Bausch Health Companies Inc (BHC) 2013 Q1 法說會逐字稿

Good morning. My name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the Valeant Pharmaceuticals first-quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I'll now introduce and turn the call over to Ms. Laurie Little, Head of Investor Relations. You may begin your conference.

Thank you, Tracy. Good morning, everyone, and welcome to Valeant's first quarter 2013 financial results conference call. I want you all to know we're having some technical difficulties on our website, and currently our slides are not available and we apologize for that. We are working quickly to get a copy of the presentation up on our website, and we will let you know during this call as soon as they are posted. Presenting on the call today are J. Michael Pearson, Chairman and Chief Executive Officer; and Howard Schiller, Chief Financial Officer. In addition to the live webcast, a copy of today's slide presentation will be found on our website under the Investor Relations section, hopefully quickly.

Today, certain statements made in this presentation may constitute forward-looking statements. Please see slide 1 for important information regarding these 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 these non-GAAP financial measures, please again refer to slide 1. Non-GAAP reconciliations can be found in the press release issued earlier today, and posted on our website. Now, I'll turn the call over to Mike Pearson.

Thank you, Laurie. Good morning, everyone, and thank you for joining us. As you have read in our press release we began 2013 with very strong operating results. On today's call, I will review our first-quarter results and performance, provide an update on recent activities, and then turn the call over to Howard, to provide a financial update, deal update, and review of our new guidance for 2013. After our remarks, Howard and I will be available for Q&A.

This morning we reported Valeant's first-quarter results for 2013, where we again delivered strong growth, profitability, and cash flow. Total revenue in the quarter was $1.068 billion, our first $1 billion quarter, as compared to $790 million in the first quarter of 2012, an increase of 35%. Product sales for the quarter were $1.039 billion as compared to $751 million in the same period in the prior year, an increase of 38%. Our first-quarter cash EPS was $1.30 per share, or an increase of 43% over 2012. If you remove the Meda royalty, cash EPS would have been approximately $0.02 lower. However, now that Zovirax has gone generic, we estimate the full 12-month run rate royalty to Meda to be approximately $0.01 a quarter, and therefore, we will not be making this adjustment going forward as it's immaterial. We did not have any one-time items in 2013 in the first quarter, and as we have promised to our investor we are excluding the one-time gains on the divestiture of the two dermatology products, and our foreign exchange gain related to the acquisition of Inova from our first quarter 2012 numbers.

Adjusted cash flow from operations was $345 million for the quarter, an increase of 35% over the prior year. Organic growth continued to be strong for the Company, despite the added generic pressure on certain brands. As previously disclosed, we made a change in our segments this quarter and renamed our US dermatology unit to US Promoted. This portfolio delivered same-store sales growth of 6% for the quarter. However, if adjusted for the additional generic impact from BenzaClin, this segment grew 12% on a same-store organic growth basis. I would also like to note that during the first quarter we reduced the Medicis dermatology wholesaler inventory levels from over two months in the channel to approximately one month, as we harmonized wholesaler contracts between Medicis and Valeant. Excluding this additional impact, pro forma organic growth was 7% for the quarter, for our promoted products segment.

Now, let me turn to our US Neuro and other business. Due to the stabilization of Wellbutrin, coupled with the growth of a number of our orphan products, US Neuro and other EBITDA stayed flat versus 2012. Despite a significant decline on our partnered products, for example, diltiazem CD and Adalat, which has significantly lower operating margins, and a slower launch of fenofibrate, which also has limited profitability. For the full year 2013, we expect our Neuro and other business to show flat to slightly positive top line growth, however positive EBITDA growth versus 2012.

The Canadian/Australian operations have several brands that exhibited strong growth this quarter such as COLD-FX, CeraVe, and our prescription dermatology business. These gains were more than offset by the decline of Cesamet that went generic at the end of the first quarter of 2012. The Cesamet is excluded, and our Canadian and Australian businesses grew 5% on a same-store sales basis. Our emerging markets continued the exceptionally strong growth seen in 2012. The biggest contributors this quarter were Poland, Russia, Brazil, Southeast Asia, and South Africa. As we go forward, we plan to exclude the Zovirax ointment from our organic growth calculation, and with this adjustment, we expect mid-single digit organic growth for the rest of the year.

To give you a better sense for what is underlying the strong growth in the US Promoted business, slide 5 which you'll eventually see, shows which brands are performing ahead of or behind our budget this year. The budget of course forms the basis for our guidance. The brands that are performing ahead of budget include Acanya, Arestin, CeraVe, Dysport, Restylane, and Perlane. We would also like to note that [Olapharm] continues to grow double digits and CeraVe continues to be the fastest-growing facial care brand, with growth of over 40% in the quarter. The other brands that shown on the slide are Ziana and Solodyne, which are performing at budget, and Zyclara, which is performing behind budget.

Turning to the emerging markets. As I mentioned earlier, all of our emerging markets are doing quite well. For the last trailing 12 months, we have seen phenomenal growth in these operations. We continue to deliver organic growth rates well above the industry. Furthermore, the emerging markets segment, in its entirety, is becoming a significant business for Valeant, with the last 12 month sales exceeding $1 billion.

Finally, before turning the call over to Howard, I would like to address some of the softer elements of the Medicis integration. Based on the suggestions and recommendations of senior leaders whose joined us from Medicis, we have embarked on an extensive and comprehensive set of activities to spend time with thought leaders in the dermatology, esthetics, and plastics communities in the US and Canada. For example, I have personally attended six city dinner meetings, four industry conferences, and have had one-on-one meetings with over 50 thought leaders in the last two months. Howard and the rest of the senior team and most of our Board of Directors have attended a similar number of events. While it will clearly take us time to develop the extensive network of relationships and the dermatology effects on plastic surgeon communities we eventually hope to have, feedback to date on our outreach has been extremely positive. With that, I would like to turn the call over to Howard.

Thanks, Mike. Today, we reported our first-quarter 2013 results. As mentioned, we're very pleased with the performance of our business, and are confident in our ability to deliver superior results throughout 2013. Total revenue in the quarter reached nearly $1.1 billion, a 35% increase over Q1 2012, excluding the one-time items Mike mentioned. We're excited to report our first $1 billion plus quarter. Our costs of good sold for the quarter was 22%, which is a decrease of 3 percentage points as compared to the first quarter of 2012, due to a favorable product mix, global plant consolidation, and other initiatives. We saw improvement in both our developed and emerging market segments in our cost of goods sold.

SG&A expenses as a percentage of sales were relatively high this quarter, due to several legal and other expenditures related to Medicis. We expect SG&A as a percentage of revenue to return to historical levels in future quarters. R&D expense was $24 million for the quarter or about 2% of revenue. Similar to SG&A, we expect R&D expenditures to fluctuate quarter-to-quarter but stay in this relative percentage range in 2013. Operating margins for the first quarter of 2013 were 52% of revenue, a 3 point decrease from 2012. The decrease was primarily due to the increase in SG&A that I outlined a moment ago. The bottom line is we achieved cash EPS of $1.30 and adjusted cash flow from operations of $345 million.

Now, I just want to give you an update on the Medicis deal. We have previously shared with you the synergies that we expect to achieve through the Medicis integration. We originally estimated approximately $225 million of synergies, and then raised that to greater than $275 million in run rate synergies by the end of 2013. We now expect to achieve greater than $300 million in run rate synergies by the end of the year. In addition to the synergies, we have recently settled litigation with Actavis with regards to both Ziana and Zyclara. In our deal model, we had Ziana going away at the end of 2013, and Zyclara, on a standard schedule beginning to go away at the end of 2013. We have now extended the life of these products to July of 2016 and January 2019 respectively. These settlements will generate significant additional shareholder value, versus our original deal model.

And finally, we've achieved certain corporate structure efficiencies much sooner than expected, providing significant upside to our model. We originally estimated that the total restructuring costs associated with the Medicis acquisition could be as high as one-times total synergies achieved. To date, we have spent $138 million on restructuring related costs. The majority of the remaining restructuring costs will be in the areas of R&D and legal, which we've stated before, take longer to work through. We have also communicated our objective to aggressively manage our restructuring costs in our efforts to maximize cash flow. To that end, we're pleased to report that we're now expecting that restructuring costs will be significantly less than $275 million.

Next I'd like to give you an update on our most recent acquisition, Obagi. The acquisition of Obagi closed on April 25th. We again moved quickly and decisively and notified all employees as to their status on April 26th. In addition, we have now shut down our Irvine location and have consolidated those people into the Long Beach offices of Obagi. We now expect to achieve run rate synergies of at least $50 million by the end of 2013, up from our original estimate of $40 million. We have a current sales force of approximately 95 people detailing the Obagi topical line to dermatologists and plastic surgeons in the United States. Historically, Obagi has used distributors to sell its products outside of the US. We believe that there will be opportunities to significantly accelerate the ex-US sales of Obagi, by leveraging our existing sales and marketing infrastructure around the world. We are excited to add the Obagi topical line to our injectable aesthetic product offering. The addition of Obagi gives us one of the broadest portfolios in the field of esthetics.

Lastly, I want to address our updated guidance. Despite the fact that we are losing $0.35 to $0.40 per share from generic Zovirax ointment, we are raising our cash EPS guidance for 2013 to $5.55 to $5.85 for the year. This represents a $0.45 to $0.50 increase in cash EPS for the year, and reflects our confidence in the continued strong performance of the Company. We are keeping the ranges for revenue and adjusted cash flow the same. Now, I'd like to turn the call over to Laurie.

Thank you, Howard. In recent days we've received many questions about deal-related speculation that has appeared in the media. As is Valeant's policy, we do not confirm or deny this type of speculation, and we will not be answering any questions on this subject during this call today. And with that, we will now open the call up for questions. Tracy? May we have the first question?

The first question comes from the line of Gregg Gilbert with Bank of America Merrill Lynch. Your line is now open.

One for Mike and one for Howard. First for Mike, I wanted to ask your view on potentially large transactions that could include generic businesses in developed markets. I'm pretty sure that you were not interested in that part of the world in the past.

And for Howard, on EPS guidance, you did make, I think, a few acquisitions that were not in your prior guidance previously. Can you walk us through the different buckets of things that add, versus the $0.35 to $0.45 negative from Zovirax? Please? Thanks.

Thanks, Greg. So we're not going to comment on any specific transactions, as Laurie said.

In terms of our strategy, our strategy remains the same. We are looking for assets and business models with durable cash flows in high growth areas. This means that we're going to avoid certain geographic areas like Western Europe, Japan, China, and India, just because Big Pharma is really focused on those.

We're going to avoid primary care. We'll be avoiding markets that are not growing. So our basic premise of collecting cash flows that are durable in growth markets around the world remains the same.

And in terms of acquisitions as it relates to our guidance. As we mentioned when we gave original guidance, Natur Produkts, which closed in the first quarter, was included in our guidance. So Obagi and the acquisition of Targretin were the two significant acquisitions. There were a couple of smaller deals in Europe, one in Russia, and one in Poland, but they were quite small, so it's really the addition of Obagi and Targretin.

Fair to say the out performance versus your guidance before has a lot to do with the Medicis integration stuff that you mentioned, Howard?

Well it's a combination of things. It's some from these acquisitions. It's some from the out-performance of the Medicis integration. And it's some from the out-performance of a number of our businesses.

Thanks.

Your next question comes from the line of Andrew Finkelstein with Susquehanna. Your line is now open.

Maybe you can talk a bit more about how the revenues from the Medicis business are comparing to your expectations. And in particular, with the aesthetics products, how those are doing and how you see pricing and competitive dynamics shaking out in that market? Thanks.

Thanks for the question. Again, the Medicis brands, let me go through again. It's unfortunate you don't have the slides to take a look at but as I go through the Medicis brands, Ziana and Solodyne are both performing at expectation. Zyclara is a little bit behind, and the Dysport, Restylane, Perlane which are the exact brands are performing ahead of expectations.

In terms of what's happening in the marketplace, pricing is largely staying the same. We did take the price increase on Restylane in the first quarter of about 10%. A price increase has never been taken since it was launched, and Allergan immediately followed it with a price increase on Juvederm, so price is stable.

We are putting together an overall program which will allow doctors to take advantage of our broad aesthetic offering. We did not have one of those previously, or Medicis did not have one and Allergan did, so we think that will be helpful as well.

And overall discounting in that business, has it stayed largely consistent with how it had been at Medicis, or had there been changes in the dynamics?

Not in our business. I think my understanding is Merz has been pretty aggressive on the discounting side. But in terms of our approach, it stayed the same or actually we've reduced the level of discounting.

And do you have goals for share for share of particular products? Where do you see potential to maybe gain or hold the line against new entrants?

Well, our objectives are to grow the business, and we would like to grow our share in all of our products. We also are looking forward to the Emervel line which was part of the Galderma agreement. So Emervel, which is a line of four fillers that are sold in Europe, two will be submitted for registration in the United States this year, and two next year. So we hope to introduce new products as well.

So what we're really focused on is growing the entire business, and I think the key to success will be growing the market. And I think Allergan and Merz are both very smart companies. And I think the key to all of our successes is growing the market, and not focused just on taking share from one another.

I appreciate it. Thanks very much.

Your next question comes from David Risinger, if you could please state your Company name, your line is now open.

Yes, thanks very much. I have some financial questions. I guess first with respect to the guidance for 2013, Howard, I was hoping that you could walk through the revenue adds from these acquisitions. So Obagi, Targretin, I think you said, and then the one in Russia and the one in Poland, just so we understand the contribution to the top line?

Then with respect to divestitures this year. Do you include for example, on a product like MetroGel, is that included in the guidance as a contribution to the cash EPS?

Then the final question is with respect to income taxes. So the press release indicated a recovery of income taxes of $27.3 million, and I noticed that the cash tax that you reported for the quarter was lower than we had expected, and consensus had expected. I think it was around 2%. Just so that we can understand the framework for a 2% tax rate, is what's happening that you are benefiting more from the GAAP losses, which then translate into a lower cash tax rate than expected? Thank you.

Okay, first of all, in terms of guidance, Obagi obviously is a public Company, so you have a real sense as to exactly what their 2012 revenues were, what the estimates out there were for 2013. Now on some of these smaller deals, we are not going to be giving revenue estimates for. The deals of Russia and Poland were quite small, as is Targretin, but we aren't going to give estimates for each individual product.

In terms of divestitures, MetroGel is not included in any of this. It's going to get registered this year, hopefully towards the end of Q2 -- or it's going to get filed somewhere towards the end of Q2, so there's nothing included in that.

And in terms of our tax rate, slightly below 3%. There were some things that we were able to minimize around, we were able to reduce some of the swedish tax and it relates to the Medicis restructuring. There was some R&D tax credits, and we were able to maximize some of the Medicis attributes including R&D tax credits and transaction costs that we were able to deduct. And get earlier integration into our corporate structure. So we were able to, that's what I meant when I mentioned we were able to accelerate some of the corporate efficiencies that we were able to take.

The $26 million, it was a recovery of some taxes that Medicis had paid prior to the close, so it was a one-time recovery of $26 million or so. The number is going to move around a little bit depending on where we earn income. So I think it could stay in this range, it could move up a little bit, as we mentioned in guidance, we talked about a 5% range. But it's going to be in this rough range depending on where we earn our money through the course of the year.

Thank you.

And just to let you know, everyone, the slides are up on the website so we apologize for the delay. We'll take the next question.

Your next question comes from David Amsellem with Piper Jaffrey. Your line is now open.

Just a couple. Just as you talk about in the past, potential merger of equals bearing in mind the recent chatter. First what's your I guess appetite for being involved in the US generics space, that's something that you have shied away from in the past?

Second question is, can you maybe provide a little more color on how the integration with Medicis is going? And I guess given that this is such a relationship-driven business in aesthetics, any concern about how the transition could be impacting performance with key accounts, how should we think about that? Thanks.

Sure. In terms of the first question, we're not commenting on any specific acquisitions, and I think I laid out sort of our strategy in the pharma question. In terms of the second, in terms of the Medicis integration, we recognized the point you're making, which is relationships are critical in this area.

The first step we took was to retain the best of the best in the sales force, probably about two-thirds of the sales reps came from Medicis, and the others came from Dermic, Ortho and the Coria business that we previously acquired. It's one of the reasons we're spending so much time, even top Management and the Board of Directors going to all the conferences, holding our own series of dinner tours both in Canada and the United States, where we invite the top dermatologists in each of the cities.

The attendance at these meetings has been outstanding, and it has given us a chance to tell our story, because obviously our competitors are telling our story for us, and we want to get out and tell it directly. The reception has been very, very good, in terms of that. And our message is simply that we're very, very committed to dermatology and plastics and aesthetics for the long term, and that we want to partner with the physicians.

Again, our story is all around the growth of the specialty and that if we can tell their practices, that's going to be a win-win for us and them. So we're feeling sort of cautiously optimistic that we're really starting to have an impact -- a positive impact on the community. But we also recognized one set of city tours is not going to do it, that this is a long term game, and we're committed to the long term. So the early results are positive, but we recognize we really have to stay at it and we fully intend to.

Your next question comes from the line of Marc Goodman with UBS. Your line is now open.

Mike could you give us a little more color on the emerging markets, just take us around to the key regions. And give us a flavor for what was the reasons for driving growth, was it market growth picking up and how are you doing relative to the market growth? And new product launches, things like that, thanks.

Sure. We highlighted some of the real growth areas. I think what we're particularly pleased at is we are outperforming the market growth in almost every emerging market that we're participating, certainly the key ones.

Russia, we have had long time to plan the nature product integration, given how long it took that deal to close. But we now sort of have a consolidated business between the GL acquisition we made, the Sanitas acquisition which gave us our first entry into Russia, and now Natur Produkts. What we are doing is watching a bunch of our products from Poland and from other members of Central and Eastern Europe and we're launching those into Russia as well. So it's a combination of product launches and just growing the brands that we have faster than the market.

Poland, which had a spectacular year last year relative to the market, where we were one of only two companies that actually grew last year, and we grew the fastest, [Opharma] was second. We have really accelerated our growth there. We had a great first quarter and the business is really performing strongly.

Southeast Asia and South Africa are both, they are both small, but they are growing well over 20% compounded annual growth rate in terms of organic growth. And that's been a consistent set of results ever since we bought Inova. So I think we're very fortunate, we've created a lot of focus, we've moved our regional operations from Australia over to Singapore. So Andrew Howden, who many of you met at our investor meeting now is situated with his team in Singapore, which has put a lot more focus on Southeast Asia, which is the future.

We just replaced -- our General Manager in South Africa retired and he's done a great job and we just hired a woman who seems terrific. And is keeping that business going strong, and then finally Brazil, which again we're growing very, very quickly and well above market, so we're very pleased with the emerging markets. We have a long list of products that we're introducing, brand generic products across the regions. And I think we're beginning to see the results of the investments we've been making over the last three or four years, and buying dossiers and registering products.

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

You gave us a lot of color on the Derm segment, and what you're doing to promote the relationships, but I guess on the prescription side, I can't help but notice some of the slides in the prescription trends. So I'm just wondering if you can tell us whether that's you moving things into alternative fulfillment, or if there's something else going on there?

And then further on the Obagi integration, are you suggesting that you're using some of the 95 sales reps and how are you going to leverage that with your other products? Thanks.

On the dermatology part, I think of the prescription side, I think what we're beginning to see is in the month of January, it was a little bit slow, because what we had was sales forces from each of the legacy companies that only were promoting historical products. And what we've put the month of January to do was to train everyone on the new products, and we created three new sales forces. We tried to retain as many of the personal relationships the sales reps had, in terms of territories, but we trained them all up on their new products.

So now we have three sales force. As each week goes by, each sales force is getting more and more comfortable with the products that they are promoting, to the extent that some relationships are new. Again, each week that passes, the relationships are getting stronger. And we expect to see continued growth in dermatology through the course of the year as people settle in.

In terms of Obagi, we have a specific sales force for that set of products. But we now at this point have potentially up to five or six people that are promoting different products to a single dermatologist or plastic. And obviously what we're doing is making sure that these calls are coordinated, that there are sort of strategies put in place around each doctor.

And while each rep has a specific set of products, a specific set of objectives that they are measured against, clearly there's an ability to help each other out, both in terms of leads, in terms of support. And again, we're hoping over time we'll be further upsides to the performance both for Obagi and quite frankly, Obagi products, as well as the rest of our products.

Okay, and then in terms of the synergies that you're realizing, both from Medicis, and I guess Obagi, given that you're making bigger efforts on the promotional side or on the relationship side and really trying to create some kind of a set program does that possibly reverse some of these synergies? Or can you just give us a little bit of color of how much more expense is going to have to go into the SG&A and promotional effort?

No, no and I think as Howard mentioned the additional sales and marketing spending in the first quarter was largely one-time. We'll get back to our regular numbers.

The synergies we're achieving largely come from back office, distribution, IT, finance, and sometimes some special initiatives these companies have, special projects that we've decided not to continue. So when we give synergy, expect synergy numbers, they are net of any additional sales and marketing activities that we're embarking on.

Okay, thank you.

Your next question comes from the line of Doug Miehm with RBC Capital Markets. Your line is now open.

Mike, given that we're this much closer to potentially launching IDP-108 maybe you could give us some idea of what you're up to there and how you're planning to put that product into the market? And what your expectations might be initially?

Sure. Well we have not received any official correspondence back from the FDA, so I have no update there. We are still targeting and hoping to, as we said at the beginning of the year, launching the product this year. And will be doing is expanding our Podiatry sales force from -- it's currently 20 to 25 people, and we'll probably increase it at least by 40. And then obviously, all the other reps that we have we have detailing dermatologists, we'll adjust their bags because we think this could be a significant product and we want all doctors to be aware of it.

In terms of, we're getting a ton of calls from both physicians and from patients just to Valeant, wondering when the products coming out. Unfortunately, we don't control the timing of that but people know about this product. People have seen the data. We will also be doing direct-to-consumer, not traditional direct-to-consumer, big add campaigns on network TV but reaching out because we do think this will be a consumer driven product. But I'm sorry, Doug I can't give you anymore precision around of the timing until we finalize things with the FDA.

Of course, and then Howard just a quick question with respect to cash flow. It looked like cash income, as calculated, was just over $400 million and cash flow was around $345 million. Just give me a walk through in terms of the difference.

And then you're set up I believe in terms of the management groups around the world, one of the criteria that they have to meet their cash flow targets as well, and how that's going, how it's being implemented, perhaps? Thanks.

Sure. When we looked at cash flow this quarter, we did have an uptick in accounts receivables as the business is growing, we would expect accounts receivables to grow. But it probably grew at the end of the quarter more -- it did grow more than what we expected. I think there probably two reasons for that -- three reasons for that.

One is, Mike mentioned that we harmonized or started the harmonization process between the Medicis wholesaler agreements and ours, bringing the Medicis inventory levels down, so their dermatology RX products down to our levels. And as a result, the bulk of the purchasing of the Medicis RX dermatology products was at the end of the quarter, after those inventory levels were brought down, so that was one reason.

Two, Targretin, which we bought from Eisai, they are actually still selling that product. We're marketing it, but they are invoicing the product. And we didn't get -- they batched the invoices and sent it to us at the end of the quarter, so that was all booked at the end of the quarter so that cash is probably in already.

And thirdly in Poland the sales tend to be back-end loaded there's a little bit of games being played with the distributors who like to order at the end of the quarter and they end up getting their whatever rebates they get prior to them having to pay the money to us. So it was accounts receivable. I think in general, the message to all the business units around the world in the US has gotten out, when Mike and I have business reviews it's part of that review. When our corporate controlling team conducts the monthly accounting reviews, it's front and center as part of those reviews, so it continues to be something we're all very focused on.

Thank you.

I'd just like to clarify we're getting some e-mails and I'd like to just clarify a comment that Howard made, which is that we did collect $26 million in back cash taxes that was owed to Medicis. That did not run through our P&L. That was just a cash receipt that was something that was owed Medicis.

We were not aware of it at the time of the acquisition, so quite frankly, it's a nice little upside to the Medicis deal, but it had no impact in terms of our adjusted cash EPS for the quarter. So you can see that on table 2. Next question?

Your next question is Chris Schott from JPMorgan. Your line is now open.

First question, just can you elaborate a little bit more of what happened to that US Neuro and other line this quarter? I guess, was the impact of some of these lower-margin products a one-time issue, and starting to get a little bit more clarity as to why we think the top line of that business rebounds for the remainder of this year?

Sure. So we've had employees ever since the merger with Biovail. Biovail had partnered a number of their generic products with companies like Teva and Forest and some others. And so what we really do is, we are really a contract manufacturer.

So we produce these products up in Steinbeck, these are legacy Biovail products that have gone off patent. In terms of the selling of that, that's all done by these partners, and we get a percent of the profits. And so these are very, very low margin products, and we do not control their distribution.

And we had a dramatic decline, especially in the Teva products this quarter. It's probably more to do with ordering than anything else, because they can choose to order and in terms of how much inventory they keep, that's their decision. And so it affects the top line, but has minimal impact on our bottom line, which is why actually our cash earned, our cash EPS actually grew in Neuro.

Now these contracts do come up, they are starting to come up now this year, and next year, so our strategy with these products is to take them back. There's no need to leave them and strike better deals with you other generic companies and/or distribute them ourselves where we have control, so that accounts for a lot of the drop.

And, quite frankly, it probably will shift next quarter because the actual demand, if you go and look at the end-user demand for these products, it hasn't changed at all, so this is one of timing. But even if it comes back, it will help our organic growth next quarter or the quarter after, but it won't have much impact on cash EPS. So for the year, we expect the segment to grow. More important, the things that are growing are ones where we're making a lot of money. And that's why we think the bottom line, the organic growth of the cash flows will be positive, which is obviously the more important number.

Great, thanks. Second question I had is just more of a general question. As Valeant considers larger mergers and maybe things larger than Biovail or Medicis, do you see the same magnitude of opportunity for expense reduction and margin improvement, relative to some of the smaller transactions the Company has historically pursued? I guess my question is, are these larger organizations inherently more efficient than the smaller assets you've done, and there's less to target, or is that not really the case?

We always look back at our transactions and see what percent of total costs we can take out of an organization. And the analysis we've done with our strategic review last summer identified that we actually do better with larger acquisitions, we can take a lot more costs out as a percent of the total cost base.

You've seen that, and I think when you first announced the Biovail transaction, we announced $175 million in synergies, and we ended up well over $300 million. In Medicis we announced $225 million and we're already over $300 million, and even Obagi, which is smaller, because it's a public Company, they have a lot more. We can quickly get to above $50 million, so our belief is that synergies will actually be disproportional to the size of the acquisition.

Okay, great. Thanks very much.

Your next question comes from the line of David Krempa with Morningstar. Your line is now open.

First question, I think Astra mentioned on their call that they are seeing Eastern Europe increasingly resemble Western Europe/ So I was wondering if you could comment on any change in the dynamic that you've seen.

Secondly, when we look at some of these high growth markets you are avoiding like China. If you were to do a big merger and you were to build a scale that would rival the Big Pharmas, then would you be interested in these markets, or would you avoid them, even if you had the scale of the other players?

Well it's hard for us to comment on the first question of Central and Eastern Europe looking like Western Europe, since we don't participate in Western Europe, and don't have direct line of sight. But actually, in terms of some of the characteristics of Western Europe, where some of them are direct substitution markets. And second, that healthcare spend is actually decreasing and prescription spend is decreasing, we are not seeing that.

We're seeing prescription -- the basic, what we're betting on is the demographics of these countries, and the fact that healthcare spending as a percent of GDP and population growth, it pales in comparison to any developed country and we expect healthcare is a pretty fundamental need, and we expect healthcare in total to increase as a percent of GDP. If you look at every market in the world you see that, as the country develops economically, and prescription pharmaceuticals is a component of it. And is usually a faster-growing component than some of the other components. So I don't think the fundamentals have changed at all, and certainly our businesses remain strong, so I guess I don't understand that comment.

I'd also add it depends on where you invest. We're investing in Russia, CIS, Poland. These are different markets than some others in Central and Eastern Europe.

Absolutely, and in terms of markets like China and India, which are fundamentally just like the ones I described, I think that's the key that you identified, that I don't think small players can win in these markets, when all the Big Pharma is highly focused on it. So some of these Big Pharma companies in China have more than 5,000 representatives out there. And that's a major investment, and it's just not one that we can't compete with that.

If we bought a Company that had 5,000 reps and was growing in China, we would probably stay in for sure. But what we're not interested is being a niche player in these markets, that larger companies are really focused on.

Great, thanks.

Your next question comes from the line of Tim Chiang with CRT Capital. Your line is now open.

I had just two questions. Mike, you commented that you've gone to a lot of these dermatology meetings. What sort of feedback are you getting about the consolidation strategy that you have deployed here? What sort of challenges do you think you face in the dermatology segment this year?

Yes, so the comments that we're getting, or the questions that doctors have, are first of all are we in it for the long term? Or are we just a financial Company that is going to build a big business and then sell it? That's sort of the first question.

And obviously, given our unique corporate structure, the odds of us selling to anything is low given whoever bought it would lose that corporate structure in all likelihood. So the business is worth a lot more to our shareholders than it is to any other set of shareholders. So once -- and they are just looking for reassurance, and quite frankly, a lot of these ideas are probably why our competitors are placing those in their minds.

The second is our commitment to advancing the field of dermatology, both in terms of supporting that practices, in terms of helping to pay for some of these conferences, that we're going to come out with new products, that we're going to invest. Again, I think most of them know Dow Pharmaceuticals, who has a great heritage, and most of them don't realize that we actually own it. They hear about it, efinaconazole, luliconazole, the Emervel line, and that reassure that we probably have one of the best pipelines in the dermatology area.

They are excited to participate in some of the clinical trials, of some of the future products that we have. Then a lot of it's just relationships that they want to get to see you're a human being, and it's just a lot of one-on-one and getting to meet the senior team.

Finally a lot of them have thanked us for keeping the reps, it's a rep-based relationship business, and by and large for most doctors, the reps have not changed, and so that's a real positive. So it's basic blocking and tackling and investing in the time and the space.

I think they also understand that as being the biggest dermatology Company at this point in the United States and Canada, that they want to tie their success to our success too. That they want to have a good relationship with us, because they make the assumption that we're probably going to spend more on the industry than anyone else, and they want to be a piece of it.

I don't know, Howard, I've rambled a little bit. You've been to many of the dinners. What's your take?

I think you summed it up well, Mike. They want to look at us in the eye and see us as their partner in building the specialty. And that's why its been really important for the whole senior Management team, for the Board to get out there and meet these folks and communicate our message.

And as Mike said, our word is only going to go so far. It's going to be our action and we're committed to this. It's an important part of the Company, and we're going to keep at it and be successful at it.

Okay, good. Thanks for the feedback.

The next question comes from the line of David Steinberg with Deutsche Bank. Your line is now open.

Thanks. Just a follow-up on the IDP-108 question. You've indicated, Mike, you think it could be a big product and that's underscored by I think 30 million Americans have some form of the disease, onychomycosis. Was wondering if you've done any work on what percent of the scripts or revenues are cash pay, as there's an FX component?

Secondly with regards to managed care, could you comment on some of your pre-launch activities, particularly as you have no branded competition. For example, could you give us some color on discussions with managed care, lives covered, pricing, et cetera? Thanks.

Yes, I can't share anything on the cash pay component of what we believe the market will be. We are working on it, but it's not something that I can really share on this call.

In terms of managed care, the reception has been quite good, because the clinical data, now it's going to depend a lot on making sure we price this drug correctly. In terms of, there really is a clinical story here in terms of efficacy and safety. And I think as long as we price it appropriately, the early signs is that this is a drug that is going to be covered, which is quite positive.

And just a follow-up, thinking about revenue synergies. So you have amassed a pretty significant portfolio of Derm products in the US, primarily, I'm thinking about Medicis and Obagi. Is there a substantial opportunity to bring these products -- is there only a market in the United States right now, a substantial opportunity to bring them overseas to your emerging markets businesses? And if so, what sort of timeline do you think that it could generally be implemented on?

Yes, so in terms of the aesthetics products that we got from Medicis, we only have rights in North America, so those are not products that we can sell outside the US. We do have rights to Sculptra, although we partner them in Western Europe and the rest of the world.

Obagi, we have rights everywhere. They actually had, as Howard mentioned, they had a lot of distributors around the world, but they are not -- most of these distributors are not actively promoting them. It's more just really making them available.

Our General Managers and their teams around the world are actually quite excited about Obagi. The name is known and even in places like Canada, not even just the emerging markets. We believe that given the sales infrastructure we already have in place and the relationships with the doctors that -- so we're cautiously optimistic that we could do a much better job. And it could become a much larger component of the Obagi business.

I think Obagi was selling $18 million or so internationally. But you have to remember that was with heavy discounts, because we sold to the distributor, it's sold at more than a 50% discount to what it sold in the United States. So even just going directly will allow us to retain that margin, and then if we actually put some efforts against selling it.

So we do view that -- we did not model any international growth in the deal model because we want to be conservative. But we don't ever model in revenue synergies per se, but we do think there's an opportunity. And we've already notified quite frankly every distributor that we have that's international, that we are going to be taking this direct ourselves. So that was, those notices were sent out on Monday morning of this week.

Thanks.

There are no further questions at this time. I'll turn the call back over to the presenters.

Okay, so thank you very much for joining us this morning and I will look forward to talking to you next quarter.

Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may now disconnect.