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Valeant Pharmaceuticals International, Inc. (NYSE:VRX)

2013 Financial Guidance Conference Call Transcript

January, 04, 2013 08:00 AM ET

Executives

Laurie Little - Head of Investor Relations

J. Michael Pearson - Chairman and CEO

Howard Schiller – Executive Vice President and CFO

Analysts

Gary Nachman, Susquehanna Financial Group

Douglas Miehm, RBC Capital Markets

Marc Goodman - UBS Securities

Annabel Samimy - Stifel Nicolaus

Chris Schott - JP Morgan

David Risinger - Morgan Stanley

Corey Davis - Jefferies

David Amsellem - Piper Jaffray

Gregg Gilbert - Bank of America Merrill Lynch

Tim Chiang - CRT Capital

Michael Tong - Wells Fargo Securities

David Steinberg - Deutsche Bank

Operator

Good morning. My name is Beth and I will be your conference operator. At this time I would like to welcome everyone to the Valeant Pharmaceuticals 2013 Guidance Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Laurie Little, Vice President of Investor Relations. Please go ahead.

Laurie Little

Thank you, Beth. Good morning, everyone, and welcome to Valeant's 2013 guidance conference call. Joining us 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 today, may constitute forward-looking statements. Please see slide 1 for important information regarding these forward-looking statements and the associated risks and uncertainties. Readers are cautioned not to place undue reliance on any of these forward-looking statements. The company undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this presentation or to reflect actual outcomes. In addition, this presentation contains non-GAAP financial measures. For more information about these non-GAAP financial measures, please refer to slide 1.

Finally, the financial guidance in this presentation is effective as of today. It is our policy to update or affirm guidance only through broadly disseminated public disclosure.

And with that, I will turn the call over to Mike Pearson.

J. Michael Pearson

Thank you, Laurie. Good morning, everyone, and trust everyone had a good holiday break and we are pleased you are joining us this morning. On today's call I will provide a brief look back at our accomplishments in 2012, Howard will present our guidance for 2013, and finally I will discuss a few operational updates including our new initiatives for 2013.

2013 was another very strong year for Valeant. From a top line perspective we added over $1 billion in revenue in 2012 as compared to 2011, an increase in total revenue of more than 40%. This increase does not include any one-time items and is on top of overcoming approximately $200 million revenue decline in the year due to the genericization and continued erosion of four products: Cesamet in Canada, Cardizem CD, Ultram ER and Wellbutrin XL in the U.S.

On the bottom line, we delivered cash EPS growth of greater than 50% as compared to 2011, demonstrating once again the sustainability of our business model. Our businesses continue to deliver strong organic growth and we expect full year 2012 to have same stores sales organic growth of approximately 8% and pro forma organic growth of approximately 10%. We were also very busy on the business development front where we completed over 25 transactions, many that did not meet the threshold the of materiality and were too small to announce.

As in previous years we had a mix of small tuck-ins acquisitions, mid-sized transactions and then our acquisition of Medicis that closed in December. Over the past two years these transactions have provided an entry point to new growth platforms such as Oral Health, Podiatry, Anesthetics as well as new geographic territories such as Russia, South East Asia and South Africa.

The majority of our deals were purchased - and prices between two and three times sales well within our ongoing average. I'm also pleased that we greatly enhanced our management team of Valeant during 2012 with the addition of several new executives. Many of you remember Pavel and Andrew from our Investor Day, but we've also added Steve Sembler from OraPharma, who now runs our Oral Health, Ophthalmology and Consumer Operations. We welcome Jacques Dessureault, to run Valeant Canada, with Tom Schlader's retirement at the end of 2012 and we hired Marcelo Noll Barboza to manage our Brazilian operations, each of these executives bring valuable expertise to our operations.

In addition, yesterday we announced the addition of Laizer Kornwasser to the executive team. Laizer will be in-charge of our U.S. Neuro and Other, Canada and various other U.S. operations and will be joining Valeant on February 1.

Finally, we have added several key members of the Medicis team, Jason Hanson, Justin Smith and Vince Ippolito who will be key asset as we continue to grow our U.S. operations.

2012 was also a very strong year in the area of R&D. Several submissions were filed this year, Efinaconazole, in the U.S. and Xerese in Canada by Valeant and Luliconazole for athlete's foot in the U.S. by Medicis. We are also very productive in the branded generics area where we launched over 300 products in our emerging markets.

We launched several patented and OTC products this year with Valeant introduction of Regederm in Brazil, Potiga in the U.S., Sublinox and Lodalis in Canada and many OTC line extensions such as the CeraVe family of products. CeraVe continues to be the fastest growing moisturizer in the U.S. and Canada. In addition, Medicis launched the Zyclara Pump in September in the U.S. These products will continue to add to our product sales growth in 2013. Finally, we achieved regulatory approval for Dysport in Canada at the end of December and the lith indication for Restylane with lidocaine in the U.S.

During 2012 we also continued to carefully manage our balance sheet, we purchased, 5.3 million shares of Company stock at an average price of $53 and raised over $4.5 billion of high-yield notes in loans primary associated with the Medicis Transaction.

This next chart provides you with a comprehensive summary of our financial achievements in 2012, we reported nearly $2.5 billion revenue in 2011, or $2.4 billion excluding one-time items and we expect to be in the range of $3.3 billion to $3.5 billion excluding one-time items for 2012, this is an increase of greater than 40% year-over-year. Our cash EPS performance is even stronger with an expected increase of 55% to 60% year-over-year.

Our adjusted cash flow from operations increase should be in the mid-30% range. All in all a strong financial performance, even in the face of generic headwinds, currency fluctuations and required divestitures. Before we wrap up the discussion of 2012 I would like to touch on our expectations for the fourth quarter. Our previous guidance for the existing business remains the same. Our expectations are that the impact from Medicis on a cash EPS basis will not be material to the business in the fourth quarter, due to the timing of Medicis sales and expenses in the last few weeks of the year.

Now an update on the Medicis integration, first the new leadership team has been in place since close. All personnel decisions have been made and communicated to both the Scottsdale office staff and those affected at the various Valeant sites. We have put in place incentive programs to ensure the selling efforts to remain intact during the first quarter of 2013 and have scheduled our sales force product training for late January. We plan to have approximately 350 sales professionals in the United States that will cover prescription dermatology aesthetics and Podiatry.

I already mentioned that we were pleasantly surprised with the Medicis pipeline and when we finally had the opportunity to review their portfolio in detail. Since the announcement Medicis has received approval for Dysport in Canada which will be launched in the first quarter of 2013 launch of the Zyclara Pump in September, filed Luliconazole for Athlete's foot in the fourth quarter and they plan to file MetroGel for vaginal infections in the first half of 2013. Collectively these assets should provide us with additional upside to our deal model.

Finally, we now expect our synergy captured by the end of 2013 will exceed $275 million on a run rate basis. A significant amount of these synergies will not occur until the back-half of 2013 as they relate to restructuring of certain legal matters and winding down a number of R&D programs. Furthermore, we expect the restructuring costs will be less than the full year run rate synergies. The majority of these costs will be incurred or have been incurred in the fourth quarter of 2012.

Now I would like to turn the call over to Howard.

Howard Schiller

Thank you, Mike. And now to turn our attention to 2013. Our guidance for 2013 excludes any potential acquisitions other than Natur Produkt which is expected to close in January. We currently expect that our revenue for 2013 will be in the range of $4.4 billion to $4.8 billion, an increase of over 30% from 2012. Our cash EPS guidance for 2013 is in the range of $5.45 to $5.75 a share or an increase of approximately 25% over 2012. This does not include the royalty to Meda that is capitalized in the balance sheet and as such does not flow through cash EPS.

The royalty should be approximately $0.10 per share for 2013, bringing our cash EPS range down to $5.35 to $5.65 for the year. We will report both these matrix on a quarterly basis. Adjusted cash flow from operations is expected to be in the range of $1.5 billion to $1.75 billion in 2013 an increase of approximately 40% over 2012.

To provide a bit more clarity to our guidance, we thought it would be helpful to detail some of the assumptions that we are utilizing to prepare our estimates. To begin with this range assumes a currency landscape throughout 2013, that is comparable to current spot rates. Our expectations would change as the U.S. dollar materially improves or deteriorates throughout 2013. We are also assuming approximately $100 million in deterioration from generic introductions for several products. Although we do not have any specific patent expiries in 2013 we anticipate that Cesamet and BenzaClin will continue to decline and we anticipated that a generic version of Retin-A Micro will be introduced in early 2013. We have not built in any generic assumption for Zovirax as we believe any potential launch will probably not occur in 2013.

We have also built into our 2013 guidance the fact that we anticipate divesting several assets that have roughly $40 million to $50 million in annual revenue. We are in active talks for these assets and hope to conclude these deals in the near future. We are also projecting Solodyn sales of $250 million to $275 million in 2013 and we believe this is a conservative assumption.

As I just mentioned, our guidance does include Natur Produkt which we expect to close in early January and if that does not transpire we'll advice further.

No other acquisition to be built into our guidance. Similar to previous years we expect to realize some seasonality to the business with the approximately 45% of cash EPS to be realized in the first half of the year and 55% to be realized in the second half of the year. We continue to expect that the second quarter would be the lowest of the year and the fourth quarter will be the highest.

Our cash tax rate this year will be less than 5% we are able to move the Medicis IP [into our] corporate structure through a license arrangement and by utilizing tax attributes. The upfront cash tax to implement this structure should not be material. Finally, we have committed to reducing our leverage to below four times within 12 months of the close. The close of Medicis. We now expect to get to this level by the end of the third quarter through a combination of debt pay down and EBITDA growth. As we continue to grow, it is prudent to review our reporting segments.

Beginning in 2013 we'll be moving to two operating/reporting segments, developed markets and emerging markets. We will continue to report the same level of detail on our organic revenue growth tables, both on a same store sales and a pro forma basis so that the information that you receive will not change.

Of note, we made the decision to rename our U.S. dermatology operations to a more appropriate U.S. promoted title, as this reporting group includes Podiatry, Ophthalmology, and Oral Health as well as Dermatology and Asthetics. Now we'll turn the call back over to Mike.

J. Michael Pearson

Before we end the call I wanted to highlight a few more areas. As we have done for the past five years we wanted to share with you our strategic initiatives for 2013. But first to optimize the balance sheet by reducing leverage to less than four times and driving improvement in the working capital.

Second, successfully Medicis and achieve run rate synergies of greater than $275 million by the end of the year. Three, build out key therapeutic areas such as Podiatry, Ophthalmology, Oral Health, and geographic platforms such as South East Asia, South Africa, Latin America and Russia, through tuck-in acquisitions. Fourth, receive approval for both IDP 108 and Luliconazole, and launch both of these products in the U.S. in 2013.

Fifth, improve gross margins from 2013 to progress towards a goal of 80% and six maintain global government reimbursement levels across all our products of less than 20%.

Finally, some concluding thoughts on our organization. Earlier this year Valeant undertook a strategic plan review where we conducted a third party challenge session which confirmed that our strategy remains both robust and relevant. Specifically we believe our business development driven approach and selective therapeutic and geographic pharmaceutical and OTC markets will first continue to create value for our shareholders, second allow us to provide a unique approach to serving, physicians, patients and consumers and third enable us to achieve our ambitious growth aspirations.

Following this process we have determined that it is essential to preserve a decentralized model as we grow from a $3 billion to $4 billion revenue company to a $10 billion to $20 billion company in the foreseeable future. Unlike most traditional pharmaceutical companies that organized centrally by function coupled with regional commercial operations, we are creating a role of company group chairmen, each of who will have to [stay put] - disparate set of businesses and functions reporting to them.

Each company group chairman will have no direct staff. This new structure allows me to focus on helping troubleshoot problem businesses and to focus on the larger business development opportunities around the world.

We have already announced the appointment of Ryan, Jason and Laizer as our current company group chairmen and Howard has taken on operational responsibilities in addition to his other duties. Rob, Brian and Su will finish out the executive management team they will be reporting to me.

Before we take questions I would like to extend my thanks and gratitude to our investors who have stuck by us though another challenging, yet exciting 2012. Your loyalty and support motivates us to continue to work harder to continue to deliver shareholder value both in the short term and the long-term. We look forward to delivering another strong year in 2013.

With that we'll now open the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Gary Nachman, Susquehanna Financial. Your line is open.

Gary Nachman - Susquehanna Financial

Mike and Howard, can you tell us what you're expecting at a high level from the different segments in terms of growth targets to get to such robust growth for the whole company, of 35%? A little detail there would be very helpful for us.

J. Michael Pearson

Yeah, so we're not going to give any organic growth targets since that was proved to be problematic in past years, but you should expect that organic growths in most of our businesses will be about what they were this year with exception of the Dermatology Group, which will obviously we can't sustain at the levels we've had previously.

Gary Nachman - Susquehanna Financial

Okay. And then maybe directionally, just assume that you think we'll do better or have better chances of improvement versus what you saw in 2012 in terms of the different regions?

J. Michael Pearson

Really the only big - the only two big changes, Garry, are Neuro which we expect as we mentioned previously to have positive organic growth this year, and dermatology which will probably fall more in line with what we experienced as a company, the rest is not going to be significant changes to.

Howard Schiller

Mike, we'd probably also would hope to have a better sort of macroeconomic environment in Central and Eastern [Europe] than we had in 2012.

Gary Nachman - Susquehanna Financial

Okay. And then I guess why wouldn't you be able to grow EPS faster than revenue with all the synergies both on the cost and the tax side. In the slide you have both growing at 35% and I would think that you know one of your targets in the past would be to grow the bottom line a little bit faster than the top line.

J. Michael Pearson

Yes, but we will certainly aspire to do that, but at this point since it's still early on the in the integration we rather take the conservative approach.

Howard Schiller

There's also some mix issues, some products some of the hits from genericization that Mike talked about Cesamet, BenzaClin, Retin-A Micro, very high margin products and some of the revenue being replaced so slightly lower margin business that will impact that but as Mike said that that continues to be the goal and aspiration.

Gary Nachman - Susquehanna Financial

Okay maybe one of the drivers there is going to be gross margin improvement throughout the year and I know you are trying to achieve the 80% at some point. Can you give us a little bit more of a sense of how much improvement we could see in 2013 versus 2012 and then down the road, at what point you might see some manufacturing synergies from some of the deals that you've done specifically Medicis, when that could enter into the mix.

J. Michael Pearson

Yeah. So we're not going to give specific guidance but I think if you look at our gross margins, especially if you take sort of a year-on-year look, you know, quarter to quarter they fluctuate a bit but year-on-year you've seen significant improvement over the last year. And we would continue to expect to see that next year. But we're not going to give a specific end of the year target for gross margin.

And the manufacturing - actually we're making good progress we've shut a plant in Brazil in the fourth quarter, we're down to two and hopefully the first half of the year we'll be down to one. And similarly in Mexico, so we are seeing the plant in Canada will be shut down in the first half of - one of our plants will be shut down in the first half of next year so we're seeing some good progress there.

In terms of Medicis they have no manufacturing, they use contract manufacturers. Many of them are the same ones we use, so over time as contracts expire we would hope to - we would hope to gain some leverage there and in the end we may end up moving some of their products into our facility in Lowell and also in Steinbach in Canada. So that will also help us along the road towards improving our gross margins.

Gary Nachman - Susquehanna Financial

Okay, all right thanks guys.

Operator

Your next question comes from the line of Douglas Miehm, RBC Capital Markets. Your line is open.

Douglas Miehm - RBC Capital Markets

Yeah. Thanks and good morning. Just first question a follow-up on your view that in the near term or - the year two you could have revenues of $10 billion to $20 billion could you talk about if it would be within your existing business and how might you accomplish that given the size of the company today? Thanks.

J. Michael Pearson

You know, Doug, we like to be aspirational so we're - how long it will take us to get there we're not saying. But obviously it's going to require both continued strong organic growth and continued business development of both continued small tuck-ins but also more significant acquisitions. But we do have the aspiration at Valeant to grow into a major pharmaceutical company.

Douglas Miehm - RBC Capital Markets

And would that include moving away from using debt to finance acquisitions, are you contemplating mergers under that scenario?

J. Michael Pearson

Well the first transformational move we made was the merger with Biovail and I think that turned out pretty well for shareholders and similar types of transactions mergers of equals where both sets of owners get to share in the synergies and the tax efficiency are certainly one way of doing that which will also allow us to delever.

Douglas Miehm - RBC Capital Markets

Okay, great. And then maybe just a couple of questions on specific products or one of the acquisitions anyway, Solodyn $250 million to $275 million maybe you could walk us through what your assumptions are for scripts pricing under that scenario and then finally just with Natur Produkt and how much are you including in terms of your revenues for this acquisition and if or not to close what will be the implications? I'll leave it there thanks.

J. Michael Pearson

In terms of Solodyn we're not assuming we're making any kind of major price increases in that - in terms of the end consumer through the AF Program, it will allow us our average price internally to go up because of the way that system works. And we're taking a quite - when we mentioned, and when we talked about when we acquired Medicis we talked about taking a very conservative approach to the revenue then the forecast and so we continue to do so with Solodyn as Howard mentioned we would hope to beat those numbers, but we thought it was useful for our investors know what we're - what was the basis of Solodyn revenues that we included in the budgeting process we went through. So again we would hope that over the course of the year that would prove to be conservative.

Natur Produkt, Howard what's the-

Howard Schiller

It's about $80 million in revenue.

Douglas Miehm - RBC Capital Markets

Okay, thank you.

Operator

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

Marc Goodman - UBS Securities

Good morning. Couple of questions. First, can you talk about your expectations for the new products that are coming Luli and 108 as far as what's in the numbers this year and just how big you think Luli can be, and we talked about that one before?

Second, Australia; what are your current thoughts about that area and the [Mediterranean] area, are you thinking about divesting the area?

And third in the past you've talked about this, being a top 15 company by the end of 2013. Obviously you're still talking big aspirational goals but we didn't see it on the slide, just curious what you're thoughts were about the big picture and now?

J. Michael Pearson

Sure. So in terms of the products, again we would hope to get both of them approved and launched in United States this year. In terms of our numbers we have nothing material, I mean our numbers for this year since we hope to have significant potential but we're not going to realized that potential this year.

Now, the [being] upon approval, there may be some upside there. But in terms of our numbers and our guidance they're really immaterial for this year.

In terms of Australia, Australia is doing well for us now. Australia is showing good organic growth good profitability with the addition of iNova. It's I think we have a nice sized business that's growing so, we're pleased with Australia's performance, this year and anticipate good performance next year.

In terms of the timing of the - last year we put it on slide, you're right that by the end of 2013 to be a top 15, company. Well, we're not at the end of 2013 yet, so we have not missed that one yet. But when we talk about our aspiratoinal objectives, if you look over time over the last five years, what you'll see is, we don't always make them the year that we say, we're going to make them and we don't. They are aspirational. But I think if you go back and look at them within a year, a year later something like that we have met every one of them. So we haven't given up on that one for this year, but if we don't make it this year then maybe we'll make it next year.

Laurie Little

Operator, operator?

Operator

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

Annabel Samimy - Stifel Nicolaus

Hi. Thanks for taking my questions. I just had some questions regarding the alternate fulfillment that's one of the thing that thought was very attractive about the Medicis acquisition. And now that you've been in it a bit integrating, starting to integrate is it what you expected and to what extent can we see the implementation of that through 2013 and does that affect the margins in anyway?

J. Michael Pearson

Yeah the more we understand about it and the more excited we get about it quite frankly because it's not - it's not just a singular initiative that there is a whole evolution being planned in terms of stage 1, stage 2, stage 3, and there is some exciting opportunities there that we are not going to give specifics of. And also as we were - as we had hoped we think it will apply to more than just Solodyn, Ziana is actually also being already - Medicis had Ziana been used in the AF program and we see application for a number of our dermatology products and potentially neurology products in the U.S.

Annabel Samimy - Stifel Nicolaus

Okay and how long do you think that implementation could take for some of the own products?

J. Michael Pearson

I would hope by mid this year we'd probably have some of our products running through that system as well.

Annabel Samimy - Stifel Nicolaus

Okay. Thank you.

Operator

Your next question comes from the line of Chris Schott, JP Morgan. Your line is open.

Chris Schott - JP Morgan

Great, thanks very much. Just had a couple here. First, can you just talk about the actual synergies we should anticipate in 2013 and are you talking about the $275 million run rate by year end but sounds like obviously some of that's back half loaded. Can you just talk about what you actually realize this year?

The second question just coming back to your earlier comments on merger of equals, if you were to consider those type of transactions, would you ideally like to stay within the categories and geographies you're currently focused on or do you really be willing to broaden down to areas that may be had - get more the government payer exposure or just new categories if the financials made sense.

And then finally just the addition of Laizer Kornwasser to the team just like a little bit about the opportunities you see with your payer relationships and what you - I guess would help you bring to the team relative to what you have right now?

J. Michael Pearson

Howard, do you want to talk about the synergies, (Inaudible)?

Howard Schiller

Yeah there's a couple of wildcards as we referenced and then the presentation largely round R&D programs and R&D partnerships and legal settlements that will move this around. The realized synergies will certainly be north of $200 million. How much about $200 million depends on some of those issues. And as Mike also said we would hope to exceed that so we uncover other opportunities that currently aren't identified then that'll [go back] to that as well.

J. Michael Pearson

And in terms of as obviously as one gets larger and we do larger transaction, you're never going to find the perfect acquisition that will line up entirely with our philosophy of what markets we like and we don't like in therapeutics areas. And but we're not going to change the view, we're not going to - if financially it makes sense but it doesn't really align with our view of the world we're not going to do those deals.

If some assets come with a larger transaction that aren't in areas we like we can then if we can then divest them or part with them and that's what we would do. So I don't think you're going to see us changing course from our basic beliefs of the types from markets that we'll continue to avoid government reimbursement and will avoid primary care. We're going to avoid Western Europe those types of things, we're not going to change that for the sake of doing a large deal, which might help us in the short term but won't help us in the long-term and what was the third question - what?

Laurie Little

Laizer.

J. Michael Pearson

Oh, Laizer,. Yeah, so Laizer, he's a great guy. I had a chance to work with him during my years at McKinsey. He is a very bright, thoughtful guy and obviously brings this whole area of understanding managed care. He knows a lot more about that than the rest of the senior team. So we think that he'll be very helpful in terms of as we think through our relationship with payers and managed care payers as we become more and more significant in United States.

Chris Schott - JP Morgan

Is there any particular products you see an opportunity there or is it just that you're engaging with payers more and you thought bringing someone with this background wouldn't make sense, I'm just trying to understand how big of an opportunity that might be with your - with payer access or the contracts you currently have?

J. Michael Pearson

I don't think we can answer that. I think we are making the assumption that there are some opportunities and it's an area that we have not focused on as much in the past because there's a smarter payer. You're relevance and degree of leverage is irrelevant. I can't give you - it's our hypothesis, it's going to be very helpful but we don't have any - I can't quantify it in any way at this point.

Marc Goodman - UBS Securities

Okay. Thanks very much.

Operator

Your next question comes from the line of David Risinger, Morgan Stanley. Your line is open.

David Risinger - Morgan Stanley

Thank you. I have a number of questions, I guess, first I'm very interested in the high level commentary obviously it fits with your historical success, Mike, and what you talked about in January of last year. But historically the company has emphasized use of cash for deals and I was just wondering if you could update us on that in light of the aspirational targets and how we should think about the company continuing to borrow two pursue deals in the future. So that's my first question and then I have a couple more.

J. Michael Pearson

Howard, do you want to take that one?

Howard Schiller

Yeah. I mean when we review 2013 with the board we looked at how much cash we are going to generate and from operations and we had a discussion around our priorities and I think business development continues to be our priority we continue to see very interesting opportunities around the world. Opportunities to build out, a recently acquired platforms and add to existing established platforms so we continue to be very encouraged with that. I think balancing that is the commitment we've made to reduced our leverage our below four times.

So with the integration of Medicis in the shorter terms it probably means that the transactions, theyy're going to be on the smaller side as opposed to very large transactions, but given our ability to generate cash. And the growth in our business, we are a very quickly be able to get under that four times. And then obviously we continue to debate share repurchase versus business development, as well so it's a big of a three dimensional puzzle that we're trying to solve for but business development given the opportunities we see continues to be the number one priority.

David Risinger - Morgan Stanley

But to double or quadruple the revenue of the company, I would assume that you're planning on significant - very substantial M&A deals using equity, or is that wrong. I guess, I just don't understand how you could target achieving double to quadruple the revenue in the next 12 to 24 months without using significant equity for deals?

J. Michael Pearson

Well, I think there is it depends on what you're buying too, right. So I think what we are saying is mergers of equals, with companies that we think at a value that would allow for a significant value creation, again I go back to Biovail as being the prime example where we were able to achieve quite a bit of synergies and we have and in that case we're able to pick up the tax, treatment which we now have that was very helpful and if there's other companies that have where there's a fair amount of overlap and opportunity for synergy and also for some tax arbitrage, we believe that would make sense and we would use equity in that case. We won't pay a premium for their equity but as a merger of equal we would do that.

In terms of when you're buying companies with cash a lot have to do with the balance sheet of the company you're buying as well. And if there is companies that are quite unlevered there's opportunities to make significant acquisitions without - without creating a leverage problem for ourselves. So depending on the deal and depending on the price sometimes acquisitions can be delevering activities as well.

David Risinger - Morgan Stanley

Got it. That's very helpful. And then a couple of quicker numbers questions for Howard. First, does the EPS guidance included any one-time gains in 2013 associated with the planned divestitures of $50 million of revenue?

Howard Schiller

No, there is no one-time gains either in the revenue line, bottom line included in the estimates at all.

David Risinger - Morgan Stanley

And that $50 million in revenue is already out of the guidance?

Howard Schiller

Yes.

David Risinger - Morgan Stanley

Okay, and then second and-

Howard Schiller

And the profits from those businesses as well.

David Risinger - Morgan Stanley

Got it. Okay, that's helpful. Then in terms of non-material move of the Medicis net income or pretax income outside of the U.S. I'm assuming that you used NOLs in the U.S. to achieve that. So just if you could explain that a little bit further how you have accomplished that number one and then also where the NOLs now stand for Valeant post that action?

Howard Schiller

Sure. The structure is not that we haven't finalized it and implemented it, but essentially we're going to use a licensed structure to migrate the IP into our structure. So there'll be licensed payments between our offshore entities and the U.S. entity over time. And in addition as I mentioned we're going to tax attributes and the result will be very minimal amount of tax [leakage] upfront and our ability to incorporate them in our tax structure right away. As I mentioned we have less than a 5% tax rate. We will be using up some of the NOLs, but when we look at our five year projections our tax rate will still be in the 5% range even looking five years out. So it doesn't and that assumes a static world. That is that doesn't assume that we do anything else that creates other opportunities for ourselves in the future.

David Risinger - Morgan Stanley

Got it. Then one final question, so before this action could you just update us on what the NOLs were for Valeant at the end of last year before you know this new action is contemplated?

Howard Schiller

We are not, we haven't closed the books yet, but it would be we are in the $500ish million range.

David Risinger - Morgan Stanley

Got it. Thank you very much.

Operator

Your next question comes from the line of Corey Davis, Jefferies.

Corey Davis - Jefferies

Thanks, I have two, just to follow-up on that last tax question or maybe ask it a different way. Are you saying that there won't be any one time upfront cash payments associated with moving that IP offshore?

Howard Schiller

It will be very, very small. It will be, it's certainly immaterial. It will be a few million dollars may be slightly double-digit.

Corey Davis - Jefferies

Second, on the tax, I'm assuming that the synergy that's created by taking the Medicis pretax income and moving the tax rate down to whatever it is close to zero is not included in your 275 tax, 275 synergy figure?

Howard Schiller

It's included in the EPS guidance.

J. Michael Pearson

But we don't, that's not included in the tax - we don't compare it to synergies.

Howard Schiller

No, it's not in the two separate, it's included taken to account in the guidance, the EPS guidance.

J. Michael Pearson

Our synergies are purely cost synergies and nonmanufacturing synergies. That's how we, that's our - any revenue synergies or any tax synergies are not, those we don't count when we talk about synergies.

Corey Davis - Jefferies

Next a little bit more on the AF Program as you move more of your products into AF. Should we see that more as not just eliminating negative scripts but that revenue generating scripts for lots of products will start going to the AF Program and therefore IMS data becomes less reflective of the revenue trends on various products. So A, is that the way to think about it and B, can you quantify at this point how much of the Solodyn revenues that you're to be booking does go through AF. Is it something like 10% or closer to 50%?

J. Michael Pearson

Well, the last question it will much closer to 50% than 10%, that's for sure. Yes, what we - the AF if at all works out will both help eliminate or get rid of nonrevenue producing or non-profitable scripts, but hopefully can be used to start generating truly profitable scripts through a different channel. That's the intent and we are seeing evidence of that will work.

Corey Davis - Jefferies

Great, that's all I have thanks.

Operator

Your next question comes from the line of David Amsellem, Piper Jaffray. Your line is open.

David Amsellem - Piper Jaffray

Thanks just a couple. First on the tax rate, this is more of a longer-term question. That how confident are you in the sustainability of your tax structure and being relatively free from government scrutiny of that structure, beyond this year and longer-term?

Howard Schiller

Well as we have said before there is nothing black box or really cutting edge as to what we are doing. People just have to keep in mind we are not a U.S. company, so we are more or less doing what every technology company around the world including U.S. companies do. We just aren't subject to the worldwide taxation rules that a U.S. company is subject to. So there is no reason that we know off that we, that our tax structure the integrity of our tax structure shouldn't hold up in the future.

David Amsellem - Piper Jaffray

Okay, and then just a couple of real quick ones on specific products, just first on Zovirax, how confident are you that they will be free of generic competition longer-term, and then on efinaconazole what's your, how should we think about the peak sales expectations given that there is a potential other [entity] opportunity and of course product that you could be competing with and given that the systemically available agents are generically available? Thanks.

J. Michael Pearson

On Zovirax, we continue to work both with outside council and experts in the area. We don't have a point of view in terms of whether Zovirax will at some point and again we're only talking about the ointment at this point not the cream. At what point if and when a generic might come on the market, but we certainly do believe that that won't happen this year and that's all we have said publically. So we are not going to give projections beyond this year for Zovirax ointment.

So when do we - we have not given peak sales we certainly would hope that it would do better than Penlac and probably won't do as well as, I don't think, we would delighted if it did, but we are not thinking it's going to do better than Lamisil but hopefully it will do better than Penlac, because was Penlac was a topical and clearly our compound is significantly more efficacious. So we are, we remain hopeful but we are not going to give a peak sales estimate. We will let you guys come up with that.

David Amsellem - Piper Jaffray

Thanks.

Operator

Your next question comes from the line of Gregg Gilbert, Merrill Lynch. Your line is open.

Gregg Gilbert - Bank of America Merrill Lynch

Thanks, good morning. Howard I was hoping you could offer us what your GAAP cash flow from operations out of this for this the year or at least with expected adjustments that you have excluded from the cash flow guidance for the year?

Howard Schiller

Well going into the year the only adjustments that we would make are the ones that we know of today, right. So the restructuring cost related to Medicis, which as we said they will be less than one-time the full year run rate synergies. And then also there is some carryover its measured in tens of millions but much less than $100 million of restructuring costs from deals from the back half of last year. I don't have a specific number, but its defiantly not $100 million. So those are the only two adjustments that would be made GAAP cash flows. But obviously as we make future deals there will be some adjustments and the resulting restructuring, but what going into the year those are the only two that we know off.

Gregg Gilbert - Bank of America Merrill Lynch

Okay. Are you willing to share the total contribution in revenue from Medicis products you factored into your guidance range for revenue.

Howard Schiller

Well, we gave you the Solodyn number, we are not going to give for Restylane and Dysport, Ziana and Zyclara. We're not going to give specific product revenues.

Gregg Gilbert - Bank of America Merrill Lynch

On the tax front Howard it seems like your tax structure and your rate in your projection is far better than what Biovail sales had, and Mike talked about Biovail the merger of Biovail gave you the tax situation. So my question is since the Biovail transaction was there a key event or events or deals that fundamentally improved your tax position further?

Howard Schiller

No, I think well the additional leverage obviously helps because it soaks up, obviously it soaks up quite a bit of income in the U.S., which is - and then also the migration from Barbados to Bermuda on the margin helped as well, but I think probably the leverage, obviously I wasn't here back then, but I would guess the leverage is probably is one of the biggest impacts on the certainly the impact is in U.S. taxes.

Gregg Gilbert - Bank of America Merrill Lynch

My last question is for Mike on the AF initiative. There has been a lot of focus on this call about it. But as outsiders what's clear to us is that since Medicis went down that path, there's been a significant decline in RX demand based on third-party data anyway, lower reported sales were Solodyn and even with your conservative guidance a big hit to actual revenue. So can you comment on the original goals of improving ASPs and profitability and you mentioned there's been some evidence that the AF plan is working, but we don't see any of that evidence from either real world actuals or your predictions for next year or be those conservative assumptions? Thanks.

J. Michael Pearson

So Gregg just help me, I get on what's - help me with the question.

Gregg Gilbert - Bank of America Merrill Lynch

The question is why are you so encouraged by the AF strategy when net sales have been heading in the wrong direction for the one case study we can observe Solodyn?

J. Michael Pearson

Sure. I think if AF was not in place that's its relative to what would have happened without AF, that's what we are trying to measure against. And what we do have is visibility into the scripts that have now moved over from just traditional retailer to AF. Now part of the issue in terms of the decline was the implementation where Medicis themselves reported that they had some execution problems in the early months, basically demand was way more than anticipated and sort of the AF program just was overwhelmed and it took more than two weeks for people to get their scripts and there were implementation problems. So that unfortunately happened, but fortunately its now fixed and won't be a problem in the future.

Again Medicis is still learning and we are just still learning about what we can do with these AF scripts. So when someone actually makes the call or sends the script to the alternate channel, what can be done with that? And a number of things can be done. One is you can continue to try to adjudicate the claim, just because the claim was, just because the script was rejected at retail pharmacy does not mean that eventually you can't get the payer to pay for it. If you think about the retail pharmacist the retail pharmacist doesn't have a huge incentive to work hard to get that script reimbursed, in fact you might argue they have the opposite incentive because they get paid more if they convert it to a generic.

So all of a sudden if it goes to a different channel where the incentives are in place to actually try to get that claim adjudicated than, so there is a significant amount of that volume that gets rejected by retail that you then adjudicate and actually get fully paid and in fact since its going through a channel that doesn't include the distributor or the retailer at a higher margin. So there is that piece that is not in substantial. And then the second piece if you think about it is how much do you actually charge the patient when it turns out they do not have insurance.

So the Medicis approach was to say you can get a script of Solodyn for $20, whether you have insurance or you don't. What we have done with products like Atralin is we actually charge different prices. If you have insurance we'll guarantee you get it for $20, but if you don't it will cost $75. So we're going to being to implement some of those programs. So I think through as we continue to learn about this AF program there are some things that we can do that might actually change the direction in terms of so rather than see a decline in Solodyn you know if we are really successful we can begin starting to grow that product again.

So it's things like that that sort of start giving us some real optimism in terms of what you can do and how this program can sort of turn out a much better case assuming you didn't have the AF program.

Gregg Gilbert - Bank of America Merrill Lynch

Thanks for the color.

Operator

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

Tim Chiang - CRT Capital

Thanks. Mike, do you guys expect the panel meeting for efinaconazole in front of the FDA action date?

J. Michael Pearson

No, we don't.

Tim Chiang - CRT Capital

I know you guys made the assumption that you'll be breakeven with the launch. I mean, how much resource do you thinking you'll put behind this launch if its approved?

J. Michael Pearson

Well, certainly we'll have our full dermatology field force and podiatry field force geared up to launch this program and that's probably where at the beginning we're going to spend most of our efforts. We'll try to, again those are, those are the physicians that we would like them to sort of own the molecule, but then we obviously there is a wider audience if you look at where scripts are coming in terms of Lamisil. There is a fair amount of primary care scripts. So it is an area that we're going to address, we're probably just start going to using any traditional primary care sales force.

We'll probably focus much more on the consumer side and direct-to-patient investment in terms of trying to educate the patients about the disease. The good thing about this disease is its self-diagnosis is quite easy and we can help patients understand the disease and given to self diagnose then we hope that we can pick up a fair amount of that volume as well.

Tim Chiang - CRT Capital

Mike that's helpful, you know I had one follow-up and I know you didn't want to comment about the dermal fillers revenue for - revenue targets for 2013, but can you comment a little bit about what your expectations are for growth for your fillers that you're inheriting here and do you expect growth in 2013 with the dermal fillers?

J. Michael Pearson

Yes, in the aesthetics we'll have, the Medicis - we'll have Dysport, we'll have Restylane, we'll have Perlane, we'll also have Sculptra. And the combination of the four we certainly expect to grow that franchise.

Tim Chiang - CRT Capital

Is there anything, because you have so many fillers? I mean, I would expect you would probably try to prioritize them, I mean is there any chance you might even look to divest a couple of these fillers?

J. Michael Pearson

No, - we

Howard Schiller

Niche different.

J. Michael Pearson

Yeah, we think they are highly complementary in terms of primarily both where on the face or the body they are used and also their duration of action. So I think that for example we only had about 45 sales reps promoting Sculptra in United States. Starting by February we're going to have closer to 100 that are promoting all these different fillers. So we would certainly expect that Sculptra will do a lot better than it did.

Second is Allergan has been quite effective in terms of bundling and I think the bigger the bundle the better it will be able to compete with Allergan. So we think it's an advantage to having more. So we are not anticipating any divestitures.

Howard Schiller

The more we learn about the entire aesthetics the more we learned that doctors are using all these products and combination with one another. So it's just very few doctors just use one.

Tim Chiang - CRT Capital

Okay, great thanks a lot for the commentary.

Operator

Your next question comes from the line of [David Campra], Morningstar. Your line is open.

Unidentified Analyst

Guys thanks for taking the call. First this is a follow-up to that on the aesthetics market. I was wondering if you guys can give your take on it. It seems like it's a lot more concentrated of the market than you traditionally go after and you had a couple bigger players which guys historically have tried to avoid. So do you still see opportunity there or is that something you are just kind of going to be happy maintaining what you have?

J. Michael Pearson

Well, again we do try to avoid areas where there is large and lots of competition. Sometime more concentrated areas or concentrated markets are more disciplined which is helpful. But in the case of aesthetics its obviously going to be Allergan, Merck and ourselves and we think we are off comparable size with these companies even as we sit here today.

Unidentified Analyst

Okay, and then looking at the 2012 goals one was to exceed 1.5 billion in emerging markets sales. It looks like we're going to be a little lower on that. Can you talk about is that just kind of weaker performance than you expected or where there not enough opportunities for acquisitions or are we just focused on other things this year?

J. Michael Pearson

We are certainly going to miss that number. We will be over a billion obviously, but we won't be close to 1.5 billion. I guess I would put that in the category of an aspiration that we didn't hit this year but hopefully we'll hit next year, actually [Nature Products] will help. It will add another AD and Russia is growing double-digits, so that will help flowing our way. But again, again we had to make choices about our acquisitions and at the beginning of the year you don't know where those acquisitions are going to come from, you don't know which you are going to get at the right prices. We ended up doing a lot more in the U.S. than we probably predicted at the beginning of the year picking up OraPharma and Medicis two significant acquisitions we made in the U.S.

So in terms of our intent our intent is to continue to grow our emerging markets both through organic growth and acquisitions and hopefully by the end of next year we'll achieve that 1.5.

Howard Schiller

Yeah, I would say Mike while we didn't hit that 1.5 we're still very happy with the organic growth of our emerging markets business.

Unidentified Analyst

Okay, but valuation still seems fair, I know in the past you've said Latin America got a little too high so you cooled off there.

J. Michael Pearson

Yeah, Brazil in particular we did do one acquisition down there Probiotica, which has actually proven to be a very good acquisition at least thus far. But we continue to look at emerging markets as far as our greatest focus area right now is in South East Asia which we think is a very interesting market where we are still not at scale and so we are looking pretty intently at that area.

Operator

Your next question comes from the line of Michael Tong, Wells Fargo Securities. Your line is open.

Michael Tong - Wells Fargo Securities

Thanks, good morning. Just a follow-up on one of your earlier questions about growing top-line and bottom-line. It seems to me that I think the question was valid in the sense that, it seems like the top and bottom-line are growing in parallel right now. And the answer was that product mix was an issue. How do you reconcile that with the fact that you are expecting gross margin to go up. So if that's the case where is the offset coming from, is it from operating expenses because it doesn't sound like the tax rate is going up either. So any color on that would be helpful. Thanks.

J. Michael Pearson

Well again I think what Howard said is that our aspiration is to grow our bottom-line quicker than the top-line and if you look at our history that's what we have done. So in terms of actual results I think that's what you have seen. We said our guidance is conservative and we believe it is and so hopefully we will continue to achieve that.

Now there are some mix, so if some of our most profitable products like Cesamet had a very, very high gross margin. Right, Cesamet was probably 95% gross margin and we [lost] that product. So mix does make a difference in terms of and will have an impact, but clearly our aspiration is to continue to do what we have done in the past which is continue as we grow larger to continue to grow our bottom line quicker than our top line.

Operator

Your next question comes from the line of David Steinberg, Deutsche Bank. Your line is open.

David Steinberg - Deutsche Bank

Thanks. I had a couple of questions about your dermatology business. As part of the Medicis transaction the click for the first time they revealed their pipeline and estimates for the next five years. And I was curious their nine products and they're estimating that they could generate a billion sales plus in five years. What products are you keeping and which are you going to tube and then as far as a couple specific question about products. So luliconazole if I recall with one indications with onychomycosis you are going to launch this year. Is that the, are you going to launch two drugs for onychomycosis or is there another indication.

And then finally they also project 40 million of Ziana pads for this year. You didn't mention that as a launch, I was just curious. Is that delayed or where does that stand?

J. Michael Pearson

Sure. We focus primarily in terms - we'll answer in the reverse order. In terms of the pads we talked about the products that either have been launched or about to be launched. So I don't think there is any change to the pads, that is not going to be a material amount of sales this year. So, I think that one is still on track.

In terms luliconazole, actually the indication that Medicis has is for athletes foot and that's well is filed, so it's not for onychomycosis. So we actually think it will be actually a very nice product to promote alongside IDP-108, because it will, obviously its exact same position that we'll be targeting. In terms of the R&D we did a review just like we do whenever we integrate a company across both companies. We looked at our pipeline and their pipeline and we made some decisions in terms of what we are keeping and what we are not, but again our practice is not to talk about our pipeline when products are ready to be filed. So that's the position we are going to take with the new pipeline.

David Steinberg - Deutsche Bank

Okay, just one follow-up. As far as your new dermatology sales force, I may have missed it, but could you discuss what percent of the reps came from Medicis and which - what percent you are keeping from Valeant?

J. Michael Pearson

I don't have any precise figures on that right now that I think we really want to share. People a lot of that the actual sales force decisions were made are communicated this week and so I think we would probably prefer not to give specifics. Obviously in aesthetics they had a much larger sales force than we did. So obviously many more Medicis people were retained and in the medical term we went through what we think was a merit based selection process and made those determinations.

Howard Schiller

I would say Mike there is never any objective of any specific mix, since who had the best relationships with doctors who is going to be most effective.

David Steinberg, Deutsche Bank

Fair enough, thank you.

Operator

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

J. Michael Pearson

Well thanks everyone for joining us this morning and we look forward to a great 2013. Thank you.

Operator

This concludes today's conference call you may now disconnect. Thank you.

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