Bausch Health Companies Inc (BHC) 2013 Q3 法說會逐字稿

Good morning. My name is Julie and I will be your conference operator today. At this time I would like to welcome everyone to the Valeant Pharmaceuticals financial 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. Mrs. Little, you may begin your conference.

Thanks, Julie. Good morning, everyone and welcome to Valeant's third quarter 2013 financial results conference call. Presenting on the call today are J. Michael Pearson, Chairman and Chief Executive Officer, and Howard Schiller, 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 may constitute forward-looking statements. Please see slide 1 for important information regarding these 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 these non-GAAP financial measures --

Apologize, everyone. We seem to have had some technical difficulties. Hopefully everyone can hear us. You missed my exciting forward-looking statements statement, with that I'm going to turn the call back over to Mike Pearson.

Thank you, Laurie. We are not sure where we got cut off so I'll just start from the beginning. Good morning, everyone and thank you for joining us.

As you have read in our press release we followed up our solid performance in the first half of 2013 with another quarter of strong operating results. On today's call I will review our third quarter results and performance, provide an update on Valeant's business, and then provide my early prospectus on our Bausch & Lomb acquisition. Howard will then provide an update on the Bausch & Lomb integration and discuss the business going forward. After our remarks, Howard and I will be available for Q&A.

This morning we reported Valeant's third quarter results for 2013 which were driven by strong sales growth and profitability across all of our operations, including strong performance from Bausch & Lomb since the August 5th close. Total revenue in the quarter was $1.54 billion as compared to $884 million in the third quarter of 2012. Our third quarter cash EPS was $1.43 per share.

As a reminder, we closed the Bausch & Lomb financing before we closed the deal. The pre-closing interest expense and the pre-closing impact of our additional shares cost us $0.09 per share this quarter. If you exclude this cost, our cash EPS increased 31% this quarter.

In addition, foreign exchange movement negatively impacted us by $0.03 in the quarter and an unexpected early generic launch of Retin-A Micro that occurred right after our last earnings call in August had a negative $0.04 impact on the third quarter results. All of these negatives are included in the $1.43 cash EPS. Adjusted cash flow from operations was $408 million for the quarter. An increase of 69% over the prior year.

I would like to take a moment to touch on several one-time items that were also recorded during the quarter. First, we took a total impairment charge of $645 million for the retigabine/ezogabine franchise. This charge was necessitated by the decision by GSK to cease marketing and sales support for the immediate release formulation in the United States. In addition, we announced earlier this week that we have settled all outstanding claims by Anacor pharmaceuticals regarding Jublia and all other disputes with Anacor for $142.5 million.

Finally, we recorded $305 million in restructuring and integration charges primarily related to the Bausch & Lomb acquisition. As we mentioned in August post the Bausch & Lomb acquisition we have a very diversified portfolio of Rx, device, OTC and, branded generics businesses. We will continue our strategy of focusing on long-lived durable products, cash pay businesses, and growth geographies. We do not want to limit ourselves to one or two therapeutic areas but rather we look for durable products that can be actively promoted --

Ladies and gentlemen, this is the operator. I do apologize, but there will be a slight delay in today's conference call. Please hold and the conference will resume momentarily. Thank you for your patience.

-- so we apologize for the issues that we're having this morning. We're going to go ahead and go back a little bit. And Mike's going to start probably at the top so we'll probably be repeating a bit of what you just said but we're not sure exactly where we dropped off. So apologize for the delay and I'll turn it back over to Mike.

Good morning, everyone for the third time. Hopefully the third time's the charm. We'll start from the beginning. As you have read in our press release we followed up our solid performance in the first half of 2013 with another quarter of strong operating results. On today's call I will review our third quarter results and performance, provide an update on Valeant's business, and then provide my own perspectives on Bausch & Lomb. Howard will then provide an update on the Bausch & Lomb integration and discuss the business going forward. After our remarks, Howard and I will be available for Q&A.

This morning we reported Valeant's third quarter results for 2013 which were driven by strong sales growth and profitability across all of our businesses. Including strong performance from Bausch & Lomb since the August 5th close. Total revenue in the quarter was $1.54 billion as compared to $884 million in the third quarter of 2012. Our third quarter cash EPS was $1.43 per share.

As a reminder, we closed the Bausch & Lomb financing before we closed the deal. The pre-closing interest expense and the pre-closing impact of our additional shares cost us $0.09 per share. If you exclude this cost, our cash EPS increased 31% this quarter.

In addition, foreign exchange movement negatively impacted us by $0.03 in the quarter and an unexpected early generic launch of Retin-A Micro that occurred right after our last earnings call in August had a negative $0.04 impact on the third quarter results. All these negatives are included in the $1.43 cash EPS. Adjusted cash flow from operations was $408 million for the quarter, an increase of 69% over the prior year.

I would like to take a moment to touch on several one-time items that were also recorded during the quarter. First, we took a total impairment charge of $645 million for the retigabine/ezogabine franchise. This charge was necessitated by the decision by GSK to cease marketing and sales support for the IR formulation in the US.

In addition, we announced earlier this week that we have settled all outstanding claims by Anacor pharmaceuticals regarding Jublia and all other disputes with Anacor for $142.5 million. Finally, we recorded $305 million of restructuring and integration charges primarily related to the Bausch & Lomb acquisition.

As we mentioned in August, post the Bausch & Lomb acquisition, we have a very diversified portfolio of Rx, device, OTC, brand generics businesses. We will continue our strategy of focusing on long-lived durable products, cash pay businesses, and growth geographies. We do not want to limit ourselves to one or two therapeutic areas but rather we look for durable products that can be actively promoted to a small set of physicians or healthcare professionals to drive strong organic growth.

As you can see from the chart, branded prescription drugs now represent 41% of our total pro forma 2013 revenues. Of this revenue slice only 24% of the branded prescription sales or 10% of our total revenue are subject to a patent cliff. We believe our strategy has positioned us with the most durable set of assets in the industry. This dynamic is further demonstrated by the patent chart that we shared with you last quarter.

Looking forward over the next four years you can see that 2013 is by far our toughest year as we were impacted by generic competition for Zovirax, Retin-A Micro and a number of other brands. The year-over-year impact in lost revenues will be $300 million in 2013, a significant impact on a total revenue base of approximately $6 billion. We will also expect patent expiry on VANOS in the US and Wellbutrin in Canada during the fourth quarter.

With our most recent acquisitions, including Bausch & Lomb, and other promoted brands coupled with the significant increase in third-party promotion of many of our neuro and other products, our US business mix has changed significantly. Today, 80% of our US products are now actively promoted through sales forces, direct to physician marketing and other targeted selling activities. Going forward, our percentage of promoted products in the US will only increase given the number of new product launches we have planned for 2014 and beyond. Therefore, it's no longer makes sense to split the US market into promoted and nonpromoted products for the purpose of reporting organic growth.

I would also like to note that with the addition of Bausch & Lomb, coupled with the acquisition of Obagi and the significant growth of our aesthetics businesses, our US business is even more diversified. For example, our prescription dermatology business in the US now only represents 20% of our US revenues; a dramatic shift from just a year ago.

Given the impact of generics on the Zovirax franchise, Retin-A Micro, and BenzaClin, we thought it would be more useful to our investors to show organic growth excluding these products to demonstrate the growth of the underlying business. The decline of revenue of the above-mentioned products was approximately $100 million for the quarter and the details are included in table 6 of our press release for your information.

As we move forward we will continue to show organic growth without the impact of significant generics and also to disclose the quarterly revenue impact of products excluded from the calculation. We believe that this presentation will facilitate investors in modeling our revenues going forward. Excluding these products our US business continues to exhibit solid organic growth of 5% driven by many of our dermatology and prescription brands, our aesthetic and oral health portfolios, and our orphan drug products and CeraVe.

Our Emerging Markets segment delivered a same-store organic growth rate of 14% in the quarter continuing the exceptional strong progress seen so far this year. Almost all the legacy Valeant US businesses reported strong performance this quarter. While the overall US dermatology market continues to realize greater generic penetration, most of our brands have continued to maintain or grow market share including Elidel, Acanya, Atralin, Carac and CeraVe, just to name a few. Solodyn, while seeing some erosion this year, appears to have stabilized at roughly $200 million on an annualized level.

Our aesthetics franchise continues to perform extremely well. Dysport continues to increase its market share and Obagi had another great quarter. We attribute this continued progress to our commitment to the specialty, our continued development of relationships with many doctors, and our broad portfolio. Our MVP program has been very well received and should continue to pay benefits. We are very excited about the future of this business.

OraPharma continues its strong performance track record once again with double-digit revenue growth. We will introduce a new product to support bone regeneration post tooth removal in Q4 which should further boost growth going forward.

Finally our neuro and other portfolio saw double-digit growth in our orphan drug portfolio and we are pleased to say that Wellbutrin XL continued to be stable at approximately $150 million annually. The legacy generic products that are partnered with Teva and Forrest continued their decline but now represent only about $50 million a year.

As we noted on the organic growth chart our Emerging Markets continued to deliver strong growth. Our operations in central and Eastern Europe remained robust growing at a healthy 15% rate with both Russia and Poland significantly outpacing their respective markets. We're now a top 10 player in Poland and we have well north of $400 million in revenue in Russia.

Our operations in Southeast Asia and South Africa also remain very strong with same-store sales nearing 20% organic growth. We are excited to have entered Vietnam and with the close of the UV pharma acquisition and we are looking to establish a local presence in Indonesia within the next 12 months. Latin America also reported double-digit growth in the quarter with both our Mexican and Brazilian businesses continuing their track record of strong growth.

Finally, a few reflections on the Bausch & Lomb acquisition. Since the transaction closed in August, I've spent a significant amount of time getting to know our operations and people around the world. I've been to Germany, France, the UK, Sweden, Eastern Europe, China, Japan, Mexico, Canada and all of our locations in the US multiple times. Probably the best word I can use to sum up these travels is excited. I'm excited about our new colleagues and I'm very pleased with the continued strong performance of the business during the integration process. I'm excited about the opportunity to streamline costs and to trim the fat without touching the muscle.

The global and regional Bausch & Lomb infrastructure was inappropriate given the size of the business. In fact, we should be able to exceed our synergy targets. I'm excited about our decentralized philosophy that has been embraced across the organization. I am convinced the better decisions will be made by people closer to the customers. And I'm most excited about the opportunity to adopt local business strategies and foresee local business development activities. I am convinced that we will accelerate our growth by giving our country teams more say in how products are positioned and priced and how they can be complemented by new products such as lower-cost surgical equipment to meet local needs.

Finally, I'm excited about the continued productivity of the Bausch & Lomb development team. Since we announced the deal, we have had eight new product approvals and many more are on the way. As expected our R&D spend will be higher in the first half of 2014 as multiple Phase III pharmaceutical programs will be reaching completion. We do not include any of these development programs in our deal model. We would hope some will succeed so we can deliver more upside to all of you. With that I will turn the call over to Howard.

Thank you, Mike. I am pleased to report that our integration activities continued to yield positive results. We have now identified greater than $850 million in synergies from the Bausch & Lomb transaction with a run rate of greater than $500 million exiting 2013. At this point we have integrated the three Bausch & Lomb global businesses into our decentralized structure and have synergized the global corporate regional and back-office functions to streamline the operations and place responsibility and accountability into the hands of the country managers and the business leaders in the United States.

We've also begun to review and rationalize the Bausch & Lomb and the legacy Valeant R&D portfolios. The cost to achieve these synergies will be approximately half of a full-year synergies and we have spent close $128 million to date. The economy rules required us to accrue for all identified severance is whether paid or not, which is why the restructuring charge of $305 million is significantly above the cash spent to date.

Finally we also expect to be on track to complete the B&L IP integration by January 1, 2014. I know that all of you would like some update as to the performance of the Bausch & Lomb trend operations, so we have provided this chart as a look into the strength of the business since we have closed the acquisition. I

In the US, the operations delivered 15% organic growth driven by strong growth in pharmaceuticals and OTC sales while the rest of world developed markets delivered 3% growth bringing the total developed markets growth rate to 9%. Emerging Market businesses delivered double-digit growth of 14% as almost all of the Emerging Market businesses exhibited strong growth, driven largely by sales of contact lens and OTC products, including lens solutions. Overall B&L's organic growth rate was 10% in the quarter. We are very pleased with this accomplishment so far and hope to continue this trend in the future.

As Mike mentioned, we have visited most of the Bausch & Lomb regions and businesses and with this world tour now complete we have a better view of the opportunities and challenges facing each of the businesses. As we currently look at the B&L businesses we have divided them into three categories listed on the slide. A number of the businesses are performing extremely well. These include the US, Russia, China, Turkey, the Middle East and Germany among others. And we would expect to continue to invest in these franchises and accelerate their growth.

There's a second group of businesses including Japan. Mexico. Brazil. Southeast Asia, and Canada that are doing well but we believe they'll benefit from our decentralized structure and will develop local strategies including local business development to drive improved growth. Lastly, there are also a few countries where we need to rethink the way we are operating business and turnaround the performance. We are in the middle of our 2014 budget process and so far we have ample reasons to be excited about the improved profitability and growth prospects that the B&L's businesses in 2014.

Turning now to a summary of our financial performance we delivered strong results again this quarter. Looking at our ratios and margins, as expected our cost of goods sold increased with the Bausch & Lomb acquisition from 23% last quarter to 27% in the third quarter. On a standalone basis B&L had gross margins in the [53%] range prior to the acquisition. In addition, both SG&A and R&D expenses as a percentage of revenue both kicked up in the quarter. This led to an operating margin that dipped below 50%. We would expect these ratios to improve over time and trend towards historical levels as we realize cost synergies and implement the Valeant business model.

While we're very pleased with our strong performance in Q3, we did face a number of headwinds in addition to the genericization of Zovirax, Retin-A Micro, and BenzaClin. During the quarter the dollar significantly strengthened versus a number of our currencies. Compared to FX rates in Q3 a year ago and compared to FX rates we used when we updated 2013 guidance in August, this movement in currencies cost us approximately $20 million in revenue and $0.03 a share to the bottom line. As you can see from the chart we now have significant exposures to additional currencies including the euro, the yen and a number of emerging market currencies.

As mentioned in our Q2 call, we did not back out of our Q3 cash EPS the pre-close costs of the B&L financing. The fact that we closed the financing for the Bausch & Lomb acquisition before the deal closed cost us about $0.09 per share.

Finally when we provided guidance at our last call we were expecting generic competition for Retin-A Micro to occur in early 2014. Unfortunately a generic launch occurred just a few days after our last investor call. This event negatively impacted our third quarter results by approximately $0.04 and we expect an impact of $0.06 on the fourth quarter of 2014. We were pleased that we were able to absorb these headwinds and still delivered cash EPS above consensus.

Today we have updated our annual 2013 revenue guidance to $5.7 billion to $5.9 billion which is a slight reduction from August but in line with current analyst consensus. Since August the reduction has been primarily driven by the unexpected early launch of the Retin-A Micro generic, foreign exchange headwinds, and slower sales of the B&L surgical equipment which has a much lower gross margin.

In addition, we have divested several small products in the US and Australia. We discontinued the sales of active ingredients to third parties from our Probiotica business in Brazil and expect some softness in our contract manufacturing operations. These items are also low margin businesses so the impact to our bottom line will be less than to our top line.

We are tightening up the range of our previous cash EPS guidance to $6.11 to $6.16 for 2013 reflecting the strength of our underlying businesses. Finally, our adjusted cash flow from operations should be greater than $1.8 billion for the year.

In closing, we are pleased with our progress this quarter as we integrated Bausch & Lomb and we delivered a very strong quarter. We are nearing completion of our normal budget process and we are excited and confident in our ability to deliver strong operating results in 2014. We plan on discussing our 2014 expectations with investors in early January. With that I will turn it over to Laurie.

Thank you, Howard. Before we turn the call over and open it up for Q&A, I just want to remind everyone to limit your questions to one at each time to make sure that we accommodate as many people in the allotted time, especially as we're running a little bit late due to technical difficulties. So please limit yourself and you can always get back in the queue and we'll take your questions later. Operator, with that we'll open it up for questions.

(Operator Instructions)

Douglas Miehm, RBC Capital Markets.

Good morning. Since I'm limited to one question I guess what I am curious about is Mike, with respect to what you're seeing on the acquisition and merger front is anything changing given the way different companies are now approaching their businesses in terms of costs et cetera? Are you seeing pricing changing for opportunities or do you think there are number of opportunities that have fallen way or do you still as see as much opportunity as you've ever seen?

Thanks, Doug. Actually probably the opportunity set has increased. I think part of that increase is we more well known and most companies include us in their list that they are going to call before they either divest assets or put them out for sale. And I don't see any fundamental differences. I think some other companies have taken out some costs but I think as we've seen with Bausch & Lomb we believe there's an additional quite a bit of opportunity if we adapt our business model. So I don't think -- probably the least of our concerns in terms of our strategy is the number of opportunities out there. What we have to do is remain very disciplined on price and focus on getting durable assets and growing geographies.

And have you seen any changes in pricing?

No.

Okay. Great. Thank you.

Andrew Finkelstein, Financial Group.

Thanks very much for taking the question. I was hoping that maybe you'd be able to talk a little bit about some of the drivers in the Emerging Markets for your business, where you're seeing the most opportunities for growth? And then in terms of the US are you thinking any differently as you combine and are not making the distinction between promoted and nonpromoted, are you approaching your sales force promotion any differently in particular to how you're marketing the dermatology products? Thanks.

Sure. In terms of the Emerging Markets, we have been changing our mix to more and more branded generic and OTC products. Which tend to be increasingly cash paid. So we are trying to avoid the government reimbursed products. And in a sense branded generics that are not government reimbursed are very similar to OTC's in that doctors will make recommendations or pharmacists will make the recommendations. But the patient will pay out of their pocket and it makes us more susceptible to economic cycles, but obviously less susceptible to government intervention.

I have to say our teams have been doing a terrific job, double-digit organic growth in all of our regions as they look forward. As part of the budget process that Howard mentioned, we visited all these locations and have seen preliminary budgets and we're very optimistic about the continued performance in the Emerging Markets. In terms of the US, in terms of sales force differences in dermatology I guess two comments. One is we are increasingly focused focusing on physician dispensed products. We love the Obagi acquisition and we are adding a number of products under the Obagi umbrella. So that again, these are protected because they're going directly through the physician channels and the injectable business, or the aesthetics business is really a great business. We're seeing very strong growth and we'll be investing heavily in that area looking forward. I think the other thing we're doing is we have a very creative team running our neuro and other business and we have a number of our products now that are being promoted primarily through partners. And we've seen significant uptick in growth in that business as well as very few of our products at this point have no promotional activity.

Chris Schott, JPMorgan.

From JPMorgan. My question is, with several of the major pharma companies having become more vocal about exploring ways to manage their legacy or established brands, some as potentially separate entities, it seems like these type of businesses would be ripe for a Valeant-like approach to cost management. Are those potentially opportunities that you could look at or do those type of assets not fit your criteria of being durable assets with limited payer exposure et cetera? I'm just trying to understand as we're hearing this, is that something that would look at as a piece of the Valeant portfolio over time? Thanks.

Thanks, Chris. Those certainly are some assets that we're beginning to explore. And it kind of depends on the mix of the established products. We obviously love the emerging market established products businesses because they tend to be brands that have lost patents already so in a sense they're branded generics, they just have the originator name on them. Obviously in the US, tail products, there's less you can do with them but certainly from a cost management approach, applying our business model would make sense. So certainly on our list of possibilities.

Can I ask a follow-up to that? As you're looking, also as the Company becomes larger and you're looking at potentially larger acquisitions and pulling off that answer, would you entertain deals that again have a portion of assets that might be for instance branded generic assets in the emerging markets that you like but come with -- to get those assets you might have to buy portfolios that have Western European exposure or US exposure? Is that, are you going to flex that criteria a little bit if you'd get a good chunk of assets that are attractive to you or is that just going to be too hard to pull off?

No. I think Bausch & Lomb is an example. We weren't thrilled initially by the fact that we would have Western European businesses. It's an area we've avoided. Now it turns out in Bausch & Lomb that almost all of the Western European assets are cash pay businesses. So very low government reimbursement. Their whole Pharma business is OTC. And contact lenses is all direct to consumer. So I think that's just an example of a company that we bought where most of the assets are in higher growth markets but we can't be completely selective as we look at larger acquisitions or we're not going to find any opportunities.

Thanks very much.

Gregg Gilbert, Bank of America.

For Howard, I was wondering if you could confirm that same-store organic growth if you did not adjust anything else was more like down 20 four US and down 9 or 10 for total company? And on Solodyn you talked about $200 million for a stabilization level, earlier in the year I think you guided to high $200 millions or mid-to-high $200 millions. Is there still some price flexibility there or are there other things you are doing to still achieve that given that that's maybe the most important assets that came with Medicis? Thanks.

Yes. In terms of the organic growth, obviously if you include those generics it's negative and your calculations are roughly correct. And again we gave you the pieces, just so everyone remembers, we gave everyone the pieces of the puzzle to pull that calculation together in table 6. As it relates to Solodyn I believe we said originally it would be about $250 million. We've clearly seen some erosion. We believe it's been stabilized. We are exploring opportunities to continue to grow that.

I would point out while it was the largest asset there were also a number of upsides we've seen since Medicis. Including Luliconazole, which we hope to get approved at the end of this year which we did not value the extension of the Zyclara patents. I would also point out the aesthetics business in our mind was actually overall the most valuable asset, and there were also a portfolio of orphan assets which we didn't know about that have been quite profitable. And lastly I'd point out that we were actually able to realize higher synergies. So Solodyn has been a disappointment, but overall, there's more good things than bad happening as it relates to the Medicis acquisition.

Thanks.

Tim Chiang, CRT Capital.

Mike, could you talk a little bit more about some of these antifungal products you have in the pipeline? What's your confidence that you'll get a positive FDA decision in the near-term?

So is efinaconazole is obviously our most important antifungal product. I think we were pleased with the Canadian approval. I think that bodes well for compound. I think on our last call we mentioned Howard and I were both down at the FDA in the last meeting we had with them, they made it pretty clear to us this is a question of when, not whether we get approval. And we'll hopefully be addressing most of their concerns and resubmitting the end of this year. And then we believe we'll get approval sometime next year. In terms of Luliconazole we've had positive interactions with the FDA, and so we would hope we would also get an approval on that one. And that would be end of this year, beginning of next year.

Just a quick follow-up, you've already -- you already have the marketing infrastructure to sell these products. Right? You don't need to build any more on the sales side, do you?

No. We have -- we believe our current resources will be enough. Depending on the success of the products. If more sales reps makes sense, but for the launch and I think we have the capacity in terms of our sales and marketing infrastructure as we speak. We also bought Patanol last year which is probably the strongest company name among the podiatrists. And we think that will help as well.

Okay. Great. Thanks.

David Amsellem, Piper Jaffray.

Thanks. Question on M&A developments and strategy, given the cost of debt related to the Bausch deal should we assume that the next large transaction is essentially going to be a stock deal? Or do you think you can take on additional debt and acceptable costs? How should we think about that? And speaking of large deals, what's your appetite for acquiring a presence in the US generic space? Thanks.

Okay. As we've stated post the B&L acquisition we took our leverage up because we thought it was absolutely the right acquisition. We continue to believe that being a double B is the right general credit rating for us to be at to ensure low-cost access to capital over cycles. And we're committed to getting our leverage down to below four times. So that means that in near-term were likely to do smaller cash deals, tuck-in deals, many of which are not only NPV positive but also credit enhancing. And with the possibility of larger deals which could be for stock. In terms of generics, we now have a $300 million or so generic business in the US, which has very attractive margins and we're excited about so many opportunities that are in the pipeline and we will continue to grow and invest in that business. So it's something we're excited about.

Thanks.

Alex Arfaei, BMO Capital Markets

Good morning, Alex Arfaei, BMO Capital Markets. Mike, a follow-up question on the opportunities available to you, I appreciate your earlier comments on the branded generics and emerging markets. But what about looking at something like Merck's consumer care business to complement your OTC business? Is your preference on the pharmaceutical side as opposed to consumer products or will it really depend on the opportunity? Thank you.

Thanks. It's really depends on the opportunity. We don't think about -- I talk about therapeutic areas, we don't think about growing or not growing in a specific asset type. Again, what we're looking for is durable assets, ones where we believe we can achieve significant synergies and then maintain or accelerate growth in the assets that we purchase. So those are our criteria. And we have made consumer acquisitions in the past. We brought Afexa up in Canada a couple years ago. We've got some J&J consumer brands, and about a year ago, so I think as I mentioned on the last call about 25% of our overall business is consumer products at this point. We picked up some very nice consumer products with Bausch & Lomb, both the solutions business but also the vitamins and the allergy products that are growing very nicely. And we have a lot of skills we believe in the consumer area at this point.

Thank you.

Marc Goodman, UBS.

Howard, you had mentioned when you were talking about the changes to the revenue guidance you talked about surgical FX, generics, divested products, things, can you go through each of those and help quantify what changed and help us with some of the numbers? How much revenues are we losing with divested products on an annualized basis? And you mentioned contract manufacturing, you mentioned API, Brazil Probiotica. Can you go through those slowly and help us? Thanks.

Sure. I don't have each of those individual components at my fingertips, and Marc, a number of them are small. But they add up to a number which led us to take it down slightly. And so Retin-A Micro we said will cost us about $0.08 a share, so you can reverse engineer that. And it was very high margin product. So it was $25 million plus or so in revenue. The foreign exchange -- that will move around a lot.

I mentioned in Q3, versus the FX rates we use when we gave you guidance in August it cost us a little over $20 million in revenue. Just since those were end of July rates we used. So if that holds up, that will likely be another $20 million plus because our revenue will grow, so you're at roughly half of that number to begin with right there with those two items. The Bausch & Lomb surgical equipment business, there has been some slowdown in some of the big-ticket surgical equipment, but that's very low margin. As you recall on the surgical side you made your money by selling the consumables and the intraocular lenses, not the capital equipment. And then there were a bunch of little things, the divestures in Australia and the US, they're not large. In total for the quarter, they're probably in the $5 million to $10 million range.

There's one other that's new which is in Probiotica in Brazil, we were selling ingredients to third parties. We were buying ingredients for ourselves and also selling some to third parties hoping to get a better price by buying more of the whey protein, but we really weren't. And it became a bit of a distraction so we stopped that. That is probably another five or so, so there's a lot of little ones. And the contract manufacturing we do out of our low-vol plant in Canada we do a lot of contract manufacturing, and that's probably up to a $10 million softness. But again, as you know, the margin on contract manufacturing is quite small, so hopefully that gets you close enough to that number. The point is though that there are things, the Retin-A Micro and the FX obviously hurt. The other items are very low margin and we can absorb that elsewhere.

Louise Chen, Guggenheim.

Hi, thanks for taking my question. Back on to the debt portion of the M&A side, if interest rates were to rise meaningfully would there be any risk to your rollup strategy or does that not really concern you for the foreseeable future? Thanks.

In theory, as interest rates rise, asset values should come down. And again, when you think about the way we price our transactions, unlike maybe a traditional buyer, we're not looking at where this breaks even. We're not looking to arbitrage low interest rates for accretion to EPS. In fact, that's not even an analysis we really do. We're very IRR focused and we're payback focused. So obviously if you have to pay more, it will impact the cash flows coming and we'll have to adjust our valuations accordingly. But I don't see any reasonable increase in interest rates isn't going to change our opportunity set. Certainly it won't change how we approach things and we will continue to be able to allocate capital. The key, as Mike said, is that we remain disciplined as to how we allocate capital.

Annabel Samimy, Stifel.

Thanks for taking my question. I know a lot of the focus has been B&L and the emerging markets have been strong, but you've made a pretty big investment in the derm space last year and it's a little bit disappointing to see the low growth as well as serious impact from some erosion of your products. So what type of investment do you think that you need to make to be able to take advantage and monetize on this critical mass that you've essentially invested in in this derm business?

Actually, if you think about the issue with derm has largely been Zovirax which had nothing to do with the investment we made last year in derm. It goes back to the Biovail acquisition, and if you look at returns we've made in Zovirax since we made that acquisition, it's more than paid for itself many times over. So if you look at the assets that we brought, Medicis, as Howard said, we are actually pleased with its performance, its cash flows continued to exceed the model we have. Again, as Howard mentioned, the aesthetics business, the piece of it that we were most excited about which is completely protected, because it's a business that's growing in the US. We still have a relatively low share which we think we can increase. And our interests are completely aligned with that of our customers because they -- the more they do the more money they make and the more money we make.

Solodyn's really been the only real disappointment. So we maybe have lost about $50 million top line for Solodyn, but we've made that up, more than made that up on the orphan drugs and then Luliconazole, which will, we hope will get approved and the extension of the patent lives of Ziana and Zyclara. From an investment standpoint in Medicis, we're very comfortable that we'll continue to deliver superior returns to our shareholders. So the biggest, in my mind the biggest issue that we've had to deal with this year, was the loss of our largest product.

In terms of RAM and BenzaClin those were both figured in the models for Ortho and Dermik. If you look at the prices we paid for those two assets, they were very inexpensive, around two times and one of them was even less than two times sales and we've already pulled the cash out of both those acquisitions. With the Dermik one, we got Sculptra, which is part of the aesthetics business now and is growing very nicely and throws off a lot of cash. And there's a number of products from the Ortho business that we've continued to grow, so again, Solodyn's probably the biggest disappointment. It's probably where we thought we could stabilize it closer to the $250 million level, it's $200 million. So in a sense there's a $50 million miss. But if you add up all the acquisitions we've made, we'd more than offset that by increases in other products.

Gary Nachman, Goldman Sachs.

Hi, good morning. Mike, on B&L, now that you've had it for a few months can you just give us a little more on what are the parts of the business where you're most pleasantly surprised and where do you foresee the greatest challenges? You mentioned surgical was slow but could you also address pharma and vision care?

Yes. Asia is probably jumps to mind first in terms of the opportunity set. I think Bausch & Lomb still has very strong market share positions in terms of contact lenses. And again most of the pharma businesses in Asia are more OTC. So both pharma and vision care in Asia we think we can really accelerate the growth. I think we talked a little bit about on Bausch & Lomb when they operated all decisions were made at corporate including new products and M&A and everything like that. And there's a lot of local opportunities. And they also, for example, in terms of the launch of the new daily lenses, Asia was going to be the last market without the lenses. We're now going to make that a priority market to get the lenses so Asia is one area. I think the strong growth in Pharma in the US as Howard mentioned 15% growth that was largely driven by pharma and then the OTC's and that's a great business.

I also think in a lot of markets where they were subscale, places like Mexico and Canada, where we have large businesses. Our presence in those markets will actually help them dramatically, for example in Russia, they didn't have any sales force per se, they used a contract sales force. We have more than 600 reps that are calling on pharmacies. So we should be able to really accelerate the growth of their pharma business which is largely OTC's. So there's a lot of opportunities like that. Probably the area that's been most disappointing is in the surgical equipment area, as Howard mentioned. Part of that is probably the overall market conditions, but part of that was also, there was some technical problems in the TPV plant and manufacturing area that there has been a backorder on some of those equipment, which should be worked out this quarter, so part of that was due to the supply. So hopefully that gives you a bit of a feel for some of the ups and downs.

Yes, and just a quick follow-up on the 10% organic growth, when you think about sustainability, do you need new products in order to achieve that? Or do you think you could do it with the existing business?

Actually, they have a bunch of new products which is the good news. So it's a bit of a theoretical question because they had eight product approvals. There's a bunch of product approvals that we expect to get next year. As you know as well as I do it's much easier to get approvals in OTC and in devices than it is in pharmaceuticals. So there's a number of -- we have the Zeus opportunity, or the silicon hydrogel lens that we're launching, the daily contact lenses that we're launching, Proxy Clear which is a new OTC product. So I think with the new products and the momentum, we would hope to, as Howard said, maintain the roughly 10% growth rate for the foreseeable future with the Bausch & Lomb business.

Thank you.

David Risinger.

Yes, thanks very much. My question is on M&A. And I guess it's two parts. Really, the first is, Howard had commented positively on US generics, but Mike, I think you had emphasized durable assets. So with respect to generics, do you see US and Western European generics as durable? And then could you comment further on the potential for large equity swap deals? I think in the past, Mike, you have aspired to do a large merger of equals using equity. And could you talk about after having had discussions with other large companies, what the potential is for such a large equity swap deal and what investors should expect on that front in the near to medium term?

Sure. So I think US generics and European generics, certainly US generics are more attractive than Western European generics in our view, but not all generics are equal. I think that it's similar to our view of the world in terms of the US marketplace, large primary care products are probably from a generic standpoint the least attractive. There is specialty generics. They fall in so the same areas that we're in if you look at topicals and if you look at injectables and some of the more specialized forms, you can actually make good money for long periods of time. I think that's what Howard was referring to where Bausch & Lomb had a number of ophthalmology drugs that have gone generic and it's a pretty good business. So we think portions of generics can be durable. But the high litigation sort of -- the high litigation strategies and that type of thing we're probably less comfortable that we're good at that.

In terms of the large equity slump, it's a very difficult question to answer. Clearly, it's something that we're interested in. We are not going to do it at a premium so don't expect us to offer some big premium for a company using stock. We would want to do more of a merger of equals. And when I say merger of equals it's less referencing the size of the company, it's more referencing that two companies can create shareholder value by in a sense doing a no premium deal, yet both sets of shareholders really get the benefit, similar to what we did a few years ago with Biovail. And you can't predict when something like that will happen. Do I think it will happen at some point? Yes. In terms of timing, it's just impossible to say.

Great. Thank you.

David Krempa, MorningStar.

Thanks for taking the question. Going back to your China presence, do you think your ophthalmology presence you will be able to leverage that into other products like derm and branded generics or would that require significant more reinvestment?

No. We are having our team over there look at that right away. Now, it takes a while to get products approved in China. It's one of the more difficult markets, but we certainly have the infrastructure that -- so it's probably not going to have any impact next year but probably the year after we'll start seeing that. I think the other point to make about China is we're very pleased that we sell very few products to hospitals there, which is the issue in China right now. Most of them are OTC direct to consumer contact lenses and OTC's. So what we don't have is a big sort of traditional pharmaceutical business and we don't have the large infrastructure of -- we don't have, many other companies have thousands of reps running around in China. We do not have that. So it's probably going to be more in the OTC and the device area that we'd be bringing products in, less so in the pharmaceutical side.

Great. Thanks.

Yi Chen, Aegis Capital.

Thank you for taking my question. Regarding efinaconazole, do you expect it to be a drug superior to Tavaborole in the nail fungus market? Thank you.

Yes. We do.

Thank you.

Lennox Gibbs, TD Securities.

Good morning, thanks. TD Securities. How would you characterize Bausch & Lomb, and I guess by extension Valeant's competitive advantage in the global contact lens market, particularly given how capital-intensive that business tends to be? As well as the typically high R&D requirements of that business?

Our competitive advantage I think -- Bausch & Lomb has had the biggest competitive advantage probably is their brand name and their heritage. They invented the category. So around the world, Bausch & Lomb, probably less so in the United States, but certainly in Asia, and as I think we've mentioned in China, disposable contact lenses are known as Bauschies. So an excellent brand name.

Bausch & Lomb had not introduced a new contact lens for almost a decade when we bought the Company. But what they did do is recently reinvested quite a bit of money into development. So earlier this year, they launched a daily, disposable daily lens, which we believe is a very, very good lens. We announced a hydrogen, silicon hydrogel lens which will be more of a biweekly or monthly lens which is we think will be highly competitive. And then we recently launched a Pure Vision Two multi focal, which is a redesigned multi focal lens, which is getting terrific reviews in the United States and we need to roll that out around the world. So I think we now have a set of products that are at least as good, if not better than what our competitors have. And we have the brand name.

In terms of going forward, it is a slightly -- one has to continue to invest in manufacturing and those types of things. And as long as we can grow that business and make it profitable, we will invest the necessary money to make it sustainable. Again, but just like other parts, we believe the approaches other companies have taken to contact lenses, I think we've proven we can do things in a lower cost way than our competitors in these industries. And I think we do believe we'll come out with lower cost ways of sustaining the contact lens business than others in the industry. I think that's, if we're good at anything that's one thing we're probably pretty good at. So we are excited about that business.

Okay. And then just a quick follow-up, where do you think you have a better view as to the CapEx that's going to be associated with the launch of Biotrue and Zeus? Or more so Zeus I guess than Biotrue?

As we mentioned, we're going through the budget process right now, which includes figuring out demand for these new products around the world, which will obviously drive how much capacity we need and what capital is going to be required. So I would suspect January, certainly in January when we have our guidance call, we'll be giving you a sense as to how much capital's going to be required for the business next year.

Thanks very much.

Okay. With that, we're going to end the call. I want to apologize again for the technical difficulties. And we wish everyone a good Halloween.

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