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EXPLANATORY NOTE
The following is a copy of the transcript of Valeant Pharmaceuticals Internationals
(Valeant) conference call and live Internet webcast on August 2, 2010 relating to
Valeants 2010 second quarter financial results.
FINAL TRANSCRIPT
VRX Q2 2010 Valeant Pharmaceuticals International Earnings
Conference Call
Event Date/Time: Aug. 02. 2010 / 2:00PM GMT
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
CORPORATE PARTICIPANTS
Laurie Little
Valeant Pharmaceuticals International IR
Mike Pearson
Valeant Pharmaceuticals International Chairman, CEO
Rajiv De Silva
Valeant Pharmaceuticals International COO, Specialty Pharmaceuticals
Peter Blott
Valeant Pharmaceuticals International CFO
CONFERENCE CALL PARTICIPANTS
Corey Davis
Jefferies Analyst
David Amsellem
Piper Jaffray Analyst
Gregg Gilbert
Banc of America Merrill Lynch Analyst
Juan Sanchez
Ladenburg Analyst
Sakib Mersa
JPMorgan Analyst
Sakhim Cha
Analyst
Michael Tong
Wells Fargo Analyst
PRESENTATION
Operator
Good morning. My name is Gordon, and I will be your conference operator today. At this time I would
like to welcome everyone to the Valeant Pharmaceuticals second-quarter 2010 earnings conference
call.
(Operator Instructions). Laurie Little, you may begin your conference.
Laurie Little - Valeant Pharmaceuticals International IR
Thank you, Gordon. Good morning everyone, and welcome to Valeants second-quarter 2010 financial
results conference call. Joining us on the call today are Mike Pearson, Chairman and Chief
Executive Officer; Peter Blott, Chief Financial Officer; and Rajiv De Silva, Chief Operating
Officer, Specialty Pharmaceuticals.
In addition to this live webcast, a copy of todays slide presentation can be found on our website
under the Investor Relations section within the webcast event details.
Before we begin please turn your attention to the second slide containing our cautionary statement
regarding forward-looking statements and other important information. Certain statements made in
this presentation and other statements made during this call and the Q&A session afterwards may
constitute forward-looking statements.
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1
FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
All forward-looking statements involve risks and uncertainties that could cause actual
results to differ materially. These include, but are not limited to, risks and uncertainties
discussed in the Companys most recent annual or quarterly report filed with the SEC, and risks and
uncertainties relating to the proposed merger as detailed from time to time in Valeants and
Biovail Corporations filings with the SEC, and in Biovails case, the Canadian Securities
Administrators.
In addition to supplement the consolidated financial results prepared in accordance with Generally
Accepted Accounting Principles, the Company uses non-GAAP financial measures that exclude certain
items. These non-GAAP items include financial measures such as adjusted cash EPS, product sales
growth and adjusted cash flow from operations.
Reconciliations of GAAP to non-GAAP measures can be found in the tables to our second-quarter
financial press release, which was issued earlier today and can be found on our website at
www.valeant.com. Please also note the additional information we have included regarding our
proposed merger with Biovail and where investors can find important information about the proposed
transaction.
With that I will turn the call over to Mike Pearson.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Good morning everyone and thank you for joining us. On todays call I would like to first
discuss our second-quarter results and the outlook for the rest of the year. Second, update you on
our progress against our six strategic initiatives for 2010.
Third, I will have Rajiv discuss Valeants operations. Fourth, have Peter give some more
details around our financial performance. And, finally, at the end I would like to briefly discuss
our integration and planning process with the merger with Biovail.
On slide three. Our businesses again, delivered another solid quarter on both the top line and
the bottom line. Each of our businesses delivered double-digit growth and contributed to our
overall product sales growth of 32% for the quarter and 33% for the year-to-date.
Our cash EPS also grew 33% on an annual basis, and we are raising our earnings guidance for the
year to $2.80 to $3.05 cash EPS.
During the second quarter we closed five commercial acquisitions in addition to our announced
merger with Biovail. We spent approximately $440 million for these acquisitions. To pay for these
acquisitions we raised $400 million in debt in early April and incurred additional interest expense
for the majority of the quarter.
In total these acquisitions contributed only $19 million to our top line in the second
quarter of 2010; and therefore, once the extra interest expense is included the net impact in the
quarter of these five acquisitions on cash EPS was negative.
All of these acquisitions are off to a very good start. And starting in the third quarter we
expect them to be accretive to cash EPS, even considering the extra interest expense.
Given everything that has happened this quarter, we thought it would be helpful to provide you with
more specificity into our cash EPS progression. The growth in our base business was the primary
driver in our improved performance and in aggregate delivered $0.17 to our bottom line.
The rest of our activities resulted in a combination of positives and negatives to our cash
EPS. The positives included reduced corporate expenditures, increased marketshare in the generic
BenzaClin compound we licensed to Mylan, which we refer to as IDP-111, and a reduction of costs in
our GSK collaboration as we near the end of the collaboration development agreement.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
These upsides were then offset by several decreases in the quarter, including the expected
reduction in the ribavirin royalties, and our increased stock-based compensation and share count of
our converts due to the increase in our stock price. And finally, the increased interest expense
from our additional debt.
On January 8 we provided guidance to our investors that we expected our product sales in 2010 to
increase by greater than 20% over 2009. On our last conference call we then increased this guidance
to greater than 30%. Now that we are halfway through the year we expect that our product sales
growth to increase to greater than 35% for the full year, excluding the Biovail transaction.
We have also made some adjustments to our individual business units growth rates, as you can
see on the slide. For example, or US derm and Canadian businesses are expected to grow well ahead
of our original projections for the year, while on the other hand, we have lowered our expectations
in Europe due to the market dynamics in the first quarter of 2010.
Turning to organic growth. Our organic growth for the first half of 2010 was 9%, and we
continue to expect to deliver full-year organic growth greater than 10%. There were several areas
that have worked against us in the first half of the year. This includes an additional competitor
for Efudex in the US, lower-than-expected performance from our Nyal brand in Australia, as well
as weaker economies than expected in Mexico and Europe. But our base business remains strong, and
we expect to see improvement in this area in the second half of the year.
Over 70% of our new product launches in 2010 are scheduled for the second half of the year. And I
remain confident that we will deliver double-digit organic growth for the full year of 2010.
I would like to touch on our strategic initiatives for 2010. After six months of the year, we have
largely met them all. The first was to grow our worldwide dermatology business to $500 million in
2010. We have made significant contributions to our dermatology portfolio over the past several
months, including our latest acquisitions in Brazil. As we look toward the
end of the year our current dermatology portfolio should be operating at a run rate of
approximately $450 million, nearing our stretch target of $500 million.
Once our Company has merged with Biovail, we will then add the Zovirax franchise to our derm
portfolio, bringing our year-end run rate to nearly $600 million.
We continue to make progress on partnering our dermatology pipeline, which we do expect to have in
place before the end of the year.
Our second strategic initiative involved Retigabine. We continue to move forward with our MR
development program, and we continue to have productive interchanges with the regulatory
authorities in both the US and Europe on our IR submission. We have been busy preparing for
Advisory Committee next week in Washington and we hope to see many of you there.
The PDUFA date still remains August 30, although for planning purposes we continue to assume
a first-quarter 2011 launch.
Canada and Brazil. This past quarter we completed several acquisitions in both Canada and
Brazil. In Canada we also expect to launch Onsolis in the third quarter and Ultravate in the fourth
quarter.
In Brazil we are making good progress in integrating both the Brazilian acquisitions, both of which
closed in April. Early results are excellent, and I am quite bullish about our business in Brazil.
Latin America and Europe. As with the previous initiative with our derm portfolio, we are well
on our way towards meeting this objective with our latest acquisitions in Brazil, which should add
at least $80 million in incremental sales on an annual basis. We currently expect that our year-end
run rate for the combined businesses in Latin America and Europe will be over $500 million.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Over delivering on past acquisitions. We continue to monitor the
performance of each of our acquisitions against the financial models we used to justify each deal
to our Board. We plan to present a specific update, as usual, on our third-quarter call. We are in
the early stages of doing this analysis, for this year, but it is already clear that in aggregate
our acquisitions to date are running well ahead of forecast.
Finally, cash flow from operations. After our second quarter we are on track to exceed our $275
million guidance on cash flow from operations for the year. We have not made the working capital
improvements yet that should free up even more cash, but I suspect youll begin to see progress on
this initiative by the end of the year.
Because we have largely accomplished our six objectives, our main strategic priority for the rest
of 2010 will be the successful integration of Biovail, which I will discuss at the end of the call.
Now I would like to turn the call over to Rajiv to discuss our operations.
Rajiv De Silva Valeant Pharmaceuticals International COO, Specialty Pharmaceuticals
Good morning. Let me begin with a review of our US dermatology business. As we have
shared with you previously, we continue to see strong growth and improvement in Acanya and
Atralin, our two largest promoted prescription dermatology brands, demonstrating an ever-increasing
physician and patient acceptance of these products.
This slide depicts the substantial prescription volume growth we have seen over the past 18
months. Acanya continues its strong trajectory with more than 23,000 prescriptions written in the
month of June, an over 40% increase over the 16,000 prescriptions written in January.
Atralin achieved an all-time high of 15,000 prescriptions in June, which is more than a 50%
increase over June of 2009 and a 22% increase over January 2010.
As shown in the next slide, as for the prescription volume trend, we also continue to see solid
increases in our marketshare for both products. Atralin now holds 15.1% of the market for promoted
Coria lines among dermatologists, growing 2.5 share points this year.
Acanya has captured a 16.7% marketshare among fixed dose Clindamycin BPO combination products among
dermatologists, growing 5.7 share points this year.
In addition, as the next slide illustrates, when we aggregate the number of prescriptions written
for Acanya and generic Clindamycin BPO combination products, which is developed by our own Dow
Pharmaceuticals, and which we license to Mylan and retain a financial interest in, Valeant now has
a higher share than BenzaClin in the fixed dose Clindamycin BPO combination market.
In addition, with the combined marketshare of 36.4% in June, we are fast approaching [direct
positioning in this market] as well.
Moving onto the next slide, CeraVe continues to be a very strong performer in our dermatology
portfolio. The growth in this product has increased substantially this year. As this slide
illustrates, our growth for the first half of 2010 is almost 100%, up from 45% growth for the full
year in 2009.
All three core product lines, the cleanser, the cream and the lotion, are ranked within the top
three in retail drugstore sales, as measured by SKU rankings.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
We launched CeraVe PM, a nighttime moisturizer, in January of this year, and this launch is
progressing extremely well. In addition, we will be launching two new SKUs in August, CeraVe AM, a
moisturizer for daytime use containing SPF 30 sunscreen, and a forming cleanser.
A topic that many investors inquire about is our lifecycle management of Diastat and how we
plan to prepare for generic launch by Teva in September. Although exclusive license with Teva
precludes Valeant from introducing our own authorized generic, we do have a strategy in place to
help us to retain as much of our marketshare and economic value as possible.
In essence, we plan on treating our Diastat product as if it would a generic, providing our
patients with the ability to continue to use the product that they know and trust, but at a lower
price than a typical branded product.
We plan on decreasing our WACC by at least 25% upon the launch of the generic, with a goal of
maintaining a significant share of the Medicaid units, which currently makes up a large portion of
this market.
With the remainder of the market we have a target of maintaining 20% to 40% share of private pay
unit. And we are currently engaging in active contract negotiations to implement this strategy.
As a wrap up to our Specialty Pharmaceuticals product discussion, I wanted to highlight where
we expect much of the growth in the back half of 2010 to come from. As you can see on the chart
on the screen, although we have launched 18 products and line extensions so far in 2010, we also
have
another 47 planned throughout the remainder of the year.
Many of these products have the potential to be substantial contributors, such as Onsolis in
Canada. These launches also include several line extensions for our OTC and cosmeceuticals
products, such as Hissyfit in the US, Dr. Renaud in Canada, and Dr. LeWinns in Australia.
Now I would like to turn the call over to Peter to discuss our financial performance. Peter.
Peter Blott Valeant Pharmaceuticals International CFO
Thank you, Rajiv. Today we reported our second-quarter 2010 results. Mike has already touched upon
our topline growth, which you can see is summarized here.
Our cost of sales sold expenses for the quarter was 28%, as compared to 26% in the second
quarter of 2009, and 27% in the first quarter of 2010. This slight increase relates primarily to
the impact of past acquisitions, such as Tecnofarma and Emo-Farm, and now our recent acquisitions
in Brazil. We expect to remain at around this basic level for the remainder of 2010.
We continue to maintain a tight rein on our expenses. SG&A expenses were 33% of revenue in the
same quarter of 2010 versus 36% in the second quarter of 2009, and 34% in first quarter of 2010.
Most of this improvement came from reductions in general and administrative expenses.
R&D expenses were in line with our expectations at $12 million for the quarter, compared to
$9 million last year. This increase relates to activity on our dermatological programs. We expect
our R&D to be approximately $50 million for the year.
Interest expense increased from the prior year due to the issuance of our 7 5/8% senior notes on
April 9, 2010, coming to $20 million in quarterly interest expense. In our third quarter we will
see our 3% convertible debt mature, which will bring down interest expense slightly going forward.
Of course, all of this will change upon completion of the merger with Biovail.
Bottom line, we achieved cash earnings per share of $0.69 as compared to $0.52 in the
comparable quarter one year earlier.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Our adjusted cash flow from operations for the quarter was $62 million. Although we continue to
see strong cash flow, our second-quarter cash flow from operations did not grow proportionally as
well as revenue and earnings. It was adversely impacted by several items. First, our biannual
interest expense payment was made was paid out during the quarter, totaling $20 million.
Secondly, we saw a number of areas where working capital increased, notably higher accounts
receivable and inventory balances, much of which was impacted by our most recent acquisitions.
We expect to see these working capital increases as a short-term phenomenon. Our management is
committed to improvements in this area.
We have provided guidance that we expect our adjusted cash flow generation in 2010 to be north of
$275 million for the year. Clearly we set this target before the announcement of, and independent
of, the proposed merger with Biovail. We remain confident in achieving that objective without
taking the merger into account.
Our operating margins have also improved, raising from 38% one year ago to 41% in this quarter.
Last quarter we presented a graph that depicted our quarterly progression in adjusted cash earnings
per share for 2009 and our estimate for 2010. We now have another quarter under our belts, and
expect that our strong cash EPS growth will continue. This performance leads us to increase our
current guidance for 2010 to $2.80 to $3.05 cash earnings percent cash earnings percent from our
previous guidance of $2.65 to $2.90 of cash EPS.
This guidance is based upon Valeant on a standalone basis, and does not take into account any
impact from the proposed merger with Biovail, including transaction, financing or restructuring
costs.
We expect the merger to close before the end of the year. This would mean that we would not expect
to present earnings of Valeant on a standalone basis for the full year 2010.
I would now like to turn the call back over to Mike to touch on our progress with the proposed
merger with Biovail.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
I would like to provide you with a brief update on the proposed merger. Our integration planning is
well underway. We kicked off our integration planning in early July and identified the 12 work
streams shown on this slide.
For each work stream we have planned a leader from one of the two companies top management teams,
created synergy targets, both base and stretch, and identified specific end products and timing for
completion.
I expect to have all of our key integration planning decisions in terms of the new Valeant made by
the end of September, including management and people, final synergy expectations for 2010 and
2011, the ongoing R&D portfolio, and specific locations and facilities for the new Valeant.
By now all of you should have already seen the notice that we have received early termination
of HSR. Finally, both companies have identified their five continuing Board members, and the
process for choosing the 11th board member is well underway.
In summary, our second quarter of 2010 continues our progress in delivering solid operating
performance, generating strong cash flows and producing significant bottom-line results for our
investors.
Through organic growth, margin improvement and our acquisition strategy, I believe that we
are delivering on our goal of returning significant value to Valeant shareholders, and providing
our employees and patients with a strong future.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
With that we will now open up the call for questions. Operator.
QUESTIONS AND ANSWERS
Operator
(Operator Instructions). Corey Davis, Jefferies.
Corey Davis Jefferies Analyst
I think you are the only company that I have ever covered that gives organic growth rates, so
thanks very much for that. But a couple of questions around that.
First, can you just remind everybody of your strict definition for what qualifies for organic, and
what is excluded from that? And second, can you take a rough stab at what your organic EPS growth
was in this quarter? And I will pause there before I ask one more.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Peter, do you want to cover the calculation for organic growth, and then I will try the second part
of the question.
Peter Blott Valeant Pharmaceuticals International CFO
Certainly. The two elements we remove out of our product sales growth are all currency effects. So
essentially we take out the currency effects. We lay this out on a table, I think it is table 3 in
the notes. And then we also exclude the acquisitions of all the businesses and products that we
have bought in the last 12 months.
So, essentially, anything that was bought more than 12 months ago gets included in organic growth,
but any of the acquisitions or products bought
in the last 12 months get excluded out of that organic growth calculation.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
In terms of the second question, I cannot give you a precise answer, but I can tell you that our
organic earnings growth is significantly higher than our organic sales growth. Because, again, all
of them have come with significant synergies, when we have made these acquisitions in terms of the
ones that now are rolling into an ongoing year-on-year organic growth rate. And in terms of our
businesses, as you can see through our continued reduction in SG&A, we continue to gain
efficiencies in all our businesses.
Peter Blott Valeant Pharmaceuticals International CFO
Maybe one other point to say. I think we did highlight that because of some of the acquisitions in
the second quarter came relatively late on in the quarter, such as Aton, they didnt contribute
that much, but they will contribute more in the second half of the year, because that one was all
the end for basically one month of the quarter. And yet with the money that we borrowed at the
start of the second quarter, we have the interest expense throughout the quarter.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Corey Davis Jefferies Analyst
When you give your report when you report Q3 will you tease out the effects of the acquisitions
all the way down to the earnings line?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Yes, what we are going to do is in each case we have sort of a model, an NPV model that
we do in terms of that we take to the Board to justify every acquisition. And we will we
will do our best to figure out what is the cash now being generated by those acquisitions. So we
will be focusing on cash flow generation opposed to earnings generation.
Peter Blott Valeant Pharmaceuticals International CFO
There is some interaction when we do integrate these businesses into our existing businesses
in each of the countries. There is some degree of synergies that we always expect, and therefore,
some things like G&A expense is very difficult to actually split between what came from the
acquisitions and what came from our products. Therefore, well make that distinction when we do
the third-quarter earnings call and update. And essentially that is going to be similar to how we
did it last year.
Corey Davis Jefferies Analyst
Last question, I promise. In the second half of the year in order to hit your guidance, obviously,
you must have confidence in Latin America and Europe, but any more specifics you can give us as to
how youre going to get there?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Sure. I was actually both in Europe and Latin America last week and we sat down and sort of
discussed the second year. Actually, in Europe the market has turned towards the better. You can
see that we grew organically, I think 9% in the second quarter. The market, which was negative in
the first quarter was negative by over 10%, has now turned positive. It is about a 3% positive
in the second quarter. That continues to improve. So part of it is just an improvement in the
market itself.
The second is we have quite a few launches in the second half of the year. We thought they
would be more evenly spread out, but regulatory delays have pushed some of our first-quarter
launches into the second quarter. But we do have a number of approvals now, so as we speak we are
launching a number of new products.
So we feel quite good, both in terms of the market itself, the underlying growth of the market,
which we continue to grow faster than and continue to increase share, as well as the new launches.
From a pricing standpoint, in terms of the markets that we are involved in, pricing is about flat
slightly positive, less than 1% positive, so all of this is through volume growth.
In Mexico, again, we made some decisions in terms of how we price some products, and some other
things in the first half that didnt work out as well as we had hoped. Again, we feel that there
are some things we could do to really boost the sales growth over there.
The overall market is flat to declining. It is also not a great economy in Mexico. But our
generics business, which we acquired from Tecnofarma, is the fastest growing segment in the
market, and we now have I think have our pricing right and feel a lot more optimistic in our
ability to see significant growth in that area.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Then finally, Brazil. Brazil is a market that is doing really, really well. As that becomes a
larger piece of our overall Latin American business, the underlying growth rates we are seeing in
Brazil are quite, quite strong, and so we would expect high double-digit growth in Brazil for the
second half of the year.
Again, you just saw a little bit of the acquisitions in the second quarter will now be seeing
the full impact in the third and fourth quarters. So I think Brazil in the end will drive our
growth in Latin America.
Operator
David Amsellem, Piper Jaffray.
David Amsellem Piper Jaffray Analyst
Just a couple questions. Lets start with the neuro business. You cited 12% year-over-year growth net of FX
and acquisition, so I am wondering what are the sources of the organic growth? And can you talk
about what you see as sources of organic growth for the neuro segment going forward?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Sure, I assume youre talking about our US neuro- business?
David Amsellem Piper Jaffray Analyst
Yes.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Good. So we continue to have a number of new product launches in some of our areas there.
Bedoyecta, which is it is neuro and other, which is an energy boosting product. We have a number
of new SKUs being launched there. We have a number of products that actually had been discontinued
in the old Valeant that we are reintroducing, and we expect to see some of those in the second half
of the year. We also continue to launch some AGs associated with some of our brands that do not
have patent protection, so rather than just sell the currently marketed products, we will add AGs.
We also take some price in terms of neuro in the US. But the business is growing. We also have
a number of nonfield-based promotional efforts out there. So products like Mestinon and Im
sorry. I cant hear. (multiple speakers). Migranal Reduced Time, yes, Migranal are growing quite
significantly on a unit basis.
So what we will do is we will lose Diastat in terms of exclusivity, and that will work
against us. But we feel pretty comfortable that we have a pretty good plan in place in Diastat, so
that we will retain a significant amount of Diastat as well.
David Amsellem Piper Jaffray Analyst
Then just following up on the neuro and other US. What kind of year-over-year growth came from the
Aton Pharma products, and what should we be expecting in terms of growth from those products going
forward?
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9
FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
So we will not count any kind of Aton Pharma growth in our organic number until a year has passed,
as Peter was explaining earlier.
In terms of the run rate of the business, we indicated when we purchased Aton that we were
expecting an $80 million to $100 million run rate for the year. We have actually been pleasantly
surprised by that business. Based on at this point roughly two months of performance we are
running at a rate that is well over $100 million. So I think if you put in $100 million annual run
rate, that would be a relatively conservative number.
Rajiv De Silva Valeant Pharmaceuticals International COO, Specialty Pharmaceuticals
Just to add to that. If you look at Atons own numbers for the full year of 2009, which we
obviously dont consolidate, on a year-on-year basis we expect growth to be roughly about 50% for
the orphan products and a similar percent for the ophthalmology products, so it is a substantial
run rate.
David Amsellem Piper Jaffray Analyst
Then one last question, if I may. Just talking about Brazil and Latin America, you mentioned I
am sorry, Brazil and Mexico, you mentioned product launches over the latter half of this year. Can
you give us a sense of how many products, generics and brand products you are expecting to launch
in Brazil and Mexico over the latter half of this year? And also give us a view on what you may see
in terms of new launches in those markets for 2011.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Sure. I think that roughly 5 products, 4 to 5 products in Brazil over the rest of the year, and
closer to 10 products in Mexico over the rest of the year. Going into next year, probably somewhere
between 5 and 10 for each market.
Operator
Gregg Gilbert, Banc of America Merrill Lynch.
Gregg Gilbert Banc of America Merrill Lynch Analyst
First, for Peter, can you comment on the Glaxo payment and why that was so high this quarter and
how we should model that in the next few quarters?
Peter Blott Valeant Pharmaceuticals International CFO
Certainly. As I think we have just discussed before, the alliance revenue that we record on the GSK
collaboration comes from the $125 million upfront payment we received in 2008. The collaboration
accounting required us to put that on the balance sheet, and then we release it to the P&L as we
complete our budgetary obligations.
This rate of return this rate of release depends on how far through the obligations we are, and
the mix of the obligations between ourselves and
GSK. Each quarter we agree a revised forecast for the collaboration, and it is that revised
forecast that drives the arithmetic of how much we released.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
I think we released of alliance revenue of about $9.5 million this year, as against about $5
million for the previous quarter. The biggest driver of that is we have now completed our higher
proportion of our obligations than what we were projecting previously.
In terms of modeling it going forward, youve got to essentially just play almost a zero sum
game to get to this. Eventually we have to release all of that $125 million, some of which against
our R&D expense, some of which against alliance revenue.
I would expect it to be if we continue we will look at another forecast next quarter, but we
expect it to be at this sort of level maybe for Q3, and then it will come down in Q4. And prior to
finishing our obligations, which Mike mentioned, we do for planning purposes into the first quarter
of 2011, it will probably be lower alliance revenue in those last two quarters.
Gregg Gilbert Banc of America Merrill Lynch Analyst
Thanks, thats helpful. Then on the working capital commentary you offered, can you give us a
little more specific color around what is behind some of those issues that you said would reverse
in the coming months?
Peter Blott Valeant Pharmaceuticals International CFO
I am not sure I am necessarily saying they will reverse. I am saying that we have tied up some cash
within working capital and on the balance sheet as of June. We have various things that we know we
are seeking to do and are committed to doing that will actually reduce those inventory balances,
those accounts receivable balances, which will release that cash into cash flow from operations in
the second half of the year.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
In terms of the inventory, some of this is probably we havent managed it as closely as we
probably should have over the first half of the year, so you can blame me for that. But I dont
think I think we are focused on that for the second half of the year, so you will see
improvements.
A piece of it is also part of the tech transfers we are doing between the plants. So, as you know
come in Mexico we are transferring a number of products in the process of shutting down some of the
plants that came with the Tecnofarma acquisition. And also in Brazil we are moving everything into
the new facility that we just bought. So as part of the transfer process you do have to produce
extra inventory to build a little bit of buffer.
So part of it will take a little longer to get out of the system as these transfers are
commonplace, but part of it we just then keep as close a watch on that particular metric this
quarter. So I think if you focus on something, good things usually happen.
Gregg Gilbert Banc of America Merrill Lynch Analyst
Mike, a couple questions for you. What is the earliest the deal could close, the Biovail deal?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
I think October is if everything goes well, probably by mid-October. That being said, I think so
far everything is going well. So right now for planning purposes we are thinking mid-October.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Gregg Gilbert Banc of America Merrill Lynch Analyst
So both companies will report one more quarter standalone in any event?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Yes. Well, I guess if we close before October, that will create a problem, but we dont expect that
to happen, so our assumption is yes.
Gregg Gilbert Banc of America Merrill Lynch Analyst
Lastly, Mike, a question on generics. You said some interesting things about the Diastat strategy,
and it sounds like youre doing some AGs now on some of the previous genericized products. What is
your interest level in generics as another leg of the stool beyond what we see already for
Valeant? I know you have some formulation expertise there in Dow, and it is obviously an important
part of the US healthcare all healthcare systems. Can you comment a little bit more about your
vision in generics for the new Company? Thanks.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Sure. So we certainly are committed to generics in the emerging markets. We continue to
explore generics in the US. We participate, if you consider the IDP-111, our Efudex generics or
other generics, it is not an unimportant part of our business.
We do believe that through our formulation capabilities at Dow, just like Dow came up with
IDP-111, which was a great product that is contributing very well, as you can see, this quarter, we
have started programs to develop other generic products for the US market. And, again, we are
focused on products that are not pills, but require bioequivalent (inaudible), so that leads to
better economics.
So I think the short answer is we are committed to this space in the US, but we are not going to
play against Teva or Mylan or Watson in terms of the pill business, but what we will do is play in
some of the more protected areas.
Operator
Juan Sanchez, Ladenburg.
Juan Sanchez Ladenburg Analyst
I have a question about the cost of goods say in Latin America. I know youre going through a lot
of changes in Brazil and Mexico. But they were 40%. We should think about them going lower going
forward? (multiple speakers).
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Yes, I had that same question, as you can imagine, and had a long discussion with Dr. Renaud and
the team last Thursday. Yes, there will be reductions in cost of goods going forward.
Part of this was Tecnofarma related and part of it is sort of the inventory
step up that you need to take. But part of it was we just had not moved as quickly as we needed to
in terms of moving some products from one plant to the other, so I think we lit a fire under them,
hope. I am sure Dr. Renaud is listening.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
So we are committed to that is an unacceptably high level of COGS, and so we have plans in place
to bring that down in the subsequent quarters.
Juan Sanchez Ladenburg Analyst
Also can you comment on COGS in the US? I think they were down to 17%. Is this because of the
acquisition of Aton Pharma, and what is going to happen going forward as well?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Well, I think the acquisition of Aton, as we mentioned in that call there, highly profitable
products, which help. But we continue to make great strides in the US. Our supply-chain group is
doing an excellent job. We continue to renegotiate contracts with our suppliers. quite frankly, as
we continue to grow our business. The large increases which Rajiv went through in Acanya, in CeraVe
and Atralin allow us to go back and get value discounts. So we would hope to continue to, at least,
maintain that COGS level in the US, if not improve.
Juan Sanchez Ladenburg Analyst
What kind of revenues did Brazil deliver this quarter?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Revenues in Brazil. Do you have that number, Peter? Well, we will get it to you.
Peter Blott Valeant Pharmaceuticals International CFO
We dont formally report Latin America between except for emphasis. But I dont have it at hand.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
So we dont have it for you, and we will think about whether we want to give it to you.
Juan Sanchez Ladenburg Analyst
Got it. One last question is going forward, lets say 2011 and 2012 under your definition of
organic growth, do you still think you can deliver double-digit more than 10%, especially in
Latin America, Europe and Australia?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Certainly for Latin America, and for Europe, I expect our organic growth to definitely be above 10%
next year and the following year. We are probably going through the most difficult time in those
markets that we have seen for years, and we still feel comfortable we will get it this year.
The underlying market in both, we believe, will continue to grow at higher single-digit numbers.
And given our product launches and the investment we are putting into sales and marketing, we
continue to expect to increase share.
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FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Australia is a slower growth market. As you can see, we have been disappointed in our growth rates
in Australia. That is largely around one product, Nyal, which was a legacy product. It was our
largest product, in fact, it was almost all we had in Australian when I got here. That, we are not
doing a good job on.
And I was in Australia about a month ago, and we are making some changes. The growth rate will
actually increase once the acquisitions have run for a year that we have made in Australia, so you
will see an increase in organic growth, but I would not at this point commit to double-digit
organic growth rates in Australian for next year. I would commit to overall Company double-digit
organic growth rates, but Australia, it will improve, it will be positive, but I am not sure we
will get to double digits.
Operator
[Sakib Mersa], JPMorgan.
Sakib Mersa JPMorgan Analyst
I was hoping for some background and context on the (technical difficulty) financing negotiations.
I guess specifically why werent we able to negotiate better, more certain terms, given the
combined companies profile? I am referring to the $100 million liability cap, and I guess the
explicit financing condition in the merger agreement.
Then just as a follow-up, any update on the syndication efforts? I believe the blackout dates
starts in a couple weeks. So are we going to be done by then or do we have to wait until after
Labor Day? And again, any update on your efforts with rating agencies and any bonds?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
I will let Peter take these questions.
Peter Blott Valeant Pharmaceuticals International CFO
I wasnt expecting to be going through that degree of level of detail, and to us, we are working
through the timetable with the underwriting banks on a joint basis with Peggy, the CFO of Biovail,
and on the Biovail finance teams.
I think as you are aware, we are working through the syndication process. And I think in terms of
the timetable for that I would rather refer you back to the underwriting banks, which I think you
are probably already in contact to, for the specifics of those dates.
Im not sure I would necessarily want to maybe this may be easier if you phone me directly just
to answer those sort of questions, if you have specific points, and we will do that with the
underwriting banks.
Sakib Mersa JPMorgan Analyst
Okay, I will do it. Thanks.
Operator
(Operator Instructions). [Sakhim Cha].
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14
FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Sakhim Cha Analyst
Just to clarify, you mentioned that youre expecting a mid-October close. Any comment on
where the competition in Canada stands? And also in relation to the shareholder votes, are you
expecting the shareholder vote sometime in mid October?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
So, I am sorry, the first question what was it, the competition in Canada?
Sakhim Cha Analyst
Yes, you are still awaiting for approval in Canada?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
No, no, actually Canada we actually didnt even have to file. So there is no delay in Canada.
(multiple speakers). In terms of the vote, I think the vote will obviously have to happen before we
close, and it is probably the gating item. So I dont know the precise date, but my guess is the
vote will be towards the end, early October would be my guess, but that is just a guess.
Sakhim Cha Analyst
Okay, so between early October and mid-October the difference is syndication or financing of the
transaction?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
No, I dont think the syndication the financing is not going to be the critical path. We have to
get the proxies out; we have to get the votes. We also have to wait for the SEC to give us a final
go-ahead.
Sakhim Cha Analyst
Okay, now just getting back to the financing, you are not seeing any issue in regards to that. Are
you seeing receptivity, the fact that you are paying a special dividend and what customers are
saying?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
So we met in New York with a lot of the potential banks, and I think we had a pretty good meeting.
We seemed to, if any, be over-subscribed at this point, so we dont see that as a problem.
Obviously, things could change in the world, and the answer might be different tomorrow or the next
day. But right now we actually feel quite comfortable with our ability to raise the money.
Peter Blott Valeant Pharmaceuticals International CFO
I think we are very confident that it is a very good debt story for the combined company, which are
the two companies individually that are generating a lot of operational cash flow. When you put
that together with the synergies from the combination it will be a very strong cash
generation story that I think is being well received by a number of the people we are talking to on
the debt side.
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15
FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
Operator
Michael Tong, Wells Fargo.
Michael Tong Wells Fargo Analyst
Just a quick follow-up on the Latin America business in terms of the gross margin trend. Obviously
come you mentioned about inventory step up, but that is a relatively small number. So, Mike, can
you be a little bit more specific as to what exactly happened there, and what the specific steps
youre taking to address that?
Peter Blott Valeant Pharmaceuticals International CFO
So just be a little bit more precise on the issue that you would like me to focus on?
Michael Tong Wells Fargo Analyst
That would be great.
Peter Blott Valeant Pharmaceuticals International CFO
No, I am asking I am sorry, I am asking you what are you asking about COGS, are you
asking about (multiple speakers)?
Michael Tong Wells Fargo Analyst
Yes, COGS.
Peter Blott Valeant Pharmaceuticals International CFO
Oh, COGS. Well, the steps we are taking, I was down in Mexico last week, and we went business
by business. We have really four businesses down there. We have a branded generics business. We have
a generics business. We have government business, and then we have sort of a Similarities-type business. So we went through each of the different business and worked through the actual COGS
of each of the businesses and what was leading to this overall 40%.
What we found out is that the good news is that if you just looked at the labor and the raw
materials, that represented less than 10% of the COGS and all the rest was overhead. The overhead
was largely because of the fact that we have five plants still running in Mexico. And that came
with the Tecnofarma acquisition. And we are in the process of transferring products from these
various plants. We plan to get down to two plants. So we are continuing to carry the overhead of
three plants that hopefully we will soon be out of.
So we have not been working quite as quickly as we wanted in closing those plants, and now we
have a plan in place that will shut down these plants, and those overhead charges in the COGS will
go away. So it is a fixable problem. It is related to how quickly can you get registrations and
move things from one plant to the other in Mexico. So it is a temporary phenomenon.
I think after my visit we have I think there is a lot more focus on that area for the rest
of the year. So, again, there is not a fundamental issue. It is all around how quickly we get these
products transferred into the lower cost plants.
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16
FINAL TRANSCRIPT
Aug. 02. 2010 / 2:00PM, VRX Q2 2010 Valeant Pharmaceuticals International Earnings Conference Call
In fact, once we get to the lower cost plants, it will be even better than our historic COGS
because these plants actually have lower labor rates and actually favorable tax for being located
outside of Mexico City.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
As Peter just to add one point. The actual peso or dollar value of the cost of goods may well be
lower than sorry, values. But the mix affect from us coming in with the Tecnofarma business,
which does have a significant government effect to contribution, which is a lower price, which also
affects the cost of goods percentage the mix of the actual product that we sold. So there is
some if you compare it with just purely with our historical business.
Michael Tong Wells Fargo Analyst
Mike, in your mind how quickly do you think you can get to two plants in Latin America?
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Well, now we are going to have (inaudible). So I would say within 12 months we would hope to
be completed with this process. But it will not be sort of even. There are some of the older plants
that are operating at very low capacities, because we have already moved things out of them, which
is you can do the math in your head. So each plant will be significant. The first plant will
have the most significant impact, but we would expect by next quarter that our COGS in Mexico,
youll begin to see that it will be reduced from this quarter, but probably 12 months to get the
full effect.
Operator
There are no further questions in the queue. I will turn the call back over to the presenters.
Mike Pearson Valeant Pharmaceuticals International Chairman, CEO
Okay, well, again, thanks everyone for joining us, and we look forward to updating you on the
merger as appropriate. So thank you.
Operator
This concludes todays conference call. You may now disconnect.
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17
Caution Regarding Forward-Looking Information and Safe Harbor Statement
To the extent any statements made in this document contain information that is not historical,
these statements are forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
may be forward-looking information as defined under applicable Canadian securities legislation
(collectively, forward-looking statements).
These forward-looking statements relate to, among other things, the expected benefits of the
proposed merger such as efficiencies, cost savings, tax benefits, enhanced revenues and cash flow,
growth potential, market profile and financial strength; the competitive ability and position of
the combined company; the expected timing of the completion of the transaction; and the expected
payment of a one-time cash dividend. Forward-looking statements can generally be identified by the
use of words such as believe, anticipate, expect, estimate, intend, continue, plan,
project, will, may, should, could, would, target, potential and other similar
expressions. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements. Although
certain of these statements set out herein are indicated above, all of the statements in this
filing that contain forward-looking statements are qualified by these cautionary statements.
Although Valeant and Biovail believe that the expectations reflected in such forward-looking
statements are reasonable, such statements involve risks and uncertainties, and undue reliance
should not be placed on such statements. Certain material factors or assumptions are applied in
making forward-looking statements, including, but not limited to, factors and assumptions regarding
the items outlined above. Actual results may differ materially from those expressed or implied in
such statements. Important factors that could cause actual results to differ materially from these
expectations include, among other things, the following: the failure to receive, on a timely basis
or otherwise, the required approvals by Valeant and Biovail shareholders and government or
regulatory agencies (including the terms of such approvals); the risk that a condition to closing
of the merger may not be satisfied; the possibility that the anticipated benefits and synergies
from the proposed merger cannot be fully realized or may take longer to realize than expected; the
possibility that costs or difficulties related to the integration of Valeant and Biovail operations
will be greater than expected; the ability of the combined company to retain and hire key personnel
and maintain relationships with customers, suppliers or other business partners; the impact of
legislative, regulatory, competitive and technological changes; the risk that the credit ratings of
the combined company may be different from what the companies expect; and other risk factors
relating to the pharmaceutical industry, as detailed from time to time in each of Valeants and
Biovails reports filed with the Securities and Exchange Commission (SEC) and, in Biovails case,
the Canadian Securities Administrators (CSA). There can be no assurance that the proposed merger will in fact be consummated.
Additional information about these factors and about the material factors or assumptions underlying
such forward-looking statements may be found in the body of this filing, as well as under Item 1.A.
in each of Valeants and Biovails Annual Report on Form 10-K for the fiscal year ended December
31, 2009, and Item 1.A in each of Valeants and Biovails most recent Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2010. Valeant and Biovail caution that the foregoing list
of important factors that may affect future results is not exhaustive. When relying on
forward-looking statements to make decisions with respect to Valeant and Biovail, investors and
others should carefully consider the foregoing factors and other uncertainties and potential
events. Neither Biovail nor Valeant undertakes any obligation to update or revise any
forward-looking statement, except as may be required by law.
Additional Information
In connection with the proposed merger, Biovail has filed with the SEC a Registration Statement on
Form S-4 that includes a preliminary joint proxy statement of Valeant and Biovail that also
constitutes a prospectus of Biovail. Valeant and Biovail will mail the definitive joint proxy
statement/prospectus to their respective shareholders. INVESTORS ARE URGED TO READ THE PRELIMINARY
JOINT PROXY STATEMENT/PROSPECTUS AND THE DEFINITIVE VERSION THEREOF WHEN IT BECOMES AVAILABLE,
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Investors may
obtain the preliminary joint proxy statement/prospectus and the definitive version thereof when it
becomes available, as well as other filings containing information about Valeant and Biovail, free
of charge, at the website maintained by the SEC at www.sec.gov and, in Biovails case, on SEDAR at
www.sedar.com. Investors may also obtain these documents, free of charge, from Valeants website
(www.valeant.com) under the tab Investor Relations and then under the heading SEC Filings, or
by directing a request to Valeant, One Enterprise, Aliso Viejo, California, 92656, Attention:
Corporate Secretary. Investors may also obtain these documents, free of charge, from Biovails
website (www.biovail.com) under the tab Investor Relations and then under the heading Regulatory
Filings and then under the item Current SEC Filings, or by directing a request to Biovail, 7150
Mississauga Road, Mississauga, Ontario, Canada, L5N 8M5, Attention: Corporate Secretary.
The respective directors and executive officers of Valeant and Biovail and other persons may be
deemed to be participants in the solicitation of proxies in respect of the proposed transaction.
Information regarding Valeants directors and executive officers is available in its Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, which was filed with the SEC on February
24, 2010, and in its definitive proxy statement filed with the SEC by Valeant on March 25, 2010.
Information regarding
Biovails directors and executive officers is available in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, which was filed with the SEC on February 26, 2010, and in its
definitive proxy statement filed with the SEC and CSA by Biovail on April 21, 2010. Other
information regarding the participants in the proxy solicitation and a description of their direct
and indirect interests, by security holdings or otherwise, is contained in the preliminary joint
proxy statement/prospectus filed with the SEC. These documents can be obtained free of charge from
the sources indicated above. Other information regarding the interests of the participants in the
proxy solicitation will be included in the joint proxy statement/prospectus and other relevant
materials to be filed with the SEC and the CSA when they become available. This communication
shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation
of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such jurisdiction. No offer of securities shall be made except by
means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as
amended.