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Valeant Pharmaceuticals International (NYSE:VRX)

Q1 2009 Earnings Call

May 05, 2009 10:00 AM ET

Executives

Laurie W. Little - Vice President of Investor Relations

J. Michael Pearson - Chairman and Chief Executive Officer

Peter J. Blott - Executive Vice President and Chief Financial Officer

Rajiv De Silva - Chief Operating Officer of Specialty Pharmaceuticals

Analysts

Gregg Gilbert - BAS-ML

Gary Nachman - Leerink Swann LLC

Jonathan Aschoff - Brean Murray, Carret & Co

Michael Tong - Wachovia Capital Markets, LLC

John Boris - Citi

Operator

Good morning, my name is Leslie and I will be your conference operator today. At this time I would like to welcome everyone for the Valeant Pharmaceuticals First Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions).

Thank you Ms. Little, you may being your conference.

Laurie W. Little

Thanks Leslie. Good morning everyone and welcome to Valeant's 2009 first quarter financial results conference call. Joining us on the call today are Mike Pearson, Chairman and Chief Executive Officer; Peter Blott, Chief Financial Officer; Rajiv De Silva, Chief Operating Officer, Specialty Pharmaceuticals and Bhaskar Chaudhuri, President of Valeant.

A copy of today's slide presentation could be found on our website under Investor Relations section. Before we begin, I'd like to call your attention to the fact that this conference call and presentation may contain forward-looking statements, including but not limited to guidance with respect to expected non-GAAP cash earnings per share, expectations and plans relating to Retigabine and Taribavirin, cost reductions, sales growth and other aspects of our restructuring and growth strategies and the benefits of these efforts we expect to see in 2009, the effect of financial markets and the impact of foreign exchange.

These statements are based upon the current expectations and beliefs of management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include but are not limited to risks and uncertainties related to non-GAAP financial guidance, our ability to carry out our plans for Retigabine and Taribavirin, our ability to realize benefits of our restructuring program, market condition, currency fluctuations and other risks and uncertainties discussed in the company's most recent annual or quarterly report filed with the SEC, which factors are incorporated herein by reference.

These risks are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements and undue reliance should not be placed on any of these forward-looking statements.

Valeant undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this call or to reflect actual outcome. Certain figures discussed in today's presentation will be based on adjusted or non-GAAP information. A reconciliation of historical GAAP to non-GAAP results can be found in the tables to the company's press release issued earlier today and on Valeant's website at www.valeant.com.

And now I would like to turn the call over to Mike.

J. Michael Pearson

Thank you Laurie. Good morning everyone and thank you for joining us. This morning I would like to discuss our first quarter results, then discuss our new leveraged R&D model and finally update you on the six strategic initiatives for the year. This is the first quarter that we began to see the results of our 2008 turnaround program.

We delivered solid performance in terms of sales growth, earnings and cash flow. I believe that our results begin to reveal the fundamental strength and stability of Valeant's diverse business, our focus on getting our cost in line with our size (ph) and perhaps most important our longer term growth potential.

Our balance of geographies and product lines provide us with a healthy hedge against both geographic and therapeutic risk and should continue to enable us to deliver strong profitable growth even under challenging economic conditions.

Valeant's total revenue in the first quarter of 2009 was a 178 million compared to 152 million in the first quarter of 2008, an increase of 17%. Our GAAP earnings were $0.37 per share and our adjusted cash EPS was $0.46 per share. Our cash flow from operations was $51 million. All-in-all, this was a strong quarter which establishes a strong baseline for our transformed company.

I am particularly pleased that results for the quarter were driven by contributions from across our company. All of our businesses are now profitable, cash generating and growing in local currency. In our Specialty Pharmaceuticals segment, product sales increased 8% to 86 million. As sales from acquisitions, divestures and currency fluctuations in 2008 are excluded, total Specialty product sales increased 5%. This is despite a loss of over $8 million in Efudex sales this quarter.

Our product sales in Latin America continue to show that our turnaround has been successful, with an increase in reported product sales of 94% in constant exchange rates. Even with the negative impact of exchange rates, our Latin America operations still delivered growth of over 47%.

For the first quarter of 2008, was clearly a weak competitor, the performance in the first quarter of 2009 shows this business is healthy. Our team in Latin America has now shifted their focus to sustain profitable growth. The first quarter was also very strong for our European brand of generics business, where product sales grew 30% on constant exchange rates. This business was also negatively affected by foreign exchange rates which impacted our reported sales in the quarter by $13.9 million or our reported sales decrease of 7% at actual exchange rates.

In total, our first quarter product sales for the company grew 26% net of acquisitions, divestitures and exchange fluctuations over the previous year. Looking forward to the rest of 2009, we will clearly be facing the continued headwinds of unfavorable foreign exchange and the continuing global recession. However, given the strong momentum in each of our businesses, we feel confident in raising our guidance for the year from a $1.35 to $1.60 cash EPS to $1.70 to $1.90 cash EPS.

Before I get to an update on our 2009 strategic initiatives, I wanted to take a few minutes to describe one of the fundamental elements of the new Valeant, our leveraged R&D model. For many years Pharmaceutical companies have struggled to balance the need to demonstrate a commitment to their future through an appropriate R&D spend with the stark fact that in aggregate, internal R&D spend in the industry has not earned an adequate return.

On average, internal R&D is becoming less and less productive. When I joined Valeant, I was determined to take a different approach to innovative R&D which I believe increases the bang (ph) for the buck of each dollar we spend on R&D and also increases the probability of success of each compound we have in our pipeline; a new approach which we have coined our leveraged R&D model.

Before I describe this new model however, it is important to note that Valeant is both a generic and an innovative pharmaceutical company. Well over 40% of our product sales are branded generic products in Latin America and Europe, where we spent approximately 2% of sales on R&D to obtain dossiers and submit registrations consistent with industry norms for R&D spend for generic companies.

On the remaining approximately $350 million in part sales, we expect to spend approximately 10% on R&D. However, we hope through our leveraged R&D model to demonstrate a better return on R&D spend than our competitors in our innovative Special Pharmaceutical business.

The basic principles of our leveraged R&D model are simple. One, we will not participate directly in discovery. Two, we will source our pipeline by accessing compounds that are below big Pharma's radar screen. Either through the formulation expertise Dow, through in-licensing from other small companies into geographies where we have a geographic presence and they do not. And through small distressed and undervalued acquisitions, an example of this is our Meda joint ventures.

Third, we will partners who are willing to co-fund our significant development programs for rates in geographies we do not participate in, thereby providing an external litmus test for the scientific and commercial merits of our development pipeline. If we can't find a partner, we will stop the program. Two examples of this approach are our GSK collaboration and our decision to stop our Diastat nasal spray program.

Finally, we will leverage our internal R&D spend through our Dow services business. This allows us to monetize idle capacity idle development capacity and keeps our scientists on the cutting edge by working on external programs and provides us with another unique set of partnering opportunities. We believe adhering to these principals will lead to a lower cost, more productive R&D model.

To illustrate let us compare our R&D spend and pipeline today versus 2007, the year before I joined Valeant. When I joined Valeant was spending over $100 million a year on three programs, Retigabine, Taribavirin and Diastat nasal spray. We had approximately a 100 internal full time equivalents or scientists working on these programs.

Today, we have over 200 scientists working on many programs at less than half the cost in 2007. Primarily, the result of a significant reduction in the external spend. In addition, our partners currently have over a 100 full time equivalent scientists working on these same projects. In subsequent quarters, I will keep informed on the progress of our pipeline and what we believe will be the success of this new leveraged R&D model.

Now, returning to our six initiatives for 2009. The first, is to maximize our GSK alliance and to file the Retigabine NDA. We continue to make significant progress and remain committed to filing our NDA in 2009. We are pleased to say that after a recent joint steering committee meeting, both Glaxo and Valeant are now targeting a third quarter U.S. filing and an EMEA one month later.

Most of our Retigabine team has now relocated to North Carolina and are housed in the South building on the GSK campus. Our proximity is allowing us to work closely with the GSK team and have a more hands-on collaboration. While we are hard at work on the NDA submission, we are concurrently working on our MR formulation.

We now have a lead formulation and two back-up formulations and expect that our lead compound will be in the clinic in the third quarter of this year. We also have the Phase II neuropathic pain study, that has completed enrollment and we anticipate having results available sometime this summer.

Our second strategic initiative was to deliver on our recent dermatology acquisitions. These acquisitions are contributing to our strong start in 2009. We have made it a cornerstone of our objectives this year to ensure that the three acquisitions made in 2008 were the right ones at the right price.

CORIA was our first acquisition and has become the center piece of our dermatology commercial efforts in the U.S. We are especially pleased with the growth of CeraVe, our moisturizing line of products which delivered approximately 60% sales growth over a year ago. We are also pleased to see both the recent script uptick in share gains for Aktiline a retinoid with improved tolerability over current therapies.

The acquisition of Dow brought a rich pipeline of products to Valeant. Dow's R&D group continues to work on their pipeline products and we hope to have at least two of these products move into Phase III in 2009. We remain cautious and do not want to provide specific details on our pipeline due to ongoing discussions with the FDA, but we will be providing more color over the course of the year.

The Dow acquisition also brought us Acanya which was launched to the beginning of March. We are receiving positive feedback from the dermatologist and this impression seems to be borne out with a strong script data we've seen so far. We've recorded only a modest level of sales in Acanya in the first quarter. We specifically did not book the inventory build, but we will instead only book those sales of Acanya as customer demand pulls it through the distribution channel.

Finally our DermaTech acquisition in Australia was a simple integration process which was completed by the end of 2008. We shut down the previous infrastructure and folded the dermal portfolio from DermaTech into our existing operations. Sales and cost reduction remain on track compared to plan. I would also like to announce that we have just finalized a second deal on Australia last week to acquire a number of OTC brands primarily in the sun care category.

All these OTC brands are local to Australia. We acquired these products for less than $6 million and they generated approximately $8 million in revenue in 2008. This is another niche acquisition at a cost of less than one time sales which will fold in nicely with our current business.

Our third initiative is to replace our at-risk products. As a company we are in a unique position and that we have a very diverse product portfolio with minimal generic risk. This sets us apart from more Specialty Pharmaceutical companies. But we have identified two areas of our portfolio where we need to enhance our product offerings ahead of potential generic competition.

Specifically, Cesamet in Canada and Diastat in U.S. First on Cesamet; while Cesamet is an important product to our Canadian operations, we are taking steps to replace and or augment Cesamet with other products. We've recently met with the Canadian Regulatory authorities and have begun the process of registering BEMA-Fentanyl the first product coming out of our joint venture with Meda. BEMA-Fentanyl is a patented compound with the unique delivery system designed to get rapid and reliable delivery of Fentanyl for treatment of breakthrough pain in cancer patients.

Breakthrough pain is an unmet medical need in cancer patients in Canada and currently no drug is approved in Canada for this indication. We are also in the processes of registering dermatology compounds acquired due to the Dow transaction in Canada, most notably Ziana and hope to have marketing approvals from the Canadian Regulatory authorities in about 18 months.

We're also on active discussions to in-license other products into Canada which we expect to announce over the coming months. In terms of Diastat, our agreement with GSK for the promotion of Diastat continues to do well under their enhanced sales efforts. There are approximately 175 GSK reps currently promoting Diastat and this promotion began in January. This new energized sales effort has delivered growth over the first quarter of 2008 in Diastat at a cost that is less that half of what Valeant spent last year on promotional activities. This provides early evidence that our decision to outsource this sales effort was a good one. We are pursuing a number of options for augmenting our U.S. neurology franchise to replace Diastat and look forward to providing more specifics later this year.

Our fourth initiative was to partner our pipeline assets. Our efforts to partner our pipeline have met with positive success so far. Well first on most investors mind is the potential partnering of Taribavirin. Valeant has a rich portfolio for other products which will be ideal -- which are ideal to partner in countries we no longer operate them. We are looking to out license much of our derm franchise in Europe and I just returned from a successful trip to Japan where we met with potential partners for our dermatology pipeline.

Earlier this week, we signed two agreements one to out license Ziana for a million dollars upfront and the second to out license Atralin for $2 million upfront in Europe. Both licenses include high single digit royalty payments on net sales which will become effective on the effective date. After Taribavirin we recently presented 60 week data at Easel (ph) which again confirmed the efficacy and safety previously seen at other data points during the trial.

We also have recently met with the FDA to discuss the clinical development program for registration and we're very encouraged by their responses. We continue to hold discussions with potential partners and help to successfully partner this compound in the near future. We still do not intent to progress with a full scale Phase III on our own. Our fifth initiative was to build leading branded generic businesses of at least 500 million each in Europe and Latin America. Both our branded generic operations continued to deliver very strong growth in local currency and profitability.

First Mexico, our operations in Mexico continued their momentum from the last two quarters of 2008. The first quarter of 2009 was the best first quarter Valeant Mexico has ever recorded. In addition, to strong sales and profits, we are particularly pleased that we currently stand at less than two months of inventory in the distribution channel.

We are taking a very disciplined approach to managing our distributive relationships and we are letting consumer demand pull through our revenue. Other key elements contributing to our growth in Mexico include; the first, we've doubled our sales force over the past year. We've started our sales expansion program last summer and we are announcing the results of our increased sales team. We expanded our doctor facing (ph) sales force and expanded our geographic coverage. We are now calling a 95% of high prescribing doctors when in the past, we were only calling on 30 to 40%.

In addition, we increased our retail sales force by 120 people in 2008. Given the slowdown in the local economy, it appears that more people are heading directly to the pharmacy to get their medications and bypassing the doctor altogether. Well, we have been in the process of expanding our customer base in organizations in Mexico, our competitors have been reducing their field forces to stay pass (ph). They are providing more opportunity for Valeant Mexico to talk to both doctors and pharmacist in a timely fashion.

As part of our turnaround, we have also re-energized our new product development efforts. In 2009, we expect to launch at least five new products in Mexico and in 2010 and beyond, we anticipate launching over 10 products a year. This is a stark contract to no product launches in 2008. These activities coupled with in-licensing small targeted M&A and geographic expansion, should provide opportunities for double digit growth in local currency for the foreseeable future.

Finally, this year we are also beginning to take a hard look at Brazil, to improve its profitability and growth and we'll provide more detail on this effort later in the year. In terms of Europe, our European business grew 30% year-over-year in local currency. This growth is a direct result of increased investment and product dossiers and registration which are now hitting the market.

Future growth in European operations will come from the following initiatives. First, we expect to launch five to 10 additional products in Poland later this year. We are working on creating a pipeline that will allow us to launch approximately 10 new products a year thereafter. We are replicating these efforts also in Hungary, Czech and Slovak.

We are establishing sales operations in Bulgaria and Romania and planning to launch our first products in both markets before the end of 2009. Last week, we also completed an acquisition of a private company in Poland, EMO-FARM for approximately $28 million.

This company is product sales of approximately $12 million and a promising new product pipeline which together will advance our efforts to move into new therapy to categories and to broaden our portfolio in Poland and in Europe. In addition to product sales, the acquisition brings us a brand new 13,000 square foot manufacturing plant completed in early 2009, with capabilities in the gel, cream and ointment forms. This transaction is expected to be accretive in 2009. It should be noted that our gross margins have dropped from 65% to 54% over the last year.

This is both a function of on-going contract manufacturing arrangements we have with Meda, as a result of our sale of Wemea (ph) as well as the higher cost of goods for new product registrations that we've licensed in from third-parties. Over time, this margin should show improvement as we transition the Meda products over to the Meda manufacturing facilities and bring in-licensed compounds into our own manufacturing facility. Longer term margins should improve back to 60% plus.

Our final strategic initiative is to continue to strengthen our balance sheet. Our total debt now stands at $382 million, less than half of the $780 million we had when I arrived at Valeant just over a year ago. As we announced in March, we've bought back another $66 million in face value of our 2010 convertible debt during the first quarter. Due to the recent pressure in the credit markets, we will continue to focus on paying down our 2010 debt and we'll continue buying it back when prudent.

With the strong cash flow we generated in the first quarter of $51 million, we now anticipate that our cash flow from operations will exceed $200 million for 2009. We remain committed to spending at least 50% of our cash flow on strengthening our balance sheet through debt buybacks and share repurchases. This will put us in a strong position to take care of our balance sheet needs, while at the same time, funding small targeted acquisitions.

Now let me turn the call over the Peter Blott to discuss our financial performance in more detail.

Peter J. Blott

Thank you, Mike. I want to start by talking about foreign exchange. Currency movement continues to have a significant impact upon our business. Our key exposures are to the Polish Złoty and Mexican Peso, which have moved 45% and 33% respectively from one year ago. And the Canadian and Australian dollars have also impacted our reported sales growth. The total currency impact on our top line results for the quarter is a negative of $29 million.

Although exchange rates have moved back slightly in the past few months the full year effect in 2009 would still be about $100 million on our top line if rates stay where they are at present. The bottom line of this -- the bottom line impact of this foreign exchange is mitigated because significant proportion of our costs are also denominated in the local currencies where sales are made.

We have a factory and significant cost base in Poland, Mexico and Canada. We manage these businesses in local currencies and we'll be concentrating on growing these entities on a constant currency basis. Although our top line was adversely affected by $29 million our bottom line impact in the first quarter was only 6 million after-tax. If the exchange rates stay where they are where they are now the full year impacts on the bottom line will be 15 to $20 million.

I now want to turn to cash. You can see on the next slide, we started 2009 with $219 million in cash and marketable securities. At the end of March 2009, our cash balance was 146 million. Cash flow from operating activities and continuing operations was $51 million in the quarter. This is shown here net of CapEx of $7 million. The cash flow from operating activities in the quarter is another indicator of the strong operational performance of our base business and the impact of the business changes we've made over the past year.

The GAAP cash flow of $51 million is consistent with our operational performance shown in the P&L, with only minor movements in working capital. Whereas the cash flow in the first quarter of 2008 benefited from significant release of balance sheet items from the prior year. We expect this level of operational cash flow to continue throughout 2009. During the first quarter, we paid out $42 million for various obligations from deals made in 2008; including 21 million that was paid into an escrow account arising from the Dow acquisition.

We expect to complete funding of this 35 million escrow commitments in the second quarter. You can also see we used $64 million in the first quarter to purchase more of our convertible debt, with maturity due in August 2010. This retired debt with a face value of $66 million and follows a purchase of 33 million face vale in the fourth quarter last year.

We currently have a $142 million face value of the 2010 maturity debt remaining, our projected cash balance is sufficient to address this remaining debt maturity by 2010. The next cash item shown is the impact of revaluing cash balance with a closing foreign exchange rate. This shows a negative impact on cash balances of $15 million.

We intent to maintain a cash balance of at least $75 million to meet operational and business requirements. As Mike mentioned, we have completed two regional acquisitions recently, utilizing some of the March cash balance. Also since the March quarter end, we have recalculated cash from foreign subsidiaries to the U.S.A. Currently approximately three quarters of our cash balances are held in the U.S.

And now I want to turn to the next slide, which shows some financial details of P&L. I want to comment upon a number of individual lines that work down the P&L and then discuss the calculation of cash EPS which is also shown on this slide. We're now into the second period of collaboration GSK on Retigabine. We've again provided details in our press tables as to the accounting treatments.

In the first quarter the release against operating expenses were sufficient to offset the $8 million of cost we incurred on the Retigabine collaboration work, such that we recognized a net zero as R&D and SG&A expense in our P&L in this area. We did recognize $3 million as collaboration revenue in the quarter.

The impact of our restructuring last year and our cost control efforts are now being seen on our operations. With businesses acquired in 2008, now integrated, the first quarter is a good representation of our financial structure. For the first quarter, our SG&A expenses of $64 million showed a decrease over last year, despite the addition of approximately $9 million of new SG&A costs associated with the CORIA, DermaTech and Dow acquisitions; net of synergies. This is because of restructuring related cost savings of $12 million in the quarter and the benefit of foreign exchange rates. We also wrote down $1.7 million in the Swiss biotech fund and recorded a transfer tax of $1.6 million in the quarter.

And turning to the R&D line; our R&D expenses in the quarter were $9 million. This is significantly lower than the 29 million in Q1 of last year when we were operating a full in-house development operation and incurring significant external costs on Retigabine. The level cost level shows the impact of the restructuring to-date and the impact of our leveraged R&D model. Although, we get the benefits of progressing a large number of R&D programs, the burden on our P&L is significantly reduced by the GSK collaboration, by our joint venture activities with Meda and from having a dermatology service business.

We expect our R&D cost to be slightly great during the back half of the year as dermatology development projects move into Phase III. As we've said previously, we expect our R&D expense in 2009 to be below $50 million. Along with other companies with the December year end, we've adopted the new accounting standard of APB-14-1

This requires companies with convertible debts to reflect interest as if there was no conversion option. In our case this means showing an interest charge of about 7.75% on our converts, even though their actual coupon is only 3 or 4%. This new accounting standard is implemented with retroactive effect so that we have restated our opening balance sheet in prior periods as though this standard has always been in place.

The slide also shows how our calculation of cash EPS works, as you move from the GAAP P&L for the fourth for the first quarter of 2009 shown in the second column on the slide over to the non-GAAP calculation of cash EPS shown in the third column. A number of non-cash and non-recurring items are removed. Restructuring one million, amortization 17 million, gain on extinguishment of debt 5 million and the new non-cash interest on the convertible debt related to APB-14-1 3 million.

These are tax affected to an adjustment in the tax line, to leave a non-GAAP effective tax rate in the calculation of cash EPS of 36%. Cash EPS is therefore, $38 million divided by the fully diluted number of shares, which following our share repurchase program is down to 83.4 million giving a cash EPS in the first quarter of 2009 of $0.46. This calculation methodology is consistent with that used last year.

Finally, we announced today that based upon our performance in the first quarter. We've decided to raise our financial guidance for 2009 up to a range of $1.70 to $1.90 for the year. This reflects experience of the strength of our business and our expectation in the ongoing operations to continue to deliver strong financial results. Now I'll return the call back to Mike, for closing remarks. Mike.

J. Michael Pearson

Thank you, Peter. Valeant delivered a strong quarter with clear cut cash EPS improvement ahead of our original outlook. Our goal is to build a sustainable and profitable pharmaceutical company that delivers important products to help patients.

We feel good about our focused decentralized business model which is diversified, both geographically and by product type; Specialty Pharmaceuticals, OTC and branded generics. We look forward to sharing our progress with you in the months to come. With that we'll open up the call -- operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Gregg Gilbert of Banc of America Merrill Lynch. Your line is open.

Gregg Gilbert - BAS-ML

Thanks, good morning. First of all Peter, what's the biggest change in guidance? Is it lower SG&A and R&D on a go forward basis, now that you've lived with the acquired assets?

Peter Blott

Thank you Greg. No I think its more an all rounded appreciation of the things that we've changed are starting to see effects and the confidence we have that those are going to continue throughout the year. I don't think its just on one line, the improvement in the SG&A or that R&D line. But also the confidence that we've got in the growth of the base business top line as well. I mean, Mike do you want to say anything more?

Gregg Gilbert - BAS-ML

What sales item does the cost of services, Peter, of 64% apply to?

Peter Blott

So we now -- following the acquisition of Dow right to the end of 2008, we've got services revenue within our P&L. And we've also got cost of services. So the effective margin is just that difference between those two. So just the cost of services goes with the services revenue.

Gregg Gilbert - BAS-ML

And what you're calling now service and alliance revenue, is that one and the same?

Peter Blott

No, we...

Gregg Gilbert - BAS-ML

Or you add something else into that line?

Peter Blott

No, I think if you look at the press table one; you'll see that service revenue broken out separately from alliance revenue and it is the cost of services goes with the service revenue.

Gregg Gilbert - BAS-ML

Okay. And one more and I'll get back in line. The Retigabine paying (ph) date, what's the latest timing there and how will you disclose that? Thanks.

J. Michael Pearson

It's going to be in the summer and we will we'll reach agreement with Glaxo at the next joint steering committee meeting in terms of how we intent to release it.

Operator

Thank you and our next question comes from the line of Gary Nachman of Leerink Swann. Your line is open.

Gary Nachman - Leerink Swann LLC

Hi good morning, first question how is the swine flu affecting your business in Mexico if at all, and when you guys talk about new products contributing in 2009 for both Latin America and Europe, how big of a contribution could that be just in order of magnitude?

J. Michael Pearson

Can you repeat the second question please?

Gary Nachman - Leerink Swann LLC

Yeah when you talk about new products.

J. Michael Pearson

Yes.

Gary Nachman - Leerink Swann LLC

In 2009 for both Latin America and also essentially Europe, how big of a contribution could those generate?

J. Michael Pearson

Great. Okay, in terms of swine flu in Mexico, obviously our first priority has been our staff. But fortunately to date we've had no occurrences of swine flu with anyone that works for us. The government asked all businesses to shut down last Wednesday, but they have asked all pharmaceutical companies to reopen this Wednesday. So our operations has been shut down and will be shut down for approximately one week. But we -- other than that we don't really see much of an impact. Dr. Rovalo who is both a physician and leads our business down there, his belief is that its somewhat overblown in the U.S. press.

In terms of the product introductions in Mexico and Poland, again these are branded generics, so none of them are large. One to $2 million, maybe on average, some are little bit larger. So, you need a constant stream of these. But in aggregate they do start adding up. We have a couple of products, one in Europe which we just got with our acquisition which is a triple antibiotic which actually could be substantial. It should be launched later this year. But what -- but I think sort of 5 to $10 million would be roughly the type of impact this year that you would expect to see from new products in each of the 5 to 10 and each of the two different regions.

Gary Nachman - Leerink Swann LLC

Okay. That's very helpful. On SG&A, it really came in a lot lower then we thought, and then if you also exclude the write down and transfer tax, you're in the low 60s for the quarter. So is that really the right run rate to think about now going forward for the rest of the year-end. Also, given the fact that you're going to launch some new products potentially in some of these other regions.

J. Michael Pearson

We are not giving guidance on specific lines items. That being said, we feel pretty good about our current spending in SG&A. We actually incurred a lot of the launch cost with Acanya in the first quarter. But we did not record a whole lot of sales because of our approach of not wanting to recognize pipeline sales. Cost in these other areas like Latin America and Poland, launching the products, we don't incur additional costs. We just use our current sales force and current approaches, so there'll be no change there. So, we don't expect to see dramatic changes with the exception of foreign exchange. Foreign exchange strengthens a lot, that will obviously have a positive impact on our top line but our costs of our sales reps and other marketing activities in those countries will also rise.

Gary Nachman - Leerink Swann LLC

Okay and last question just on the tax rate. I guess, it's seemed when you calculated the cash EPS, it looked like it's was 27%, maybe it's 36% on a GAAP basis but what should we be using for the full year? Thanks.

Peter Blott

For the full year, I expect the non-GAAP rate to be 36%, which is what we used in the first quarter. You just have to modify from the GAAP to the non-GAAP rate. But if you just look at the final calculation, it works out at 36% which is essentially the U.S. federal rates was a little bit for the -- for the state, notably California. Our GAAP tax rate, there's a number of things we still have evaluation allowance against. Our NOL which is impacting the GAAP rates and therefore that's harder to predict for the full year.

Gary Nachman - Leerink Swann LLC

Okay thanks a lot.

Operator

Thank you our next question comes from the line of Jonathan Aschoff of Brean Murray. Your line is open.

Jonathan Aschoff - Brean Murray, Carret & Co

Hi guys thank you for taking my question. I was wondering, if you could maybe discuss perhaps confirm any SAEs in the ongoing Retigabine filing particularly from cardiovascular SAEs.

J. Michael Pearson

Sure, I think a lot of questions have been asked to both our Investor Relations group over the last few days -- over the last few months. Hold on I just want to get the appropriate answer for you. So, the answer, we are giving to everyone is patient safety is of the utmost importance to Valeant and GSK. And we are continuously monitoring our clinical trials. Retigabine has been stayed (ph) over 1,350 adult patients to date, and at least 350 patients have continues Retigabine exposure of more than 12 months. The current data indicates there is been no evidence of increased cardiovascular risk.

Jonathan Aschoff - Brean Murray, Carret & Co

And that includes this trial on going.

J. Michael Pearson

That's correct.

Jonathan Aschoff - Brean Murray, Carret & Co

How is it that for Taribavirin when you were making the case about the anemia benefit. There were three severe diarrhea in addition to a lot of those two to one ratio of less than severe diarrhea, but that's a blood lowering -- that's a blood volume lowering side effect, and that alone could giving you the benefit to anemia.

J. Michael Pearson

I am not a scientist, so I would suggest maybe we can hook you up with one of our scientists. Certainly, when we were with the FDA and I was at the FDA meeting that linkage was not made either by any of our scientists and outsider buyers that we had or the FDA.

Jonathan Aschoff - Brean Murray, Carret & Co

All right, Thank you.

Operator

Thank you. Our next question comes form the line of Michael Tong of Wachovia. Your line is open.

Michael Tong - Wachovia Capital Markets, LLC

Hi, I just want -- trying to get a better understanding on the FX impact on operating expenses, just a follow up to SG&A expenses for the quarter. Did that line benefit from FX because of your cost associated with in Europe and everywhere else. If exchange rates were to stay at same as they are now, is that the appropriate run rate to go forward with?

Peter Blott

Mike, yes. I think you've got the understanding there correct Michael. It's because those costs did not incur in foreign currencies.

The foreign currency movement, which hurts us on the top-line, reduces the dollar impact in our consolidated accounts. And therefore, helps us in the cost exposures that you've done.

The exchange rates have moved slightly. And I certainly don't want to be one predicting exchange rate movements. But, if you see the impact over the full year, it probably is consistent with what it was in the first quarter.

And I think you can work that out that if we had 100 million impact on the full year... for the full year on the top-line and 15 to 20 million on the bottom-line, then including tax you've got essentially 80 million of improvement in your cost and tax position.

Michael Tong - Wachovia Capital Markets, LLC

Okay and a quick follow-up on the PHN study. If I recall that study is completed and has the data been unblinded yet?

J. Michael Pearson

No, it hasn't. It's been full enrolled. We do not have all the final results. We will be getting those in the later spring. And then, we will be sharing the results in the summer.

Michael Tong - Wachovia Capital Markets, LLC

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of John Boris of Citi. Your line is open.

John Boris - Citi

Thanks for taking the questions. Just on Retigabine Mike, on the release of the data. How will you release the data? Will it be at a conference or through a press release?

And then, I think I parallel, you're obviously looking to study or look at formulations that would be twice daily, versus the current three times daily formulation. Any update on how that's running in parallel, at least on the development side. And do you see that being a... that if the results come out favorable, do you see that as being a stumbling block to rapidly put Retigabine into Phase III clinical development? Thanks.

J. Michael Pearson

Let me answer the first one, and I'll try to answer the second. Although, I got a little confused by the stumbling block comment.

In terms of the PHN data, we will have a joint steering committee coming up with Glaxo in the next month or so. And we have not made a decision how will release that data, whether it will be through a press release or a conference.

So, we will be sharing that in the summer. But I cannot tell you the form at this point in time.

As we mentioned on the call, we are advancing our MR formulations. We have... we now have three. When we were developing this on our own, we only had one formulation Glaxo's added a couple of others as backups, because finding the right MR formulation will be very important to maximizing this compound. As I mentioned, this will go into the clinic in the third quarter, the lead formulation, which is our original formulation, which actually Glaxo thinks pretty highly of. And I wasn't quite sure John on the stumbling block.

John Boris - Citi

Well, I may have missed your initial comments, because I got on to your call late. Really, so that's my fault.

J. Michael Pearson

Okay.

John Boris - Citi

I appreciate it.

J. Michael Pearson

Okay. But, we don't see... if there is question, what we do plan to do is file with the current formulation, and bring on the MR afterwards. So, there is no... we are not contemplating holding off on the filing with the three times a day.

John Boris - Citi

And then just the one follow-up on your meetings with Glaxo and the steering committee. Obviously, anti-epileptic drugs have a pretty broad rate of utility in a vast number of different indications, bipolar disorder, chronic migraine, head ache. Is the steering committee evaluating those type of indications also to maximize the NTV (ph) of this asset.

J. Michael Pearson

Yes, in fact, we have at least two others that we're planning to move into... starting to study. And probably, more beyond that. But, we do not have agreement with Glaxo at this time to disclose what they are. But, you are exactly right John, that's what we're looking at.

John Boris - Citi

Will you roll out Phase II studies in those indications before the end of this year?

J. Michael Pearson

I can't comment on that timing at this point, because again, we have to reach agreement with Glaxo.

John Boris - Citi

Okay, thanks.

J. Michael Pearson

Yeah.

Operator

Thank you. Our next question comes from the line of Greg Gilbert of Banc of America Merrill Lynch. Your line is open.

Gregg Gilbert - BAS-ML

Thanks. I have a bunch of quick follow-ups. Peter, sorry if I missed this, but can you give us your cash as of today, including the acquisitions and the out licensing deals you talked about on the call?

Peter Blott

The cash as of today we haven't actually saying... as of today, we have moved the cash. So, with the $34 million or thereabouts for the two items and some cash generation that's taking place as you would expect going forward. I think it's just above a 120 million.

Gregg Gilbert - BAS-ML

Okay, thank you. The derm royalties were about 2 million. I think that number was about 20 million for all of last year. Can you bridge the gap between those? Do I have that right?

J. Michael Pearson

Yes. You have that right. And again, the 20 million is not planned to come in sort of on a even quarterly basis. That's not the history of how... it's not the history of Dow received the cash. And will not be history of how we receive it. So, we still expect... we are sort of on schedule to still receive the cash that we expected to.

Gregg Gilbert - BAS-ML

So 20 is a good run rate, good for an annual period.

J. Michael Pearson

I think 18 to 20 is a good run rate.

Gregg Gilbert - BAS-ML

Okay. Peter, how much Glaxo revenue is included in your updated guidance?

Peter Blott

So, from the collaboration, you can see we're not breaking out specifically. But the best way, it was what 3.3 million in the quarter and pretty consistent with what it was in the fourth quarter last year. So, we'd expect that to continue through the year. So, if you take full quarters of 3.3 million, you are not going to be far away.

Gregg Gilbert - BAS-ML

Fair enough. And how large is Cesamet in Canada?

J. Michael Pearson

Well, it depends on the exchange rate. Rajiv, what's the... ?

Rajiv Silva

It's roughly about a $50 million product.

Gregg Gilbert - BAS-ML

50, okay. And thank you. One last one Mike, the acquisition you alluded to in Eastern Europe. I may have missed it, but can you give us the sales and relative margins for those products. If you can give us the amount of the acquisition.

J. Michael Pearson

Yeah, the sales they are roughly $12 million.

Gregg Gilbert - BAS-ML

Okay.

J. Michael Pearson

And the margins we didn't disclose. But, they'll be consistent with branded generic margins that we got in that region.

Gregg Gilbert - BAS-ML

All right. Thanks for all the answers.

Operator

Thank you. Our next question comes from the line of Jonathan Aschoff of Brean Murray. Your line is open.

Jonathan Aschoff - Brean Murray, Carret & Co

Hi. Thanks for the follow-up. When I was discussing the non P&L expenditures that you guys had about three or four week ago with you, you said that that brought your cash down to about a 120. And if it's right now at about a 145, isn't your cash flow for the first quarter really 25 and not 51?

J. Michael Pearson

Peter, who did you talk to?

Peter Blott

Peter, for about an hour ago.

J. Michael Pearson

You talked to peter, okay.

Peter Blott

Sorry, I think the slide that we put up shows the bridge from the cash, and the sources and uses in the first quarter. I think when we were talking previously, I was just talking about the individual component arts. And therefore wasn't actually in a position to say what the quarterly results were, what the cash rate flow from operations were at stage.

So, I think I was just talking to you about what we knew we were doing in terms of the debt repurchase, the foreign exchange impact and the payments from the 2008 deal obligations.

J. Michael Pearson

Jonathan, our cash from operations in the first quarter was $51 million.

Jonathan Aschoff - Brean Murray, Carret & Co

Okay. And on the PHN study, there was... are you saying no to CD related SAEs, or are you just saying you don't know what on they could be from, because it's still blinded. And that there are some, but you wouldn't know what on, they would be from?

J. Michael Pearson

We are saying no.

Jonathan Aschoff - Brean Murray, Carret & Co

Okay, thanks.

J. Michael Pearson

You are welcome.

Operator

Thank you. We have no additional questions. I will turn it back to the speakers for any additional or closing remarks.

J. Michael Pearson

Okay. Well, thank you very much for your time. And we look forward to talking to you next quarter.

Operator

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

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