Bausch Health Companies Inc (BHC) 2011 Q2 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Valeant Pharmaceutical second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the conference over to Laurie Little. You may begin.

Thank you Stephanie. Good morning everyone and welcome to the Valeant second 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 Operative Officer of Specialty Pharmaceuticals; and Phil Loberg, Valeant's interim 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.

Certain statements made in this presentation today may constitute forward-looking statements. Please see slide 1 for important information regarding forward-looking statements and associated risks and uncertainties. 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 contains non-GAAP financial measures. For more information about non-GAAP financial measures please refer to slide 1. 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, August 4th. It is our policy to update our firm guidance only through broadly disseminated public disclosure. With that, I would like to turn the call over to Mike Pearson.

Thank you Laurie. My script says, good morning, but apparently it is not a great morning. But anyways, good morning to everyone and thanks for joining us. We are pleased to discuss what we believe is our strong financial and operational results for the second quarter of 2011. On today's call I would like to review our second quarter results, talk a little bit about our organic growth results, highlight some of our recent business development activities, Rajiv will then update you on ezogabine and retigabine and our US Neuro and other performance. Phil will provide more details about our second quarter financial performance, and finally I will briefly discuss our new guidance for the rest of 2011.

Each of our businesses, again, delivered a solid results that contributed to the top- and bottom-line performance. On the top line we delivered total revenue of $609 million which included $40 million from the receipt of a milestone from the GSK for the launch of Trobalt in Europe. Our cash EPS for the second quarter came in at $0.73 which includes the investment gain we realized from our shares in Cephalon which represent $0.06 per share. More important, our adjusted cash flow from operations was $260 million for the second quarter.

All of our segments continued to perform very well on a pro forma basis, delivering significant topline growth this quarter. Of course our operations in Europe benefited by the acquisition of PharmaSwiss which was fully accounted for in the second quarter. We again continue our tradition of showing our results against our original segment guidance issued back in January. Using our second quarter 2011 segment revenues you can track our progress against our original goals. With 50% of the year now gone, we have achieved approximately 54% of our revenue target year-to-date.

Latin America continues to fall somewhat short of our expectations primarily due to the matters in the first half of 2011 such as our SAP implementation in Brazil in the first quarter. However, we expect to see our operations in both Brazil and Mexico to catch up to our original forecast by the end of the year. We have overachieved on our revenue objective in Europe as we closed the PharmaSwiss acquisition in March. In the second quarter of 2011 we recognized approximately $60 million in PharmaSwiss revenue.

We continue our practice of providing organic growth achievement to our investors as an important metric to measure our progress. We delivered 7% organic growth in the first quarter of 2011 and delivered 4% for the second quarter, bringing us to 6% year-to-date. Excluding the negative impact from the generic erosion from Diastat and Efudex, the base business grew 9% on an organic basis year-to-date. This is our last quarter of tough comparisons with Diastat and Efudex going generic in the third quarter of 2010.

Other significant items impacting our organic growth this quarter include the launch of Zovirax at the end of the first quarter which led to unusually high and unrepresentative Zovirax growth for the first quarter as we discussed on the first quarter call, and thus negatively affected growth in the second quarter. Finally, we had a difficult comparison to the second quarter of 2010 when unusually high sales were reported from legacy Biovail. Our quarter-over-quarter comparisons should continue to improve in the back half of the year. Our 8% total organic growth is an annual objective for 2011 and our quarterly comparisons provide our shareholders a point of reference during the year. We are comfortable and remain comfortable with our previous guidance of achieving 8% organic revenue growth for 2011 and we believe we are on track to realize that goal.

Although we just recently conducted a conference call to discuss our recent business development activities in the dermatology space, I wanted to briefly highlight all of our transactions in the second quarter. We continue to take a broad approach to our business development strategies looking at opportunities in each of our geographic areas in order to grow and expand our individual business operations. While we know there is some skepticism regarding the availability of acquisition targets at historic levels we continue to see many areas where consolidation and growth opportunities abound and we believe the skepticism is unfounded. We completed our original initiative of 5 acquisitions outside the US several transactions ago, and continue to task each of our general managers to uncover acquisition prospects.

We remain disciplined in our acquisition strategy and average approximately 2 times revenue for all of our acquisitions since I arrived at legacy Valeant. We currently expect the Sanitas transaction should close by the end of the third quarter and both the Dermik and Ortho transactions to close by the end of the year. With this I will turn the call over to Rajiv.

Thank you Mike. Let me start by updating you on our expectations for ezogabine for the rest of 2011. As you know we received approval for Potiga in the US on June 10 and have now begun to plan for market launch with our partner GSK. Are currently undergoing a DEA review of scheduling as required for this type of drug. Market launch can only take place after this process is complete. We hope to see a launch of Potiga by the end of this year or early in 2012 in the United States.

In Europe, where we received regulatory approval back in March, we initially launched in May and have now launched in several countries in Europe including the major markets of the United Kingdom, Germany and Switzerland. While sales are slow to start, as expected, we did receive a $40 million milestone from GSK in the second quarter. The launch in Europe is targeted at the specialist community to begin with and will expand going forward. Finally, we are moving forward with the modified release formulation program and have selected a lead formulation to progress. We will be seeking regulatory agency input to determine the optimal development plan for this formulation and hope that clinical trial evaluation would offer sometime next year.

Moving now to the performance in our US Neuro and Other division unit. It is been a mixed story in the second quarter. Organic growth in the legacy Valeant business was robust once you exclude the Diastat generic impact. However, there have been significant headwinds for the legacy Biovail products. These headwinds have led to an overall negative organic growth rate in the quarter for the distance unit. Firstly, let's discuss Wellbutrin XL. We have stabilized our TRX volume and share in the fourth quarter of 2010. However, subsequent to that the brand has been negatively impacted by a new generic entry. And while this generic has proportionately taken more share from other incumbent generics, it has clearly taken share from our branded product as well. Furthermore, given that it is a primary care brand, Wellbutrin is also -- has greater exposure to Medicare and Medicaid reform. And some of the headwinds in the second quarter are also related to this aspect.

Our expectations for the second half of 2011 is that these headwinds will continue, leading to a continued overall negative organic growth rate in our Neuro and Other division of somewhere between 5% and 10%. We are continuing to implement new tactics for Wellbutrin which include an online co-pay coupon, increased use of advisory boards, as well as the launch of a smart [water] program that will help defray the co-pay for new patients.

While we are hopeful that these tactics will block the decline that we have seen of recent, it is interesting to note that while Wellbutrin XL remains a meaningful product for us, you will see a decline as a percentage of our overall revenues. While the brand accounted for 10% of Company revenues in the third quarter of 2011, this percent has declined to 7% in the second quarter of 2011. And by 2012, this number is expected to be less than 4% given the expected growth in other parts of our business as well as our recent acquisitions, thus diminishing its overall relevance to the Company.

Our learnings from the first half of 2011 indicate the difficulty in applying non-personal promotion tactics that have worked well for our legacy specialty brands to a primary-care brand with multiple generics on the market, like Wellbutrin XL. This reinforces our strategy of focusing on smaller, more protected, specialty niche markets. With that, I will now turn the call over to Phil to discuss our financials.

Good morning. Today we reported our second quarter, 2011 results. Mike already touched upon our topline growth but I wanted to provide clarity on some of our other P&L items. Our cost of goods sold percentage for the second quarter was 32%, and once again, impacted by a fair value inventory and amortization step-up of approximately $18 million, primarily related to the acquisition of PharmaSwiss earlier in the year. This is down from the previous quarter when COGS was 34%. Although there is some remaining drag from Zovirax inventories previously purchased at the higher contractual price, the full impact of the cost reduction should be realized in the third quarter.

Excluding the purchase price adjustment, COGS for the second quarter would've been 29% slightly higher than legacy Valeant's historical levels in the 25% to 27% range. We expect to get back to historical level once our additional acquisitions are closed and we realize relevant cost reductions associated with all of our deals, certainly by Q1 2012. We continue to maintain a tight rein on our expenses. SG&A expenses came in at $150 million which included a $16 million step-up in stock-based compensation that was the result of the merger. This is in addition to the traditional stock-based compensation that we record each quarter which we include in our cash EPS calculation.

We recorded approximately $30 million in restructuring, acquisition and integrated-related costs in the second quarter from the Biovail merger, the acquisition of PharmaSwiss, and other recent acquisitions. Bottom line, we achieved cash EPS of $0.73 and adjusted cash flow from operations after restructuring, legal settlements and other charges of $260 million. As we mentioned on our call just a couple of weeks ago, in the short-term we have already negotiated for a bridge loan that will cover our needs until longer-term financing is in place and we have approximately $100 million remaining on our revolver to cover any short-term needs.

We plan to put in place the appropriate financing vehicles to fund or acquisitions of Sanitas, Dermik, and Ortho. We currently expect to raise approximately $1 billion of debt paying down roughly 50% of the debt within 2 years with the remaining 50% earmarked as longer-term debt. This leaves us at a projected leverage ratio of approximately 3.7 times pre-synergy and approximately 3.5 times post-synergies, a level that is similar to where we are today after giving a full annualized effect of the Biovail-Valeant merger synergies.

During the second quarter, we continued to be active with our securities repurchase program acquiring another $68 million of our 5.375% verbal notes, bringing the total remaining outstanding face value to $103 million. This leaves close to $300 million remaining in our securities repurchase program out of the $1.5 billion we started with. Now I will turn the call back over to Mike. Thanks.

Thanks, Phil. This leads us to our updated financial guidance for 2011. As we mentioned in our press release this morning, we have raised our annual 2011 guidance. While we continue to see strong operating performance out of our business, we also have some pending acquisitions that have yet to close as well as a potential $45 million milestone payment which could potentially swing our results this year depending upon the timing of the launch of retigabine in the US.

We are very confident the total revenue will be in excess of $2.4 billion in 2011 and, as discussed, expect to see organic revenue growth at or above 8% for the year. We raised our cash EPS guidance from $2.65 to $2.90 per share to a range of $2.70 to $3.00 per share. The US retigabine milestone is included in the given range. Finally, based on this projection we believe the adjusted cash flow from operations should still be in excess of $900 million in 2011.

With all the moving parts over the past few quarters we thought it would be useful to take a look at what the underlying run rate has been in the first half of the year and our expectations for the second half of 2011. We delivered $529 million in revenue in the first quarter, excluding the Chloderm divestiture, and then $569 million for the second quarter, excluding the Trobalt milestone. Our current expectations for the third and fourth quarters, excluding any milestones and any revenues associated with the Dermik and Ortho deals, are roughly $550 million in the third quarter and $650 million in the fourth quarter.

With all of the debt discussions coming out of Washington this week we have been asked what our overall exposure to Medicare and Medicaid changes might be. Currently, less than 5% of our total revenue is attributable to government programs and we would expect that to only diminish over time. I, also, want to provide some insight as to the quarterly run rates for the third and fourth quarter in terms of cash EPS. We have always maintained that our business tends to be very lumpy from quarter to quarter and we prefer to avoid tying ourselves to quarterly guidance. However, given the with the third and fourth quarter are likely to look like and all of the moving parts of these acquisitions including the milestones from GSK, it seemed prudent to provide you with a better road map for the rest of the year.

Breaking down the first and second quarter on this chart before you, you can see the underlying operational run rate from a cash EPS standpoint. In the first quarter, we announced $0.62 cash EPS but clearly indicated that $0.06 was represented by our Chloderm divestiture. And there was a positive $0.02 from the inventory stocking due to the launch of the 30-gram tube of Zovirax. This brings the underlying operational run rate from a cash EPS perspective to approximately $0.54. In the second quarter, we announced $0.73 of which $0.12 is attributable to the GSK milestone and $0.06 to the Cephalon investment gain. We had a negative 2% impact on inventory pull through from the first quarter launch of Zovirax Therefore, the underlying operational run rate for the second quarter was $0.57.

In the third quarter, we will not benefit from a milestone and expect to deliver somewhere between $0.55 and $0.60 for the quarter. There are a number of changes in the third quarter that we expect which will offset some of the operational gains that we also expect. Before -- we have mentioned before that the collaboration accounting treatment for expenses shared between GSK and ourselves was discontinued in the fourth quarter of 2010. This means that, as we start to ramp up our pre-launch activities for the potential US launch of Potiga, we will see an increase in SG&A expenses. Rajiv also mentioned that we are moving forward with an MR formulation of which -- where we will share the development expenses with Glaxo These activities begin to increase our expense in the second quarter and will continue to increase for the rest of the year.

We also expect to increase our SG&A expenses in Canada where we recently received approval from Health Canada for Ziana and Sublinox and we will be launching these compounds later this year along with Onsolis which was approved last year. Finally, we will be bringing down all of our wholesaler inventories in the United States from 1 month to somewhere between 2 and 3 weeks. This will have a one-time impact of reducing reported sales in the third quarter by $15 million to $30 million. This is in keeping with industry trends and will benefit us with reduced distribution fees on a go-forward basis. In the fourth quarter the greatest uncertainty is we could also receive a $45 million milestone from GSK if Potiga is launched before year-end. But this event could slip into early 2012. This payment is included in our guidance range.

So, in short, in terms of our guidance, what is included is in the third quarter, no acquisitions, and the fourth quarter, we are assuming Sanitas closes and we will get the benefit of Sanitas but we are not assuming that we will have any impact from either the Ortho or Dermik deal. Obviously, if these deals close earlier, that will have a positive impact on where we will end up for the year.

In summary, our operations continue to run on all cylinders and we remain confident that the remainder of 2011 will be no different. We remain focused on building and growing each of our businesses, generating strong cash flows and producing strong bottom-line results for our investors. We will continue to focus our efforts on organic growth, margin improvement and our acquisition strategy. And in turn, we should be able to deliver on our goal to return significant value to Valeant shareholders and provide our employees and patients with a strong future. With that, we will now open up the call to questions.

(Operator Instructions)

Marc Goodman, UBS.

So, couple questions. First of all, can you give us a sense of the core SG&A line going forward, once you start to have the PharmaSwiss cost-cutting kicking in and a Biovail cost-cutting? How much Biovail synergies are there still to go to take that line item down? I know you said that you're going to spend a little bit more on Canada and a few other areas strategically, but maybe you can help us understand how much more synergies there are to go there in the PharmaSwiss.

And second question is, big picture, you've done some acquisitions overseas in some markets that are pretty fast-growing, then you've come back and done these Durham acquisitions in the US where there's a bunch of a Durham products that will grow and some that won't grow, but in all, it is not as obvious that that is as fast a grower as the other acquisitions you've made. So I'm just curious, big picture, where are you are looking next, if you feel comfortable with your US position and now you're going to continue to look overseas more? Thanks.

We are not going to give you any precise guidance on SG&A because there's an awful lot of moving parts. In terms of where we stand in Europe, obviously with Sanitas, once it closes, it also operates in a number of the countries that PharmaSwiss and Legacy Valeant operated in. So, we will achieve a fair amount of SG&A synergies across the 3 deals while we are waiting for Sanitas to close. That will obviously have a positive impact in terms of our run rate of overall SG&A from a percentage standpoint.

The net addition of Sanitas will probably absolutely increase it, as will Ortho and Dermik. The percent SG&A will decline, the absolute dollar spend will increase as we integrate these new acquisitions.

In terms of Biovail on the SG&A standpoint we are largely complete and you should not expect any improvements in terms of SG&A there. Obviously, the G&A component of SG&A will not increase dramatically, or much at all, with the integration of the 3 acquisitions, Sanitas, Ortho, and J&J because that will be integrated into the Durham units.

In terms of where we are deploying our capital from an acquisition standpoint, we have always maintained and continue to maintain that we like the businesses that we are in. When we reach a point that we don't like the businesses that we are in we will get rid of 1 of them or more than 1 of them, and we will continue to invest across our portfolio. We are committed to, over time, increasing the percent of ex-US, but we are also focused in the US on areas that are less susceptible to what is happening in the government in terms of reimbursement. It's one of the reasons we like at Durham, where most of the reimbursement comes from private payers and very little from the government.

So, we think the dermatology -- the 2 dermatology acquisitions we made will not have the growth profile of Sanitas or PharmaSwiss, but what they will bring is a much higher accretion to earnings. There are significant synergies there. And we actually think building the critical mass in the US will actually have a halo effect on all of our brands.

Gary Nachman, Susquehanna Financial.

Good morning. Mike, first question, if I heard you correctly you said PharmaSwiss was $60 million in the quarter. How much did the adjustment to PharmaSwiss impact the quarter?

And what are the overall dynamics in Europe? Are you seeing additional pricing pressure there? We are hearing that from a lot of companies. Thanks

I will take the second question first and in terms of our European business, as you can see in terms of our organic growth, it continues to be quite robust. For our pricing standpoint we continue to maintain about an average of 0% price. We will calculate it and give it to you before the end of the year. Prior years have been plus 1 for us although the market has declined a little bit and we would expect it to be about the same.

There are some challenges in Hungary where, actually the government is imposing a higher surcharge on the number of representatives you have, so it's not really pricing, it affects your cost base. But other than that, many of our products that we sell there, and an increasing portion our non-reimbursed anyways as we move more into the OTC area and the self-pay area. So we feel good about what is happening in Europe and are pleased with our continued organic growth rate.

In terms of the PharmaSwiss, the policy we have taken on reserves, I can't give you a precise number but it's probably somewhere around $5 million, is probably approximately what that represents.

Okay. And then next question for Rajiv, in the Durham business in the US, how have you guys been doing with products that you've taken over? It came a little bit short relative to what I expected in this quarter. And how you are prepared for integrating Dermik and Orthoderm over the next few months? Thanks.

Let me just first talk about the products that we have taken over, and I would assume by that that you are talking about products like Zovirax, Eladil, et cetera. So with Zovirax, we have actually seen some very good success from a prescription trend standpoint. I'll talk about 2 aspects of it. In Zovirax, there are 2 formats of this product -- 1 is an ointment which is for -- broadly used for genital herpes and a cream that is used for cold sores. The cream product that we began promoting to dermatologists early in this year, and that has been very, very successful and we are seeing prescription growth around 10% to 11% in the second quarter which is on the order that we have now seen for the brand in recent history. So that growth is going quite well.

On the ointment, we have launched a 30-gram tube and essentially concentrating the market from a 15-gram tube to a 30-gram tube. And is going as expected, the prescriptions for the ointment are expected to go down a little bit which is in keeping with our plan. We have also expanded our contact sales organization that details the brand outside dermatologists and they just started in the month of July. So, all indicators on Zovirax in terms of the changes that we made actually quite positive and I'm hopeful that in the second half of the year we can report back what those results are.

In the case of Eladil, we have just taken it over -- and we took it over on the back of a very positive FDA advisory committee meeting which was a review of all of the safety literature related to Eladil. It was actually came up with a very positive and strong endorsement of continued precedence for the brand. So what we are doing at the moment is creating promotional materials and we expect to launch a pre-[force] promotion for the first time in several years for Eladil starting in, late in August or early September. So I think in terms of -- similar to the reps we expect to launch that in the next few weeks with our contract sales organization, as well as with our own field force. I think good progress on all fronts.

With respect to the integration we continue to -- obviously, we are working this period doing regulatory reviews, we are doing as much planning as can be done. But the integration is going to be fairly simple, which is that -- clearly, we had already expected some expansion in our field force with the addition of Elidel, but the product that we get from Orthodermatalogics and Dermik are very good complementary fits. So we expect there to be some synergy in the field force, but we also expect to be able to detail the impact portfolio in a pretty effective manner to the dermatology population.

Since these are active deals, we're not picking up a lot of G&A spend or anything of that sort, so it's mainly sales and marketing integration which, given our prior experiences we would expect to do upon closing or very soon thereafter. And then don't really see any major complications in those integrations.

Okay, very detailed response. Thanks. One very quick follow-up. The CSO, how many reps are in there helping you and then you are currently at 100 reps. How quickly do you think you'll get up to the 125 to 150 range that you are targeting for that business?

With respect to CSO, we are right now at 50, so we have brought it up from 35 representatives -- of course, we've expanded that by 15 it. And we are currently roughly at around 90 reps in our therapeutic dermatology business. And certainly with the integration of Orthodermatologics and Dermik, we would expect to expand that number. Now, frankly we have not decided what the final number is. We are in the process of doing our combined portfolio review to figure out exactly how much field force support is needed, but we would expect to be at our desired critical mass of field force by the time the deal is closed, which is hopefully by the end of the year.

Okay. Thank you.

Greg Gilbert, Merrill Lynch.

First for Phil, would you provide for us accounts receivable and inventory at the end of the quarter and can you also give us Wellbutrin and Zovirax sales?

Yes, the AR at the end of the period, and we will be filing our Q here momentarily -- just over $400 million or so. And inventory is running, probably be around 250.

We don't give specific product sales.

Okay. Phil, can you comment on why the tax rate was so low in the quarter and how, bigger picture on the tax rate, how would you describe to an investor, new or existing, how sustainable your tax rate is over time and what gets you there versus --?

A couple things for the quarter, we had favorable resolution of some audits, closing down some previous audits that had been outstanding, as well as the timing of some of the benefits of our tax -- of our write-offs that were particularly related to Q2 on a tax basis. That benefited the tax provision in the current quarter. On a go-forward basis we expect our cash tax rates to be sustainable in the low-double-digits, high-single-digit range. And that reflects our structure --

Our cash tax for the planning period as far as -- it will be under 10% which is what we have guided. We continue to find ways to optimize our various tax structures. In fact, we were down in Brazil earlier this week and there's some real opportunities there. So, it's not going to be the same every quarter, but we certainly expect it to remain in the 6% to 8% range.

So, is safe to assume that it was lower than expected and therefore the pretax income picture was a little different than you expected?

Yes, it has to do with the mix, the timing and the mix of US profit versus overseas profit. Obviously the use of NOLs.

All right. For Mike, a bigger picture question. Part of the bull case on Valeant's tied to the ability to do 8% or better organic growth and then M&A deals would drive upside to that. My question to you is, what can you say to make investors comfortable on the 8% organic growth goal given the first half of 5% to 6%? Any specific drivers other than just comparison issues in that would drive that acceleration? And in the meantime, do you think layering on a bunch of new deals beyond the ones that you've announced would be appropriate as you try to drive that 8% or better organic growth? Thanks.

Organic growth rate year-to-date is 6% -- well it is 6%, I don't think. I think if you look at the revenues from the pro forma revenues from last year you will see that there was a big second quarter which is unusual for our business. It indicated that there were more sales for whatever reason from Biovail. That is probably worth 2% to 3%, quite frankly in the quarter.

More important is the number of product launches and things that are happening in the back half of the year. We talked about the 3 product launches in Canada which will be significant. We believe that we will be able to, as we talked about, actually really increase Zovirax. We are still running through the issues of inventory out in the channel, but the prescription trends are quite positive which will help in terms of the dermatology organic growth rate which we expect will increase significantly the latter half of the year.

We think Neuro is probably going to be a little lower than we expected, but we are getting very positive results in Brazil, Mexico and Europe, and Australia which are well into the double digits. Obviously, Efudex and Diastat, those are the 2 largest products that Legacy Valeant had and represented over $100 million of sales, so it is not a trivial -- it is not trivial that those sales are down to minimal sales and we have absorbed that with a positive growth rate and we won't be absorbing going forward. So if you do the math, it is not that hard to come up with how we would expect to get to 8% percent, but again, we will see. We feel comfortable, and time will tell.

Chris Schott, JPMorgan.

Great, thanks very much. First question is on Durham. You've made 3 significant moves in a short period of time.

Should we expect that you are done that with business development in Durham until you can integrate these assets or are you still looking to consolidate more assets in the Durham space in the near-term? Tied with that, can you also highlight to us the top products for Dermik and Ortho? Are there products there that you clearly see the need for additional focus or resources? I just got a couple quick follow-ups after that.

On the second question, since we are going through FTC review we would prefer not to comment. And on the first question, in terms of other Durham deals versus other deals, again, we look for value and we are opportunistic. So we are always assessing multiple deals at any period in time. Some we end up doing and many, many we walk away from. And we also consider integration and the impact that will have on our ability to continue to drive our organic growth rate and our overlying performance.

But I can't answer your question of, is this it for Durham, it all depends. If another Durham acquisition emerges that fits in with our business and is at the right price and the right timing, you can't control when people are willing to sell, we'll do it. But, we are also actively looking in other parts of the business and as I think you can expect, what we've done in the past. Over time, we continue to add acquisitions to each of our different business units, but it is impossible to answer the question of whether we are done for now with Durham.

Fair enough. Wellbutrin XL, the roughly $40 million or so you did this quarter, is that a decent run rate to use going forward given the dynamics of the market or should we expect a further step down in that business?

We are, for our planning purposes, assuming that the brand continues to decline at a pretty aggressive rate. Rajiv outlined a whole bunch of programs we are putting in that we hope to stem the decline, and we will see if we are successful. If we are, that is an upside. But we are not assuming success. We are assuming that the brand continues to not do as well as we originally projected and we are making it up in other areas to the extent that some of these programs work and we are more successful, we will take that upside.

Okay, great. And the final question. Any comment, and I' m not sure you will have one, but any comment on the press reports that you have approached Meda and just any interest in that asset?

No, we don't respond to rumors.

Fair enough.

Louise Chen, Collins Stewart.

Hello, just a few questions. First one, can you remind us how you are defining organic growth for Valeant? And then my second question was, any notable price increases this quarter for your key products? And the last question, I was wondering if you could you just tell us how you are thinking about market opportunity for Potiga in the US?

Last one was?

How are you thinking about the market opportunity for Potiga in the US?

Oh, Potiga. Our organic growth rate is products that we have owned in the last year, for at least a year and how those have increased year on year. The only exceptions we make to that for pro forma is major, major deals like the Biovail deal. So, obviously we -- technically, we are still a Biovail entity and in our base, if we reported just organic growth on Biovail that really doesn't give you a sense so we are using our pro forma financials from last year for Valeant, adding them together with Biovail, and seeing how we are doing against both of those.

We will apply that same methodology to PharmaSwiss and Sanitas, because if not, we will end up reporting organic growth just on Legacy Valeant for a full year, which makes no sense since 2/3 of our business will be this. So what we'll do is growth over the prior year for those. So for the larger acquisitions we use pro forma; for the smaller acquisitions we just completely take them out until they have been with us for a year. So I would expect for the Durham acquisitions we have made in the US, we'll do the same thing, pro-forma because our Durham business will be -- 2/3 of it will be new opposed to historic.

So we take out -- we adjust, which is currency, which has had a significant impact in Europe -- positive impact this year in all our markets. We take that out, and then we take out the acquisitions. So either the full acquisitions, or smaller ones, or what that acquired company sold the year before.

In terms of your question on Potiga, what else -- price increases.

The significant price increases this quarter is Elidel. When we acquired Elidel it had not had a price increase for many years and was at a huge discount to its competitor product, and so we took the price up to where the competition was. So, not at a premium but not at a discount. We just took it up to -- it was not really -- as Rajiv said, it had not been promoted for years and was just being, I think, frankly treated as a bit of a tailbrand. So we have a significant price increase on that compound.

And the only other significant price increase which was a not a price increase, it's just we doubled the size, it was Zovirax 30 gram, because it is twice the product. So each script will be worth twice of what it was, which is why the number of scripts in that area has dropped about it has dropped a lot less than 50% -- it's to Rajiv's point, why we expect very good growth with Zovirax. Other than that pricing has been minimal in the US.

In terms of Potiga, we expect very little sales this year -- it may not even get approved this year, which I think is specific. We expect the ramp-up of Potiga in the US to be similar to what other epileptic drugs have been. If you look at Lamictal or any of the others, we expect it to be the same. I think the real question is what are people's peak year estimates for Potiga. Both Glaxo and us think that sort of the analyst consensus is on the low, quite low, but, again, we will see. We will see if we can achieve what we expect to achieve.

Lennox Gibbs, TD Securities.

Good morning, thanks. The warning letter. Now I understand that Sanitas is somewhat outside FDA jurisdictions, so I'm more interested in the EMEA risk and the internal path forward. How probable is it that the EMEA leverage that letter and somehow intensify the oversight of the facility or even seek corrective action? That is the first question.

Obviously, we don't own Sanitas yet so our ability to give you a really precise answer is limited. But they have been very open with us in terms of this and have opened up -- and involved us in the discussion and we actually think there is very little, if any risk in terms of what we are selling in Europe. Sanitas had a long-term plan of selling product in the US. We don't expect to sell Sanitas product in the US. We have no sales forecasted, or no intention.

We plan to use that facility just as a sourcing facility for Western Europe, and as we have also mentioned, once we acquire Sanitas we will have 4 plants. In the end we will not have 4 plants. You do the math and figure it out.

So is it fair then to think that the EMEA does not necessarily look at this and take a closer look at the facility as a result of what you are seeing coming out of the FDA?

Obviously, the agencies talk and it is public communication. I think what I am saying is we feel very comfortable with, based on what we know, that we will continue to be able to supply the markets that we are supplying.

Excellent. Thanks very much.

David Amsellem with Piper Jaffray.

Couple questions. One coming back to the organic growth of the US Neuro business excluding Wellbutrin XL. Specifically, anything you can do here to boost the growth of other products in the segment? And do you think there is a good bit of room to take price on any products in the segment?

Historically we have done a pretty good job of using non-personnel promotion and some pricing to continue the organic growth in Neuro and Other. I think what we have learned, as Rajiv said, that for a large primary care product, it -- some of the techniques that we have worked in the past for us have not worked as well. We're trying some new things.

So I think we are assuming that we can't improve anything in terms of our forecast and our guidance, and that results will stay the same. But to the extent that we can do things, it will only improve. We are looking at everything. We are trying some things. The things we are trying, we think will have an impact, but we would rather share positive results then make any commitments at this point in time.

You mentioned primary care but most of the products in this segment are specialist products. I'm just wondering, what specifically are you doing with the products that are geared toward the specialist setting?

Are you asking, what are we doing with the specialist or the nonspecialist products?

The specialist products.

We do a lot of tactics, a lot of Internet-based tactics, a lot of reaching out to physicians in nonconventional ways. We have a long series of things that we do, that again, we don't get into specific details because if they are working, we would rather keep that information to ourselves. We can tell you about some of the things we've done that haven't worked, but that's probably less interesting.

Okay, and then on the acquisition environment, where do you think you can still do deals for the 2 times revenue average that you cited? Is it in dermatology Is it in brand generics overseas? Is it other areas? I guess I'm looking on more specifics on where you think asset prices are still attractive?

As we look at Europe this year we have made 2 significant acquisitions, one was below 2 times sales and one was above. So we think can still -- the one that was above had a much higher set of margins and much higher growth in terms of what it is expected to do.

Latin America, I was just in Latin America this week, prices have really ballooned up with -- Sanofi bought Medley, [Hypermarkets] purchased MantiCore and Pfizer purchased, I forgot the asset they purchased. We're setting the price levels up. What's happened in that market since that time, Hypermarkets which is a public company has lost about 70% of its value, so prices are declining there and we are just waiting until the prices come back to the levels that we bought Bunker or Delta at. And once they get to those levels and we can find deals. We decided to sit out while the prices were quite high.

I think in Australia -- again our histories divide about that. I don't think thing's have changed too much in Australia. I think Dermatology --we paid less than 2 times sales for both of these assets.

So, we continue to believe that at that level on average are not every acquisition -- some will be a little higher, some will be a little lower, that we can still do that and that there are opportunities out there. And we don't think it's just in the dermatology space. I think it's -- we are looking around the world.

Okay, and then very quickly, on the Sanitas acquisition, if you excluded the impact of Sanitas in 4Q, then how does that impact the $0.80 to $1.00 EPS range of that you cited?

It is not very significant. It's quite small. We are assuming no synergies. We are assuming current run rates because we don't know.

We included it in the revenue guidance because we think it will close, so it is in the revenue guidance, but we don't assume much for the quarter in terms of operating income. We don't know when it is going to close. When we give you-- so we are being -- obviously we want to be able to hit the numbers that we give you, and not have things that we can't control, which is timing's of approval built-in.

Thanks.

The only one that we really built into the range is the retigabine because it is such a large number. It is another $0.12, or something like that. That one is on the upper end. That is the only event that we don't control that we included and that's why we specify that that is in our range right now. Other than that we are assuming the business we have.

Corey Davis, Jefferies.

Thanks very much. I just have 2 questions. First, you cited in your prepared remarks and even later, headwinds for the legacy Biovail products. But, bigger picture-wise, that really should not be a surprise if you buy older products, especially ones that have generic substitutions, these things should decline over time and not be growth contributors. So I guess, what is the message there about your ability to reverse the trajectories of other acquisitions that you do like Ortho or Dermik, that have declining products that are not necessarily in the same bucket as the ones that you got from Biovail, which from my mind from the very get-go never should have been viewed as sustainable at those levels?

I think that we thought we could do a little bit better with the Biovail products, to tell you the truth. I don't know that we've been able to, especially the primary care and especially Wellbutrin. Obviously, Biovail acquired Valeant, but it was more as a merger of equals. So our forecast originally for the year were higher for Wellbutrin.

Fortunately we've been able to make it up in other parts of the business. There's been a couple of negative impacts. A big one has been gross-to-net to tell you the truth because with the new healthcare reform, when we talk about our exposure to Medicare and Medicaid, it's really Wellbutrin and a few other products.

The changes the government made has had a significant impact on gross-to-nets, so we are getting a double whammy. But clearly we didn't do the Biovail deal in order to get Wellbutrin. That was not the asset that was making the deal. Whereas when we specifically go out and buy product deals we obviously feel a lot better about -- there are other things including tax rates and other things involved in Biovail that made it a very attractive asset. In the case of these others, we feel better about our ability to have an impact on the product growth.

Specifically then on Q3 in your guidance, and thanks in general for all of the granularity, but it is still not clear to me why Q3 revenue should be down sequentially. Is that all a function of bringing inventories in the US down, and if so, I thought you did that already a couple of quarters ago. Did something change there or did inventories actually come up in Q2 that now need to come back down to this 2-week level?

No, if you go to 2008, if you read the scripts, when I joined legacy Valeant our inventory levels were at 2 months and we took them down to 1 month. What we talked about a few months ago is that we are going to put new distribution agreements in that would bring inventories down. They were at 1 month, or they are at 1 month, they are declining this quarter.

We signed the distribution agreements, but most of these distribution companies close at the end of the second quarter so it is a third-quarter -- other companies are doing the same thing. We are taking it down and we quantified that at somewhere between $15 million and $30 million of impact on the revenues in the quarter, in terms of what that is. So, our underlying business we are assuming continues to grow, at a higher organic growth rate than it did in the second quarter. So we can -- Laurie can work with you in terms of the arithmetic offline, but I think you will see that it's largely this impact of drawing inventories down.

Last question would be your stock down while most 17%, I think the weakness in the US is eclipsing your success in other regions. At least in Europe, can you tell us how many new products were launched in the quarter and how many you have slated for the rest of the year?

Number of products in the US --

Just in Europe.

Oh in Europe -- back half of the year? I can't give you a precise number, I apologize. Probably it is somewhere between 5 and 15, probably about 10.

Perfect, that's all I had. Thanks Mike.

David Risinger, Morgan Stanley.

Thanks very much. I had a couple questions. First is a product question and then some financial ones.

With respect to Potiga, I had thought there was a lot of speculation about you selling this asset, and I'm just wondering where that stands, whether that's a possibility or not. And then turning to financials, I believe there was a comment about Medicare and Medicaid reform impact in the second quarter. I am just wondering why it was in the second quarter, or what was different about the second quarter than the first quarter. Was that additional reserve adjustments or something like that?

And then 2 other small questions on the financials. What was the contribution from the and 30-gram Zovirax ointment in the second quarter? And what was the FX benefit to second quarter EPS please?

Okay. In terms of divesting Potiga, everything we own is for the right price for sale. So, if we get the right price -- the question is how big of a product that will be? And we continue to believe it's going to be substantial. And so the price we expect would be substantial.

So, again, could it happen? It could happen but if it doesn't happen we are quite happy with our arrangement with GSK. I'll let Rajiv cover Medicare and Medicaid.

First, contribution of Zovirax, we quantified it I think that it's because of the inventory load in the first quarter, that probably cost us $0.02 in the second quarter. So actual net sales of Zovirax were down substantially in the second quarter. That trend is obviously reversing in the third quarter. It's because there was a load-in of the 30 and the 15 needs to clear the channel. We tried to signal that at our first quarter earnings call.

The FX benefit, I will let you go to the press tables. It is all in there which you can sort out and the Q will be up. When is the Q going to be up?

It will be up by Monday.

It will be up by Monday, but you can figure it out off the press tables. Rajiv, you want to take the Medicare, Medicaid?

Yes, on the question with respect to health care reforms, if you take the 2 pieces separately, as you know with Medicare/Medicaid reform, that rebates from the government has gone up. So what we are seeing on that one is the utilization of the product in Medicaid has gone up substantially over the course of the last 2 to 3 quarters. That explains that part of the equation.

And with respect to Medicare, there's always been a little uncertainty as to what impact the donuthole coverage issue will have. I think we are now coming to the point where we are beginning to realize some of that so those are the 2 elements that have led to the impact in the first and the second quarter.

So it's been first and second quarter, we didn't release reserves or anything. It is actual payments. It had an impact first and second quarter, but it is actually increasing the impact -- more of our sales are go into that population.

And then on the currency question, the impact quarter on approximately $5 million to $10 million. So the -- if you would neutralize it, it would reduce your income by $5 million to $10 million.

Thank you.

Alex Duran, Permian Investment Partners.

Given the bizarre share price reaction to today's fairly robust results, how do you compare accretion from buybacks versus acquisitions you currently have in the pipeline?

Personally, or as a Company? But obviously -- it is at a lower price obviously, buying back shares becomes a much more attractive option for us. Buying back from [Berts], that type of thing, because of the return.

Our view in terms of our outlook for our Company based on this quarter remains unchanged. Our view at least is the same. Clearly it is a much bigger opportunity than it was 3 hours ago.

Thank you.

Tim Chiang, CRT Capital.

Thanks. Mike, you did give some guidance for third quarter and fourth quarter for this year. Is there any material changes you expect on the margin front -- gross margins, operating margins, from what you reported in the second quarter?

We talked about some of the movements in terms of what's happening. We expect R&D and some of the sales and marketing to increase, and we also expect our COGS to decrease in terms of some of the line items on a relative basis. In terms of overall margins, we probably don't expect any kind of major swings.

And just on the stock buyback question earlier, how much stock are you currently authorized to buy back?

We have a $1.5 billion securities authorization program and I think there is $300 million left at this point.

Okay, great. Thanks.

Juan Sanchez, Ladenburg.

Only one question. What is the share count for the second half of the year? I know some convertibles are kicking in, so what would be a specific number of shares for your guidance?

It's approximately 330 million.

But the second half of the year will be lower because that was the average of the third quarter -- second quarter when we bought back the converts. So we can't give you the precise number now, but it will vary. It will be one positive impact of the decline in stock price too.

Thank you.

(multiple speakers) -- obviously a lot less -- yes on the converts

Thanks a lot.

Bill Tanner, Lazard Capital Markets.

Thanks for taking the question. Mike, just back on the warning letter. I guess appreciate in this instance it's perhaps irrelevant if the company was not anticipating selling anything in the US, but how do you think about going into these emerging markets just in terms of the risk therein? And I guess with the local regulators at least, could you speak to how much due diligence has been done historically? Any effort to step that up or is it contemplated that most of the acquisitions really are not going to entail any significant manufacturing?

Sure, we do do a pretty extensive due diligence when we make these acquisitions. In terms of Sanitas, we certainly looked at all the European approvals and everything else. It was never our -- Sanitas' intention, to be clear, was to sell into the US. Since they are still a separate companies I guess that is still their intention. Once it closes, that intention will change because our view is different.

But in terms of the due diligence we do, we think it's pretty extensive. And again we feel, obviously, getting the warning letter was unfortunate but we don't see it having any impact on the acquisition.

And not having any impact I'm guessing on just the general strategy. This is something that you feel you could adequately de-risk or do diligence?

We've picked up probably 20 plants or something since I've been here and a we've done the same due diligence. This is -- to the extent we are not trying to sell the US it is an irrelevant item. So obviously if things change and we start getting a lot more problems in some of the acquisitions that we are doing, we would obviously change things. But we don't think -- now that we've analyzed this specific situation, we don't think it actually is that germane.

David Maris, CLSA.

Hello, just wanted to build a little bit about that, Mike. You said that -- last quarter I had asked about the timing of deals and digestion of them, and the last caller asked about the due diligence ahead of time. I appreciate the, hey, they're not coming into the US, but the warning letter had to do with sterility testing and API vendor qualifications. So how much of this do you think -- isn't maybe from a regulatory standpoint an issue for the European regulators, but when you heard about this warning letter, did you go back to the bankers or back to the company and say, look, we maybe need to remediate these things and we need a lower price?

Do you contemplate stepping away from this? Is this -- give the investors some sense that there is enough due diligence that the long-term issues with this type of situation, again, the API qualification and the sterility, that's not a problem -- it gives me hope that, hey, guess what, US consumers are not going to get that product, but that the products that you are making are products that meet the highest regulatory requirements.

I guess I am trying to figure out how to answer your question because it's about our future. And I guess what you are saying is -- what you're posing is that maybe we've done pretty poor due diligence on our acquisitions and we are going to have a plethora of issues on the manufacturing side? Is that what you're asking?

That's a little harsher than I meant it. What I mean is, on this deal it seems that -- you have done a lot of deals, in this deal you get a warning letter. Some investor's have said, hey wait a second, that is a pretty serious warning letter. You have laid out why it is not a practical issue in the US and it might not be in Europe because maybe the plant exists a year from now, maybe it doesn't. Maybe that transferring products takes longer than expected.

But going to the basic, hey, we do acquisitions -- you stepped away from Cephalon, that showed great discipline. Is this one where you say, you know what, these are problems -- we don't want this type of manufacturing problems -- API vendor qualifications -- let's just step away from this? Or when do you say, hey this is too many problems and no, this really is not a problem?

I think that is a very fair question that we clearly try to do good due diligence. We don't want problems in the acquisitions that we've purchased. Our regulatory -- head of regulatory, has been involved in this both in Europe and in the US. I have had discussions with the FDA, and we are sorting through these. So we don't think this is a big issue. I guess time will tell.

We try to do good due diligence, and we think that we are doing the types of due diligence that other people do. Certainly based on the due diligence we used to work with on companies when I was at McKinsey, we are not doing any less. So we hire outside people; we always use outside lawyers on these; we hire outside accountants; we hire outside consultants in regulatory issues to review these things.

So, I think the real question is, if this is 1 event and 2 years from now we have no more, I think you would probably agree it is probably not an issue. If in the next 2 years we have 10 more of these, I would say yes, that was a very big issue. So I guess we will just have to see whether this is the first of 20 or a one-off. Our view is it's one-off, but that's what I'm talking about futures, you can't predict. So I guess investors will have to make their own determination whether this is the first of many or this is an issue that is a one-off -- each investor will make their own decision.

Thank you very much. Again, I appreciate the directive.

Greg Gilbert, Merrill Lynch.

Thanks, back to the IMA discussion. You've had IMAs in place, did the terms of those change or are you making proactive changes within the existing terms?

We negotiated -- when we did the merger with Biovail. One of the things we negotiated was new distribution agreements with all the major US distributors. Because we were a larger Company, you obviously get cheaper prices. And at that point we agreed that we can get even less price if we took down the inventory in the channel by an additional 1 to 2 weeks to put us somewhere between the 2 and 3 weeks, obviously depending on the product.

And that seems to be where you will settle out, right? That sounds pretty industry-standard at this point.

That is where we will settle out unless we go back and negotiate again. For the next year that is certainly where will be and that was the agreement that we put in place. I think we talked about it -- I think today we are at 0.9 of a month, and by the end of this quarter we will be somewhere between 0.6, 0.7, somewhere in that range.

And are you comfortable with where you are in ex-US markets from an inventory management standpoint?

Yes, we are 2 weeks in Brazil, I think we are at 2 weeks in Europe, and I think it is a couple weeks -- well, in Mexico it is a little harder -- it is a little higher in Mexico, probably closer to 6 weeks in Mexico. In Canada I think we are at about a month. So, the reason we are lower in some of those other countries is we are larger relative to the market. So we don't think any of that is going to change in the foreseeable future, but it will somewhat depend on the distribution industry as well. Any impact we will have, other companies will have as well.

Lastly for Mike and perhaps Phil, do you feel you have the financial capacity to buy back material amounts of securities in the near term and close the announced deals and pursue additional ones?

I guess it all depends. It depends on the additional ones. Certainly with the ones that we have planned and announced, we certainly would have that flexibility.

In terms of our financial covenants we have room in them as well. We have some leverage-ratio covenants and some interest coverage ratios, but we look for the best blend.

Greg, I did want to add another comment on your prior question with regards to our tax rate. Our cash tax rate as a percent of non-GAAP will be lower; I was referring to our cash tax as a percentage of our GAAP earnings. It's more in the 5% to 7% if you take the non-GAAP earnings.

That is what you believe is the sustainable level going forward, right?

I think it is sustainable under 10%.

I think we, in previous calls said 6% to 8% and presumably if we get under that no one is going mind.

Okay, thanks.

Douglas Miehm, RBC Capital Markets.

Good morning. Just with respect to Australia can you tell us what is causing the out performance there? I guess as a starting point?

This is Rajiv. Australia is a very good example of how our product acquisitions are really beginning to pay off. So much of the organic growth that you have seen now is contributed by Derma -- the DermaTech acquisition which we did actually in the beginning of 2009. Dermaveen which is the primary product that we bought from our acquisition which is a colloidal or cream-based skincare line. It is a growing extremely well. I think it's growing at a rate of more than 50% year-over-year.

We have also had a lot of work we've done around the lines of that we acquired from Private Formula International, which is primarily Dr. LeWinns. It was primarily a pharmacy-based skin care line; we actually introduced it into the grocery line for the first time this year. So those 2 things are driving the growth but beyond that a lot of the smaller suncare acquisitions that we have done are also growing as well. But it is primarily the DermaTech and PFI acquisitions that are driving the organic growth at this point.

Okay, great. And then maybe a question for Phil. If we were to look at the cash flow generated in the quarter and maybe make some changes with respect to the one-time items that Mike highlighted in terms of the guidance. Can you tell us what your adjusted number would be taking that into consideration?

It would still be over 200.

It would still be over 200? Okay, great.

We have a negative on Zovirax and a positive on the Glaxo payment and [Cephelon]. I think if you put them all together it would be about 220.

Okay. And finally just with respect to the guidance, I just wanted to clarify a couple of things. The $2.65 to $2.90 originally did not include the $0.06 that you reported this quarter but the $2.70 to $3.00 does. And then could you maybe go over the Sanitas again, how you are approaching that right now. And then just with respect to the Potiga milestone payment in Q4, are you looking at that on a risk adjusted basis that you get it or are you including the full amount? How should we think about that?

I think basically you could look at it that we did not increase our guidance this quarter if you take the $0.06. And the reason we did not is because of some of the things that are going to happen in the third quarter.

So we expect improved operating performance, but there's going to be some one-timers in the third quarter that we will need to overcome. The biggest being the drawdown of -- we are going to sell 11 to 12 weeks -- we'll have11 to 12 weeks of sales in the US rather than 13 in the third quarter. So that's a substantial hit on EPS. In a sense, we will make that up, is what we are saying this quarter. And we also have some other higher expenses coming through, so instead of a raising guidance by another $0.05 or $0.10, what we are really saying is we will absorb the reduction in sales in the US and not change our guidance.

In terms of the $2.70 to $3.00, there's a lot of items that could happen that would get us in the range. I guess what we are saying is, if Potiga is not approved in the fourth quarter, and we don't close any of these acquisitions, we will still make our $2.70. Obviously, if everything happens, if we close our acquisitions early, we get Potiga approved, et cetera, our number will be much better. But we wanted to give you a range of numbers that we believe that anything that is that not controlled, we can still make.

Okay, thank you.

At this time there are no additional questions. I will turn the conference back over to Management for closing remarks.

All right. Thank you very much for your questions and we will see what happens next quarter.

Thanks. Goodbye.

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