay coupon, increased use of advisory boards, which have provided us with valuable feedback as physicians believe that the branded product is a better option for many patients than the generic, as well as the launch of a smart voucher program, that will further help defray the co-pay for new patients.

I will now turn the call over to Phil to discuss our financials.

Thanks, Rajiv. Today we reported our first-quarter 2011 results. Mike already touched upon our topline 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 first quarter was 34%, and was once again impacted by a fair value inventory step-up of approximately $30 million, a close to $2 million amortization step-up, items that arose from Biovail's acquisition of Legacy Valeant last year.

We also had a contractual increase in Zovirax COGS that occurred in the first quarter in 2010, and that should be winding down in the second quarter -- excuse me, 2011.

While we renegotiated this deal (technical difficulty) quarter, we still have the remaining higher-priced inventory that will need to be burned through before the new terms take affect. If the reduced purchase price for Zovirax had been included in COGS from the date of the transaction, the positive impact on cash EPS for both the first quarter and anticipated for the second quarter would be about $0.03 per share.

Excluding the purchase price adjustment, COGS for the first quarter would have been 27%, in line with Legacy Valeant's historical levels in the 25% to 27% range.

We continue to maintain a tight rein on our expenses. SG&A expenses came in at $139 million, which included a $23 million step-up in stock-based compensation that was the result of the merger. This is in addition to the traditional stock-based comp that we record each quarter which we include in our operating results.

We recorded $19 million in restructuring- and acquisition-related costs in the first quarter, both from the Biovail merger and the acquisition of PharmaSwiss. Bottom line we achieved cash EPS of $0.62, and cash flow from operations before restructuring, legal settlements and other charges of $204 million. Excluding the reversal of the merger-related purchase price adjustment on the out-license of Cloderm, adjusted cash EPS was $0.56 per share.

We continue to make substantial progress in realizing synergies from the merger of Legacy Biovail with Legacy Valeant. We realized $75 million in synergies in the first quarter of 2011. This compares to $53 million in synergies realized in the fourth quarter of 2010. The first-quarter run rate puts us at over $300 million in synergies for 2011, as opposed to a greater than $200 million run rate for the fourth quarter of 2010. By the end of the fourth quarter we expect to achieve approximately $350 million synergy run rate for the Company.

Initially we expected our restructuring costs to be approximately $135 million to $180 million, of which $50 million would be non-cash. Through the first quarter, $152 million of restructuring costs have been incurred, of which $50 million was non-cash.

Stepping back from the total integration, we will have doubled our initial synergy target of $175 million, staying within the initial restructuring cost estimate.

On financing we decided to prepay our floating-rate debt, and issued more fixed-rate debt of $1.5 billion in March consisting of $950 million at 6.5% interest rate, and $550 million at a 7.25% interest rate.

The net proceeds we used to pay off our term loan A bank loan of $975 million and to fund the repurchase of $275 million in common shares. We also indicated that we would use the remaining proceeds to settle the face value of our $225 million 4% converts, which we announced we would redeem in May.

In addition, we were active with our securities repurchase program, acquiring another $64 million of our 5 3/8% convertible notes bringing the total current outstanding balance to $160 million.

In addition to the previously mentioned purchase of $7.4 million common shares in March, we also have agreed to purchase from ValueAct another $225 million worth of common shares or 4.5 million shares in May. This newest purchase will substantially offset potential dilution from shares that will be issued in connection with the expected conversion prior to redemption of our 4% converts, which I will explain in a moment.

This leaves $500 million remaining in our securities repurchase program out of the $1.5 billion we started with.

Turning to the redemption of our 4% subordinated convertible notes, we announced on April 20 that we would be redeeming these notes in May. At the time our intention was upon conversion to settle the face amount in cash and share settle the conversion premium. We have now determined that we will settle the entire amount in shares, which will be offset by the previously mentioned purchase from ValueAct.

Now I will turn the call back over to Mike.

Thank you, Phil. This leads us to our updated guidance for 2011. We are pleased with the way our businesses have come together and continue to deliver strong operating performance. With our recent transactions and the strength of our base business we are pleased to be in a position of increasing our financial guidance for the rest of 2011.

We believe that our annual revenue will be greater than $2.4 billion in 2011, with organic growth of approximately 8%. We are raising our 2011 cash EPS from $2.45 to $2.70 per share to a range of $2.65 to $2.90 per share.

Finally, based on this projection we believe the adjusted cash flow from operations should be in excess of $900 million in 2011.

In summary, the first quarter of 2011 continues to demonstrate our progress in delivering solid operating performance, generating strong cash flows, and producing significant bottom-line results for our investors. Through organic growth, margin improvement and our acquisition strategy, I believe that we are delivering on our goal to return significant value to Valeant shareholders and provide our employees and the patients we serve with a strong future.

We look forward to sharing our future successes with you in the quarters to come. With this, we will now open the call for questions. Operator.

(Operator Instructions). Lennox Gibbs, TD Securities.

With respect to the acquisition strategy, you have been quite clear on your strong preference for overlooked, less competitive markets, smaller drugs, diversification, but Cephalon looked a bit different. Was Cephalon just a great opportunity that you couldn't overlook or is the strategy evolving?

No, I think the base strategy is the same. I think Cephalon brought many of those aspects, but also brought some other things as well. As we had announced when we announced the deal that there were -- we were planning to -- if that transaction had been completed -- to (inaudible) the Oncology business and the Western European business, which would have left us with a brand generic business in Central Europe, and a set of tail products in the US, which is consistent with our strategy.

I think you'll find that as we continue to grow and we look for larger acquisitions that we're never going to find the perfect acquisition that fits exactly what we want. So what we will do is find companies that have some of the pieces we want, and then what we will do is probably partner the assets we don't want with more natural owners.

So a result of these transactions in the end will be sticking to our same strategy. But not every acquisition we make will be perfect, because if you wait for the perfect acquisition you will wait for an awful long time.

Good, thanks. Then, quickly, secondly, just with respect to the Latin American SAP implementation and looking out to the second quarter, when were you able to normalize those systems? And should we now think of that $5 million to $10 million in delayed shipments as just additive to the base rate if you look at the second quarter?

For Brazil, yes. And we should recapture most of those sales over the rest of the year. We just had some -- I mentioned it earlier in the year that we were going to have probably some delays. I think [what] we estimated at that time was 10 to 15. We were able to implement a little bit quicker than we thought, so our assessment is sort of 5 to 10, but, yes, we would expect those sales to show up in the second quarter and on a recurring basis.

Good, thanks very much.

Corey Davis, Jefferies.

The one-time items, the adjustments that you had in Q1, how much and how many of those do you expect to be repeated in Q2 and beyond, except for the amortization of non-cash interest expense that we would expect?

Good question. Over time they will be significantly reduced. One of them is a stock -- one of them is an inventory step-up, which is as you know, in all companies these days that do acquisitions or mergers get this. You need to mark-up the cost of goods of the inventory that you have that are currently finished goods inventory. That will -- we will have some in the second (technical difficulty), maybe a little bit in the third and that will go away. So that is just represents the accounting step-up there.

Restructuring charges were largely complete. We are at $300 million. We think we can actually -- we found a little bit more, so there'll be a little bit more restructuring charges. Most of those will be gone. We say that by the end of this year there will be no more restructuring charges from Biovail.

There is a stock-based compensation item, which has to do with an increase at the time of the Biovail merger. That will take a little longer to have those effects disappear. There will always be some tax items, which reflect the differences between GAAP taxes and cash taxes that you will see ongoing. But over the next couple of quarters, I think you'll see less and less of these adjustments as they take their natural course.

Great. And second question, can you tell us how much PharmaSwiss contributed in Q1? And any new (technical difficulty) thoughts on their business -- I forget what they called it -- that involved partnering with the big drug companies like Bristol and Lilly, is that a business model that you will be able to continue in those regions?

So there was about US $15 million in sales, the impact in Q1, and actually zero in terms of EPS (inaudible) some restructuring costs. So just -- there was US $15 million in -- as you saw that even without it our European business organically grew quite strongly. It is a very good quarter.

I think you are referring to the representation business that we alluded to, which is -- we weren't sure how that would fare given this acquisition, but we have been pleasantly surprised. So far everyone has, at least until now, has decided to stay with Valeant in that part of the world. In fact, we landed a number of new contracts since we have acquired them, which will increase that business.

So we think it is actually a sustainable business. It is an area of the world where many of the larger pharma companies, and certainly many of the smaller specialty companies, do not have great commercial infrastructure. And as I was alluding to, we probably have, if not the strongest, close to the strongest. So we are able to do a very effective job selling our products in those areas. So we are cautiously optimistic that will be a very important part of our business going forward.

Great, thanks, and nice quarter.

David Amsellem, Piper Jaffray.

Just a couple. On the Cloderm out-licensing, bigger picture question, is this an indication that you may be thinking your views on US dermatology assets? And, I guess, give us a sense of the extent to which you are willing to part with other US derm assets, or is this (technical difficulty) a one-off?

Well, again, as I mentioned on the call, we have done sort of 15 plus of these types of transactions. This one -- the biggest was Retigabine. This is our second biggest in terms of actual revenues, and we wanted to call it out because -- but it is -- in a sense it is recurring in that we do it all the time. But in a sense it is not recurring, because it (technical difficulty) a one-off, because that is part of our business model.

No, we are very committed to dermatology. And the reason we thought we could -- this was basically a $7 million revenue brand, and we tried promoting it and we haven't had a whole (technical difficulty) growing it. It came as part of the original Coria acquisition and was one of the minor brands in the acquisition. We picked up [Atrill] and CeraVe with that, if you have been following us for that period of time.

We have now brought in Elidel, which is a substantial product, in the US, Canada, Mexico. So we want to use our r promotional capabilities and we're going to move them to Elidel, which is closer to a $100 million brand in these territories.

So since we weren't promoting it, and there was an interest -- so any other company that is interested in heavily promoting any of our brands that we are not promoting, we are happy to license it out, because that will increase the value of the brand. And in this case we got a nice upfront and we also get a royalty stream. So we will enjoy the one-time benefit and we'll enjoy -- I hope that Dr. Reddy's does a great job with it, in which case we will enjoy a nice royalty as well.

But you might view it as we sort of traded out Cloderm for Elidel, which I think is a pretty good trade for our derm business.

On R&D, I guess the question here is it is about 3% as a portion of sales. And I guess is that a realistic way to think about the R&D spend going forward? And I guess, more importantly, you have said you're planning additional brand generic launches in the ex-US market. So at 3% of sales is that a realistic way to think about expenses considering that you are (multiple speakers)?

I'm sorry. Yes, so I think what we have said is we expect R&D to be 5% or below, in terms of our business model. It was 3% this quarter. It may move up a little bit. It will be a little bit lumpy. Again, we don't manage R&D to a percent of revenue number. That is kind of the wrong way of thinking about it; it is based on projects.

Now again, most our branded generic launches are dossiers that we license or we buy in and we expense them, so they don't show up. They show up as COGS, not as R&D. So part of those expenses are in a different line.

But some are 3% to 5% is probably a fair way to think about R&D, but again we don't manage it to the percent of revenue, it is -- but with our partnered approach to R&D we think we that can continue to spend less in R&D than many of our competitors.

Very quickly on Xenazine, is that still a priority in terms of keeping in the bag? I know you have suggested in the past that you may do something with it, any new color there?

So what we -- we have had a lot of good conversations with Lundbeck, and together have come up with some new approaches, and I think we are seeing the impact of that.

It is not a traditional Valeant type of asset, but we did get it as part of the acquisition that Biovail made of Valeant. And it is a very good product. The issue is we are able -- it is owned by Barbados, and therefore, our tax rates are relatively low on that. So we are not going to find anyone that would -- where it would make economic sense to purchase that product from us, given our tax right there. So what we plan to do is work with Lundbeck to maximize it.

I think it goes out to about 2015. So we're pleased with the increased growth, and it will be part of our portfolio for the foreseeable future.

All right, thanks, Mike.

Doug Miehm, RBC Capital Markets.

Mike, when you're looking at the pricing of assets these days. I think we've all seen that as a result of the Cephalon move that a number of the public companies have increased by a multiple point or two at least.

I'm wondering what you think the implications of that are? Plus, as you're seeing this translate into other markets as well, I know you mentioned before that because Sanofi, GSK and Pfizer had moved into Brazil that multiples have climbed a little bit there, and you're willing to step back. But perhaps you could discuss what you are seeing in the various geographical locales right now and the implications for you.

So I think whether it was a result of the Cephalon transaction or (inaudible) there has been some increases in some of the specialty pharma companies, and they are publically traded in the US. But we are not seeing that around the world. Brazil was -- a number of acquisitions were made, but, again, it is -- each transaction is different. And we still actually feel we are in many active discussions right now, and we still think we can pay very fair prices to these companies. And that it will still be at a price that creates value for our shareholders as well.

Our objective is to deliver value to both (technical difficulty), but it is -- to avoid bidding wars, to avoid overpaying, because then all the benefits go to the sellers and not to our shareholders. So we will remain disciplined. And I guess, the litmus test will be what prices we pay and what value we can deliver going forward, but we still feel quite comfortable.

Okay. Just to follow up on a question on Zovirax, of that $31 million that you would have on the cash flow statement, how much of that was due to the 30 milligram stocking relative to the deal with GSK?

And then maybe just to Phil, as it relates to the share count that you're going to be using for that $2.65 to $2.90 in guidance, is that the $332 million level? Is that how I (technical difficulty) interpreting that? And I will leave it there. Thanks.

There is probably $5 million to $7 million, somewhere in that range, of an order in on the -- I [wouldn't] guess it was 28%. But if you can do the math, what I like to do is figure out 38% and reduce it to 15%. And I haven't done the arithmetic in my head, but you can do it, but I think it will come in about that level.

What is important to note on Zovirax is also the point that Phil said. We continue for the quarter to have our cost of goods for Zovirax be at the old rates. So we are not getting the profitability increase. Because that deal with Glaxo had nothing to do with topline revenue. All it had to do with was two things. One is (technical difficulty) the cost of the product, and second, giving us the trademark so we could do other things with this product.

And, finally, we did pick up Canadian rights, which aren't reflected in that number either. So we really haven't seen the impact of the deal with Glaxo in this quarter. We will begin to start to see it in the second quarter, but by the third quarter it will be fully in there. In terms of (technical difficulty), Phil?.

The $332 million is indicative of what you should expect going forward. There is a delayed effect of the share and convert repurchases, offset by a delay in the effect of share price increases, so they can offset each other. But $332 million is a good indicative rate going forward.

Okay, thanks very much.

Chris Schott, JPMorgan.

First question was on the European generic business. Can you just -- with the PharmaSwiss deal now closed, can you just talk about your priorities for future business development here?

I guess are there other countries you would like to get into at this point or is this more about expanding your product portfolio? And again, at the right price would you consider more broadly expanding into Western Europe or is that an area you are still not interested in moving into?

So let me take the second question first. Western Europe is not an area we are interested in. If we do make acquisitions that bring Western European business with them we will be either looking to partner or sell those businesses over time. We just don't see -- it is -- the demographics are not as positive and, quite frankly, we are way below critical mass. So there is many other companies that are much stronger in Western Europe and will do a better job with those assets.

Central Europe, we continue to look for opportunities within Central Europe. As in PharmaSwiss, if we pick up a country or two, if we do these beyond there is not a ton of countries left in Central Europe, so we are in most of them. Maybe over time we will get into Russia. I don't know. But we will be going East and not West in terms of Europe.

Okay, great. Then, second question, and I know you touched a little bit on this, but can you just comment on any kind of takeaways from the Cep process? And specifically would you pursue another hostile deal in this environment?

I guess what I'm asking is with many of your competitors obviously struggling for growth, do you see an ongoing risk that someone would always be willing to show up and make a pipeline that to the extent you were to start a hostile process, especially for larger assets like a Cephalon type of deal?

I think every transaction is specific, and it is important not to generalize that, yes, Teva came in on this one. If we did another one, maybe. I think the fact it is public obviously increases the probability someone will come in, because that is part of the process.

We are not opposed in the future. We are not ruling out hostiles as part of -- we will consider anything that creates shareholder value, but our preference is friendly. And there has been many transactions that we have not reached agreement with other companies and have walked away. That's fine. I think it was the part that they want to gauge was the piece that we thought was not fair to the Cephalon shareholders.

But I guess we will see. But, again, our preference is for private. And I don't think you can really evaluate any deal until at least two years later. So I think the question will be was -- maybe we should have paid a higher price, maybe we shouldn't have. But whether it is a successful deal or not, I think we will have to wait a couple of years to see. The pressure now is on that combination to demonstrate that it was a smart move.

Fair enough. Final question was just on gross margins ex inventory step-ups. Just can you give us some kind of thoughts of how we should think about the trend for the rest of year with the changed economics in Zovirax and the PharmaSwiss business being included?

So I think 25% to 27% is where we expect to be at. I think PharmaSwiss will hurt us a little bit because of this representation business compared to our historics, but Zovirax well obviously help us. But there are opportunities in the manufacturing side of specialty over a little bit of time in Europe, because we can start moving a lot of the products they sold into our manufacturing capabilities. So that will help.

But as I have often said, we certainly manage our COGS. And we look to continue to improve them, but it is not the highest priority for management. Our highest priority is supply, and making sure we have not -- we do not have supply interruption. As a pharma company, that is what will really hurt us.

So we will never go for the last percentage point in COGS, if there is any risk of -- on the supply side. So, hopefully, we improve it, but I think 25% to 27% in the range that we expect for the foreseeable future.

Great. Thanks very much for taking the question.

Tim Chiang, CRT Capital.

It seems like you're doing better in Australia, better in Canada. And also you are doing better in Wellbutrin XL here in the States. Do you think you can you talk a little bit more about what your expectations are here for acquisitions in Australia and Canada? It seems like it appears to be still a pretty fragmented market. Is that the case or is there something else that you just seem to be in the right markets right now?

So Canada and Australia we did a quite a few deals in the first quarter. They tended to be smaller. I think you will continue to see smaller deals in those areas. There is not a lot of larger standalone companies in either of these two geographies. There are a few -- so maybe we will.

I think we have a unique capability in both these countries. In Canada we are one of the larger pharmaceutical companies up there. We have a strong primary care salesforce and a strong specialty salesforce, so we are absolutely a tremendous partner for companies that don't have (technical difficulty) Canada. And the team has a great track record of delivering.

We seem to have, with all credit to Rajiv and Tom Schlader, we seem to have gotten through this integration affair, which was a major integration, and have continued to show strong organic growth, which is not an easy thing to do.

So we want to continue to build our strong Canadian business. I think on Australia it is a very different business. It is an OTC business. And we are continuing to be active, and there is a lot of -- it is very fragmented. There is a lot of -- and we are focused on local brands. We are not focused on global brand. So I don't think there is a lot of people with that strategy there.

So you should expect to continue to see business development in those two markets. I think you're not going to see major, major companies being bought, because there aren't a whole lot of them, but rather more on the product side.

Then just in Wellbutrin XL, (technical difficulty) 2% growth rate, is that something that you think you can grow on top of that this year?

I will let Rajiv answer that, since he has to do it.

We think that we can sustain the growth rates in the low single digits, which would be a good outcome for Wellbutrin. As we noted on the slides, we do have a few different tactics where we are rolling out some (inaudible) successful, and others we will see over the course of the next couple of quarters. But (technical difficulty) the initial experience with the new tactics have been good, as you have seen with the first-quarter results.

Okay, great. Thanks.

Gary Nachman, Susquehanna Financial.

Mike, first, on the revised 2011 guidance, I just want to confirm that it includes the (technical difficulty) Cloderm. And how much are you factoring for milestones in there for Retigabine this year?

Well -- yes, Cloderm we did the deal, I think we should get credit for it. You guys got the cash. So, yes, Cloderm is included. We have, as we have said in a previous call, we probability weight any milestone payments. And that -- what we said last quarter is that if we got no milestone payments we would still feel comfortable with our bottom end of guidance.

But to get to our top line we assume some probability weighting on some of the milestones. So we are going to get at least one of the milestones since we have already gotten the first commercial sale, so we will get that, whether that comes this quarter on exporter depends on -- I'm not 100% sure in payable terms. So we will get that milestone. We will see on the US -- we don't know what the FDA will come back with, so I would say the same thing. We certainly are going to hit our bottom line even without -- the low end of guidance without milestones, but top end include some portion of them.

Okay, and just following then on Retigabine are you still actively considering monetizing that asset? And now that we're getting closer to the launches of that product has GSK shown any real interest there? And if it is monetized do you think you could do with any other potential parties or just GSK?

So I cannot talk about specifics. But our mantra is always we will do whatever is in shareholders' interests. And, quite frankly, we will monetize any part of our Company if it is the right price.

Then on PharmaSwiss, now that you have had a little bit more time with that business, just a little bit more on the synergies from it. You said $10 million to million, I think, was that just cost synergies? Maybe just a little bit more what you expect in terms of the possibilities from revenue synergies going forward.

Yes, that is just cost. We never talk about revenue synergies; obviously we have to get some. We have a whole host of products that we sell in Poland, Czech, Slovak, Hungary, which we will now start selling in these other countries, which are our own products.

Also we have a much stronger sales and marketing capability in the old Legacy Valeant Company than PharmaSwiss did, so we will obviously -- well, not obviously, but hopefully, we will do a better job selling products in those -- if they had a 30 person salesforce in Poland and we have 300, obviously, we stand some reasonable shot of being able to sell more of their products.

So we are not talking about any revenue synergies, so enjoy those. Now in terms of the product launches of our products, does won't happen until next year, because it takes -- you do have to register the products. We have rights to the products, which is good, but it still takes 6 to 12 months to get them registered. So most of those revenue upsides we will see in 2012.

Okay, and then just lastly -- this is probably for Phil. On the Biovail synergies, can you just quantify where the higher level is coming from? I think you said it will be closer to $350 million annual run rate by the end of the fourth quarter. Anything new that you have seen, anything specific on that? Thanks.

Legal is a large part of that increase, bringing down the continuing legal expense by resolving ongoing issues and hopefully keeping issues from coming up.

You have may have noticed there was always these payments to Legacy Biovail Directors that were involved in all those cases have now been settled. There has been some press releases out in the press in terms of previous management, so a lot of those have cleared up and have gone away.

Okay, is that the highest level, could it get any higher from there, not to get too greedy here?

I hope we are talking about other synergies before we get to that point.

All right, thanks.

Louise Chen, Collins Stewart.

The first question I had -- we get this question a lot, regarding the endgame for Valeant. Where is the [comfort] today? Where do you want it to be over the next few years? And are you thinking of being a large-cap pharma company at some point? Just what is your strategy here?

We are hoping to be large-cap Valeant. Who knows, like what is the endgame strategy? I think we have a strategy that so far has worked. We continue -- we expect to continue to execute on that strategy, which is -- there is really two keep components. One is M&A. Looking for companies where we think we can both operate them more efficiently and maybe do a little bit better job in terms of -- on the revenue side of some of the -- some of the tail products.

Then -- so part of it is M&A. Then part of it is just delivering strong results. I think as long as we continue to do those things, we hope we will continue to return value to shareholders.

We are really only focused on one metric and that is returning shareholder value. Which our objective function is not to -- we don't have a revenue target in mind. We actually don't even have a market cap, because we are pretty aggressive in terms of buying back shares in various forms, which obviously in turn -- increases the return to existing shareholders. But that is our focus.

Now no strategy works forever. I am sure things will change, but it is our job that as the world changes that we adapt our strategy as well, and try to stay out in front.

So I think the story is not written on our Company yet. I guess we will see what happens. But we feel quite comfortable we will be able to continue to deliver shareholder value, but we certainly are not going to -- I don't think ever, ever turn into big pharma in the traditional sense. Traditional, I mean heavy R&D -- both heavy R&D as well as commercial. We think that disaggregating in a sense the business model makes sense. I don't know if that helps or not.

Yes, it does. Thank you. Then just another quick follow-up question on the guidance for 2011, are you updating any of these sales -- specific sales lines, US Neuro US Derm, what have you?

No, not at this point. I will let you come up with your own (inaudible).

Thank you.

Annabel Samimy, Stifel Nicolaus.

Thanks for taking my question. Just on the guidance, again, I notice that the revenue increased by about $100 million, I guess, on the top end. But PharmaSwiss should have contributed on a pro forma basis about $200 million. Is there a range we should think about for the new guidance? Is it $2.4 billion for the midpoint?

And separately, can you explain some of the changes on the bottom line -- what is the biggest contributor on the bottom line? Is it the Zovirax operating margins or is it share count or is there something else that we should think about?

So on the top line I think our guidance is greater than $2.4 billion. We feel quite comfortable there. And so we didn't provide a range this time. I guess we could have, but we didn't.

So clearly PharmaSwiss is the one significant increase, because the Zovirax deal does nothing in terms of top line. Elidel will actually help on the top line too. So we feel quite comfortable that we will be greater than $2.4 billion. You guys can do your the math yourself in terms of trying to figure that out.

In terms of our guidance, largely what we are reflecting are stronger operating results. We are not making assumptions on reduced share count and other things that -- some of those things may happen, which will help. But basically we outperformed our own expectations for Q1 in terms of the underlying business, and that is what we used to increase our guidance. And, obviously, if there are other upsides that will help too.

Just to follow up, are there any specific regions that you don't feel have performed as well as you would have hoped for? And what are some of the things you might be doing to move those forward?

Well, I think there is a few. Brazil, because of the SAP implementation. The business is doing well there and the orders are there, we just weren't able to ship, so that was unfortunate. We should have done a better job. But I think we let you know that was going to happen. We probably should have done a better job on SAP implementation. Fortunately, they did a good job putting it in and where all systems are go there.

Canada, Australia actually slowed down a little bit this quarter compared to last year in terms of total growth. But that had actually more to do with comparables. If you go with all the way back to 2009 to 2010 they have been assessing that recall in 2009, which made the comparable for first-quarter 2010 much higher, because we had a recall because of some labeling issues, so that was that.

But I think overall most of the business performed in line. I think Europe had the strongest quarter in terms of -- they had a very nice organic growth rate. And things are tough in Europe right now. So I think against -- if you look at most companies, the growth in Europe was quite, quite strong. But I think all the other units operated as we expected.

Great, thank you very much.

Michael Tong, Wells Fargo Securities.

Just one quick question, actually. Your ability to continue to do M&A transaction, certainly part of it is attributed to your lower corporate tax rate than some of your competitors, which gives you a competitive advantage.

On the other hand, your cost of borrowing is -- I would consider it to be a little bit higher than your competitors, which puts you at a competitive disadvantage. So two questions, one, how sustainable is your corporate tax rate going forward? Then what do you have in mind to try to reduce your borrowing rate long-term?

Well, first of all, to be completely candid I think neither of those has any impact on our ability to do deals. We did deals well before we had a lower tax rate, and I think did them pretty well. And we do not use the tax rate to justify deals. We always assume the same the tax rate in the location -- the statutory tax rate when we justify our deals. Because if for any reason most of these tax things have to do with government actions and if we ever lost it, we don't want to do bad deals for shareholders.

There has always been a thesis out there that, at least some of our critics have that is not sustainable that we are going to be able to continue to find opportunities. And that is not, I think -- the way we believe is our success is not going to -- our success or lack of success has nothing to do with the availability of assets. There is a ton of them out there.

If you look at how fragmented the pharmaceutical industry is, it is amazing. So there are a ton and ton of companies. Not just the publicly traded ones there everyone focuses on, there is a lot of private companies out there.

So that is not going to be the constraint on our strategy. The constraint is going to be our discipline. If we start to overpay, that is not going to create shareholder value, or if we can't integrate and execute and show strong underlying operating results.

So in my mind those are the two factories that we have to get right. I think that as we get bigger and our cash flows continue to come through, our interest rates and cost of borrowing will actually go down. There is a huge correlation to the size of the company and interest rate as opposed to anything. So that will only move in our favor.

In terms of tax strategy, I think we are in a lot better shape than we were even a year ago. We used to have one tax strategy, which was Barbados. We now have [Zoot] structure for our European business. We have an Irish structure, and we are exploring other ones. So we are creating a redundancy from a tax standpoint.

So at least in our opinion and maybe we are wrong, neither of those has really any impact in terms of our ability to execute our M&A strategy.

So with that, thank you very much for listening (technical difficulty) and we will look forward to talking to you next quarter, if not before. Thank you.

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