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Valeant Pharmaceuticals International (NYSE:VRX)

Q4 2013 Earnings Call

February 27, 2014 8:00 am ET

Executives

Laurie Little

J. Michael Pearson - Chairman and Chief Executive Officer

Howard Bradley Schiller - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Director

Analysts

David Amsellem - Piper Jaffray Companies, Research Division

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Corey B. Davis - Jefferies LLC, Research Division

Louise Alesandra Chen - Collins Stewart LLC, Research Division

Timothy Chiang - CRT Capital Group LLC, Research Division

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Douglas Miehm - RBC Capital Markets, LLC, Research Division

David Risinger - Morgan Stanley, Research Division

Marc Harold Goodman - UBS Investment Bank, Research Division

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Alex Arfaei - BMO Capital Markets U.S.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

David Krempa - Morningstar Inc., Research Division

Operator

Good morning, my name is Shirley. I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant Pharmaceuticals Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Ms. Laurie Little, Head of Investor Relations, you may begin your conference.

Laurie Little

Thank you. Good morning, everyone, and welcome to Valeant's Fourth Quarter and Year End 2013 financial Results Conference Call. Presenting on the call today are J. Michael Pearson, Chairman and Chief Executive Officer; and Howard Schiller, Chief Financial Officer.

In addition to a live webcast, a copy of today's slide presentation will be found on our website under the Investor Relations section. Before we begin, 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 the actual outcome. In addition, this presentation contains non-GAAP financial measures. For more information about these non-GAAP financial measures, please refer to Slide 1. Non-GAAP reconciliations can be found in the press release issued earlier today and posted on our website.

Now, I'll turn the call over to Mike Pearson.

J. Michael Pearson

Thank you, Laurie. Good morning, everyone, and thank you for joining us. Before we start, I would like to take a moment to congratulate all of our Canadian investors for our country's accomplishments at Sochi, in particular the men's and the women's ice hockey and the men's and women's curling gold medals.

Returning to our quarter. As you have read in our press release, we continued the strong performance seen in the first 9 months of 2013 and finished the year with another quarter of strong operating results. On today's call, I will review our fourth quarter results and performance, provide an update on Valeant's business and then Howard will provide an update on our financial performance and discuss our guidance going forward. After our remarks, Howard and I will be available for Q&A.

This morning we reported Valeant's fourth quarter results for 2013, which were driven by strong sales growth and profitability across all our regions, including continued out-performance from Bausch + Lomb since the August 5 close. Total revenue in the quarter was $2.1 billion as compared to $986 million in the fourth quarter of 2012, an increase of over 100% over the fourth quarter of 2012. Our fourth quarter cash EPS was $2.15 per share. Adjusted cash flow from operations was $607 million for the quarter, an increase of 43% over the prior year. On an annual basis, we increased total revenue by 66% and product sales by 72%. Cash EPS was $6.24, an increase of 51% from 2012. Adjusted cash flow from operations for the full year increased 38% to $1.8 billion.

Following feedback from our investors, we are once again providing organic growth charts that detail both the reported organic growth performance as well as the performance excluding the impact of certain generics. The generic products this quarter, again, include the Zovirax franchise, Retin-A Micro and BenzaClin. The decline in revenue of the above-mentioned products was approximately $78 million in the quarter, and the details are included in Table 6 of our press tables for your information.

I am pleased to report that same-store sales organic growth performance for the total company was positive in the quarter, with a 2% organic growth that includes the impact of

all generic [indiscernible]. Excluding the aforementioned products, our U.S. business exhibited outstanding same-store sales organic growth of 14%, driven by many of our dermatology prescription brands, our aesthetic, consumer and oral health portfolios and certain neurology products. Our rest-of-world Developed Markets, which included Canada and Australia, delivered same-store sales organic growth rate of 12% in the quarter.

Our Emerging Market segment delivered a same-store organic growth rate of 8% in the quarter, which was slightly lower than the past quarters, primarily due to some softness in Latin America. We expect our Emerging Market segment to continue to deliver double-digit growth in 2014. On a pro forma basis, Valeant reported 6% organic growth in the quarter, including the impact of all generics.

As we reported on our last call, Bausch + Lomb operations have continued their strong performance since we closed the transaction on August. In the U.S., the Bausch + Lomb operations delivered 17% organic growth while the rest-of-the-world Developed Markets delivered 1% growth, bringing the total Developed Markets growth rate to 9%. The Emerging Markets business delivered double-digit growth of 16% as all of the Emerging Market businesses exhibited strong organic growth. Overall, Bausch + Lomb's organic growth was once again 10% in the quarter. We are very pleased with this performance so far and expect to see this continue in 2014.

Although we no longer break out Bausch + Lomb's business on a global basis, we thought it would be informative to provide a closer look at the outstanding growth in Bausch + Lomb's U.S. business in the fourth quarter. The introduction of new products, the decision to make no changes to the Bausch + Lomb sales force when we announced the deal and the decision to integrate the 3 Bausch + Lomb companies into one business unit in the U.S. has fueled the growth in contact lenses, surgical and consumer, with the generics portfolio realizing strong organic growth as well. The Rx business continued its positive growth trends from previous periods.

In addition to our new Bausch + Lomb business, many of our legacy business units also performed well in the fourth quarter, and there are a few star performers I would like to mention. To begin with, the high performers in our Developed Markets, our aesthetics business, is at a $400 million run rate based on Q4 actuals and has increased over 300% from the prior year. Neurology and other business is now at a run rate of about $1 billion, with growth of more than 20%. Finally, oral health is at $125 million run rate and increased more than 20% in the quarter. And our Canadian operations has a $400 million run rate and grew more than 10% year-over-year in the fourth quarter. Out of our significant units in the Emerging Market segment, our Asian business grew more than 300% year-over-year and is at a $1 billion run rate, with Russia at a $400 million run rate and a 300% increase while Poland is currently running at $250 million and a greater than 30% increase. All these businesses had strong same-store, double-digit organic growth in the fourth quarter. They also obviously benefited from significant business development transactions. We do believe that we are now approaching critical mass in a number of these important markets.

Slide 7 summarizes our adjusted cash flow by quarter in 2013. We are pleased to report we delivered $1.8 billion for the year. Howard will provide more detail on our fourth quarter performance later in the call.

At the end of each year, we always like to compare our final results versus our original January guidance. Consistent with our track record over the last 6 years, we have overdelivered on every key metric: Revenue growth, cash EPS and adjusted cash flow from operations. We were also pleased to once again delivered very strong organic growth for the year.

On our last conference call, we provided this chart on our expected product launches in 2014. As an update, we have now launched Bensal, our CeraVe Baby line; the enVista Inserter; Optics [ph] Plus; and Bausch + Lomb Ultra, formerly known as Zeus. I attended the Ultra launch in Florida this month where we had 300 of the leading fitters in the U.S. both Bausch + Lomb loyalists as well as Vistakon, Cooper and CIBA Vision loyalists. The feedback from physicians was overwhelmingly positive, and as one optometrist said to me, this puts Bausch + Lomb back in the contact lens game. In addition, we plan to launch Luzu, Neotensil and PeroxiClear by the end of March, with our new Retin-A Micro launching in June. In addition to our upcoming launches in 2014, we want to provide an update on our R&D projects. While Bausch + Lomb's Mapracorat project has now been discontinued due to unsuccessful Phase III results, we have now received positive Phase III results from our eye whitener compound and are working towards a submission in early 2015. We also received positive Phase III results from Onexton, an acne compound from Dow Laboratories, and have filed this with the FDA and received a PDUFA date late in November of this year for the compound. We have several other eye health R&D projects still waiting for clinical conclusions, and we will update you on future calls.

In our contact lens business, we have received FDA clearance for Bausch + Lomb Ultra Toric and Multifocal and the BioTrue Multifocal, and we are currently in design validation for these products. Of course, Jublia is still awaiting FDA approval, and we expect to hear from the FDA in May.

We often talk about the importance of our field force and their individual and collective relationships with physicians and other healthcare professionals. We thought it would be very helpful to you to provide you with a comparison of our field force related to the rest of the Valeant workforce, excluding manufacturing. The data on the slide shows that we are consistent across our regions with approximately 72% of our headcount accounted for in sales positions. The remaining 28% includes marketing and G&A, a relatively modest percentage compared to other companies in our industry. We believe this sales-heavy mix with respect to our ongoing OpEx is the key to our continued strong organic growth performance.

Moving to our aesthetics portfolio. We are well on our way to expanding the injectable sales force to approximately 200 reps and increasing the number of physicians and groups that we are calling on. We expect to complete this expansion by the end of the first quarter. We closed the Solta acquisition in January and have been busy integrating the business into our aesthetics operations. Like with the Obagi and Bausch + Lomb acquisitions, we want to maintain business momentum; and to that end, we have ring-fenced the Solta sales force and have made no changes to this group. Our plan with Solta is to maintain a separate sales force for the capital equipment and to expand the coverage of Solta's disposal products through leveraging our other aesthetics sales forces.

As I mentioned, we will be launching Neotensil at the end of March as well as the Obagi 360 system, a 3-product system that is specifically designed for a consumer in her late 20s or 30s with a focus on proactive skin care. With the launch of Neotensil at the end of March, the addition of the Solta products and the Obagi 360 product, we are continuing to expand the bundle of products offered through our MVP Program, which should help continue the strong growth momentum we realized in 2013.

As I noted earlier, our oral health business unit continues to perform very well since we acquired it in 2012. We are also expanding the oral health sales force by 50% in the first quarter, and we are well on our way to achieving this objective. This too will be completed by the end of the first quarter. This group began detailing Xerese in 2012 and actually doubled the market share within the dental market during the period from the end of 2012 to the end of 2013. We have recently launched Ossix Plus, a dental membrane, along with our teeth whitening line, which should help accelerate our dental growth trajectory.

With this, I will now turn the call over to Howard.

Howard Bradley Schiller

Thanks, Mike. We are really excited to report our first $2 billion-plus revenue quarter. As Mike mentioned earlier, most of our business units performed extremely well in the fourth quarter, including the Bausch + Lomb businesses. As expected, our cost of goods sold was slightly higher as compared to the fourth quarter of 2012 as the B+L businesses had lower gross margins than Legacy Valeant. Our cost of goods sold, however, did improve versus Q3 due to a favorable product mix. SG&A and R&D expenses as a percentage of revenue both ticked up in the quarter versus a year ago but also improved as compared to Q3. This resulted in an operating margin that dipped slightly below 50% for the quarter but was at 50% for the full year. We would expect these ratios to improve over time and trend toward historical levels as we realize additional cost synergies, launch higher margin products and implement the Valeant business model. As we mentioned on our Q3 call, we had expected that adjusted cash flow from operations would be greater than $625 million in the fourth quarter, and our final result puts us at $607 million. Our original assumptions were negatively impacted in a couple of areas.

First, our accounts receivable increased by $180 million in the quarter, reflecting both a significant increase in overall sales activity and especially strong sales in the month of December.

Second, while our sales and accounts receivables increased this quarter, our accounts payable were down significantly in the quarter due to the fact that we accelerated payments at the end of the quarter in anticipation of a systems conversion that took place at the beginning of January. These facts will benefit our results in Q1.

We thought it would be helpful to review a few key assumptions as we look forward to Q1 results. To begin with, we continue to expect that 40% of our cash EPS will be in the first half of the year and roughly 60% in the second half, which is more heavily weighted in the back half than we've experienced in recent years. Q1 should be our lowest quarter, with each subsequent quarter higher than the previous quarter. There are several reasons for these expected results. First, as we mentioned on our guidance call, we are assuming more than $200 million in lost sales in 2014 versus 2013 from generic introductions for several products, and the negative impact from generics will be most acute in Q1 as we work through the remaining impact of the genericization of Zovirax and RAM, which were 2 of our largest products. As a result, our same-store sales organic growth in Q1 would likely be negative, but we expect same-store organic growth to be positive in Q2 and for full-year 2014.

In addition, the first half of the year, and especially Q1, will also be burdened by launch costs associated with the number of new products and the cost associated with the expansion of the sales forces in our aesthetic and oral health businesses. And given that a number of the B+L late-stage R&D projects will be winding up in the first half of 2014, roughly $200 million out of a total R&D spend of $300 million will be spent in the first half.

Finally, the movement in currencies since our 2014 budget was approved by our board in November had negatively impacted our Q1 forecast by roughly $0.04 per share based on current rates. Obviously, our results will continue to be impacted if the dollar materially improves or deteriorates throughout the quarter and 2014.

With the acquisition of B+L, our business has expanded into a number of new geographies, including China, Japan, Turkey and Western Europe. And we've also increased our exposure to a number of currencies and geographies, such as Russia, Mexico, Brazil and Australia. As you know, Legacy Valeant manufactured most of its emerging products locally. Bausch + Lomb, on the other hand, imports most of its emerging markets products from either the U.S. or Europe. As a result, swings in emerging market currencies will have a significantly larger impact on our bottom line, both positively and negatively. Over time, we have plans to significantly increase the percentage of emerging market products that are produced locally to create more of a natural hedge and diminish the bottom line impact of these current currency swings.

The chart gives you a sense for the relevance of our major currencies and the changes in values relative to the U.S. dollars since our budget was approved in November. As you all are aware, there have been recent volatility in the currency markets, including significant devaluations in a number of emerging market currencies. We believe the very strong growth prospects for our Emerging Market businesses dramatically outweigh any pain from short-term devaluation, and we plan to continue to invest in these important geographies. At current FX rates, this market activity would cost us approximately $0.15 per share for all of 2014.

As we provided guidance not too long ago, in early January, and our acquisition of PreCision is not yet closed, we felt it was appropriate to maintain our previous guidance until our next call. We had already included the acquisition of Solta in our annual guidance, and as just mentioned, we have absorbed the negative impact of approximately $0.15 per share from currency fluctuations since our budget was approved in November.

In closing, we are pleased with our continued progress, both this quarter and for the full-year 2013. We believe our actions for the year have positioned us well for another outstanding year in 2014. Our businesses continue to perform extremely well, and we look forward to updating you on our progress on future calls.

Laurie Little

And with that, we'll open it up for questions. Operator, we'll take our first question.

Question-and-Answer Session

Operator

Our first question comes of the line of David Amsellem.

David Amsellem - Piper Jaffray Companies, Research Division

Just a couple. The first, just on the M&A. Maybe if you can shed any light on your thoughts on Forest and is that the kind of asset that you may have been interested in? And just your thoughts on the Primary Care setting in general and how that would fit within the broader organization. And then my second question is just on Jublia. Just can you confirm that the resubmission was actually accepted by the FDA?

J. Michael Pearson

Yes, the second, the -- it was accepted by the FDA, Jublia. And the first, Forest, we've been pretty clear. I think we've been pretty clear that we don't feel Primary Care to be as attractive a segment of the pharmaceutical market as specialty businesses. Congratulations to both Paul and Brent on the Forest deal. From our perspective, the deal will be very successful if the pipeline of Forest comes through, and I hope it does. But as we've been pretty consistent also saying this, we don't bet on pipelines, so it was not the types of asset that we were particularly interested in.

David Amsellem - Piper Jaffray Companies, Research Division

And just as a quick followup, in terms of Primary Care in any way, shape or form, is that something where you've kind of drawn a line in the sand and that's not something where you feel, at least promotionally, you want to be in?

J. Michael Pearson

Certainly, in the United States. If you go to other markets like Poland and Mexico, we actually are in Primary Care. We're -- in the branded generic space, that is a place we play in. But in terms of the United States, that's pretty low on our list.

David Amsellem - Piper Jaffray Companies, Research Division

Just a quick followup on Jublia, can you disclose what the PDUFA date it is on that?

J. Michael Pearson

We can follow up. It's in June. So we'll give it to you. I think it's late June.

Operator

Our next question comes of the line of Ram Selvaraju.

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

If you look at the current landscape of potential companies that could be classified as targets for a merger-of-equals transaction, could you give us an idea of how large that landscape is, whether it's 5 companies, 10 companies, 15 companies? And then secondly, in a general sense, are you anticipating, in order to get to your previously stated long-term 2016 goals that there would be sort of 2 pillars to getting there, first a merger-of-equals transaction figuratively and then one more transaction of comparable size? Or are you thinking about a merger-of-equals transaction and multiple, smaller acquisitions in order to get to your goal? Just give us a general idea of what your strategic thinking is like there?

J. Michael Pearson

Yes. Well, we do we don't exactly think about it the way you're asking your questions. First of all, in terms of the number of opportunities out there, we would say it's not 5, 10 or 15. It's probably closer to 50 in terms of opportunities. There's an awful lot of private companies, and there's a lot of non-U.S. companies,. So if you just look at the U.S. companies, it's obviously much more limited. But again, we've talked about pieces of larger companies as well, which does broaden it a bit. But we don't have a specific plan, we're going to merge with this company and then, we're going to buy that company, and then we're going to buy that company. A lot of this is very opportunistic. A lot of it depends on the price. We're not going to do a deal that does not create shareholder value. And so we're in multiple discussions, and we always have been and will continue to be. And when an opportunity comes, we'll move on it. So, again, we don't have prescribed path to get to our objective.

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

And then with respect to the strategy with the dermatology business in the United States, do you feel that growth by acquisition in that specific segment is more or less complete? Or do you continue to see additional potential for growth by acquisition in that specific segment?

J. Michael Pearson

Sure. There's a bunch of major categories of dermatology that we're not in. We're not in psoriasis; we're not in rosacea. So there's a lot of aesthetic -- parts of the aesthetic space that we're not in. So we would continue to expect to grow both organically and inorganically in terms of dermatology.

Operator

Your next question comes from the line of Greg Gilbert.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

First, Michael, on the deal front, as we think about the possibility of large deals, is it still the case that you don't care for the commodity generics business, particularly in the Developed Markets? And for Howard, do your same-store and pro forma organic growth metrics now officially exclude generic hits? And will that be the case going forward every time something goes generic or does it depend on how large the brand is that goes generic? Help us with that please?

J. Michael Pearson

Thanks, Greg. First, PDUFA date for Jublia is June 20th. In terms of commodity in the U.S., Greg, it's not our favorite area.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

For Developed Markets more broadly, just not U.S., sorry.

J. Michael Pearson

Okay. It depends on the Developed Markets. But the one where there's automatic generic substitution, which would be the United States, the U.K., Netherlands and there's a few others, one of the things we're observing is that as the percent of prescription drugs in countries like the U.S. and the U.K. become more and more genericized, 80%, 90% of categories are now generic. And the recent moves by -- consolidation by the retailers and the distributors, we believe that a lot more pressure is going to be put on the generics space going forward. In a sense, retailers and PBMs and managed care can't make -- there's just not enough branded business for them to make the type of returns they need to make, so they're going to start turning their attention to generics, especially small molecules, and try to squeeze those. So our sense is that business is only going to get worse over time, and that's why it's not sort of high up on our list.

Howard Bradley Schiller

In terms of organic growth, for sure, Greg, we're going to show as reported with the impact of all the generics. We've shown it both ways. A number of investors have asked us to show it both ways, given how significant the products of Rx was for us. We haven't made a decision going forward as to whether we're going to show it both with the impact of generics and then backing them out. But for sure, we'll show it as is with the impact of generics.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

And Howard, still looking for gross margin in the low 70s for 2014?

Howard Bradley Schiller

Yes, I mean, we improved by 1 percentage point in Q4 over Q3, primarily because of mix. And I think over time -- near term low 70s is still where we're at. And over time as we launch new products and we improve our manufacturing processes, we would expect those to trend up. But in the near term, low 70s.

Operator

Our next question comes from the line of Corey Davis.

Corey B. Davis - Jefferies LLC, Research Division

Two questions. One, one of the slides that you used to show that was particularly helpful showed the return on invested capital for all of your previous acquisitions, not the actual dollar amount, but just yes or no, whether or not they met your hurdle rate? And I didn't see that in today's presentation. So maybe you could just describe or characterize the current state of all the acquisitions that you've done, and are they still meeting your internal goal?

J. Michael Pearson

Cory, you said you had 2 questions I thought?

Corey B. Davis - Jefferies LLC, Research Division

Yes. That was the first one.

J. Michael Pearson

You want me to answer that? Actually, historically, we've done it once a year. We do a summary of our acquisitions. I think, it's in -- when we report second quarter results. However, we do track it -- second or third quarter results. However, we do track it on a continuing basis and actually at every board meeting review the progress. So I can say that with the exception of a couple of very small acquisitions we've made, we are ahead of our run rate in terms of cash flow generated and returns. So we're pleased to be able to report that.

Corey B. Davis - Jefferies LLC, Research Division

And the second question is a little bit of a follow-on from the last question from Greg, and that is, do you think about, do you plan for, do you budget for a certain percentage of revenue that you would expect to lose each year to generic incursions? It's a fact of life, obviously, in the drug industry, but I know that you've intentionally set this business up to try to absolutely minimize the potential for these big generic losses. And so how do you think over the next 5 years generics are going to play into your business and how should we as analysts model declines from generic products?

Howard Bradley Schiller

Well, we budget based on what we know, what we expect. Obviously, we can be surprised one way or another. And you'll get -- at last quarter, and as well as at the slide presentation we made at the JPMorgan conference, we put in an updated slide over the next 5 years what we would expect in terms of generic exposure. 2013 was by far the biggest both in terms of dollars as well as percent. This year is the second largest. But, again, we're getting bigger. So the dollar is getting smaller, we're getting bigger. We have some years -- I don't have that slide in front of me, but we have some years where it's based -- it's negligible and then other years where it's in the 100 to 150. But, again, we're growing, so it becomes a smaller and smaller percent. So we don't budget a percent. We budget based on what we know. Zovirax, for instance, we didn't know for sure. We had a budget with and without. Unfortunately, we had to look at the one with generic exposure. But I think you said it right, we set up the business to minimize those exposures. And I think if you pull up that chart, you'll see that we've got a profile that's unique in the industry.

Operator

Our next question comes from the line of Louise Chen.

Louise Alesandra Chen - Collins Stewart LLC, Research Division

Quite a few. First on your gross margin progression over time, I think you've said before that you could get to roughly 80%. And I was wondering if you can give more color how you could get there? Secondly, with respect to animal health, I think you've also said in the past before that this could be an area you'll potentially be interested in growing into. And wondering if you still feel that way and why or why not? And then lastly, I guess, if you had to choose one area which you think has the greatest growth potential in your diversified business model, would it be brands, generics, devices or OTC and why?

Howard Bradley Schiller

Well, in terms of gross margin, prior to B+L, we were on a path to getting to 80%, and we just about got there, and I think we feel very confident we would have. Remember that B+L had gross margins of around 65%. Now that will move up, result of this number of large -- number of launch products, many of which have higher gross margin although some in the consumer area won't be at that 80% margin. We're also launching -- Legacy Valeant is launching a number of products, and we continue to look for efficiencies at our manufacturing plants. We've successfully consolidated facilities in Mexico and Brazil. We're looking at opportunities in other places around the world. And as we've stated before, we take our time with that. The last thing you want to do when you have high gross margin products is not have supply. So we're very careful as to how we do it, but we see those opportunities. So we certainly see opportunity continue to move our gross margin up. I don't think we're at a point in telling you, this is where we're going to land on a particular date, but we'd be disappointed if we didn't continue to see over time those gross margins move up.

J. Michael Pearson

In terms of animal health, it continues to be an area of interest. We think it's -- in a sense it's branded generic products sold directly to the physician, and it's consistent with sort of the buy-and-build model that we like. But, obviously, we'd have to find an asset at the right price because we are -- we will not overpay for anything. In terms of the different areas, drug, device, OTC, which one we're most excited about, actually, I think we're excited about all 3. And there's examples in the aesthetic space, which is largely devices, great market, great growth prospects. Some of our -- we're excited about Jublia. We're excited about in terms of the drug space. In terms of OTC, it's -- CeraVe continues be an outstanding performer, some of the Ocuvite and some of the brands we picked up from Bausch + Lomb. And even contact lens solutions is growing double digits. So I think we like all 3 spaces.

Operator

Our next question comes of the line of Tim Chiang.

Timothy Chiang - CRT Capital Group LLC, Research Division

I wanted to get your thoughts on some of the multiples that have been paid for companies. I mean do you -- have you seen a creep up in valuations given the fact that you guys look at so many different types of companies? Could you just comment on that?

J. Michael Pearson

It's hard to answer that question generically because it depends. What we do see is different parts of the world and different types of products that time-to-time they do become overheated, a couple of years ago Brazil. Everyone's expected a very high multiple based on a couple of deals that were done, but those are starting to moderate. We're seeing in Brazil. We see different segments, either country or therapeutic or types of businesses that the multiples do creep up, and then we stay away from them. But at any point in time, we continue to see very, very attractive deals.

Timothy Chiang - CRT Capital Group LLC, Research Division

And just 1 follow-up. I know you guys have used a pretty disciplined approach in terms of what you're willing to pay for companies and assets. Are there instances where you might change that discipline, especially if you're going after something that would be much more attractive to your business today?

J. Michael Pearson

Absolutely not. The key to long-term shareholder value creation, in our opinion, is continuing to be disciplined. We continue to expect to grow both organically and inorganically. And I think the one thing that we'll-- if we begin to become less disciplined, we will fail. And there's lots of companies that have begun overpaying for assets in our industry and other industries. So the one thing we will not do is overpay.

Operator

Our next question comes of the line of Gary Nachman.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Mike, in emerging markets, what contributed to the headwinds in Latin America? Why are you confident that'll turn around? It's also notable that you called out China as a growth market. Are you looking to bolt-on further there now that you've had some time there with Bausch + Lomb? And how are buster opportunities for deals in the Middle East, Russia and Southeast Asia to bolt-on there? Those are other growth areas that you guys have called out are this quarter and have talked about in the past.

J. Michael Pearson

Sure. Latin America, part of it was a market slowdown in Brazil. The market is just not growing as quick. It was growing high-double digits and -- but it's still growing. And part of it was us in terms of stubbing our toe a little bit down there, in terms of not getting some product shipments out that we should have gotten out, so not filling some of the orders, and a slowdown. And we also had a product that -- one of our larger products, isotretinoin in Brazil, a number of competitors came into the marketplace. But the market is fundamentally growing. Our businesses are fundamentally good, and we fully expect to see that return to double-digit growth. We're already seeing it this quarter. In terms of China, I think we highlighted China just because we're very pleased by the performance of Bausch + Lomb business. It's just really doing well there, and it's growing double-digit, which is -- it was not growing double-digit when we bought, so a credit to the management team there. And China would be a place that we would continue to look for bolt-on acquisitions. And I think in the other markets Gary mentioned, Middle East, Russia and Southeast Asia, are also high priorities. So we're in active discussions, quite frankly, in all 4. And I would be very surprised if we didn't do at least a couple of deals over the course of this year in those areas.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

And then given the strong performance in Bausch + Lomb, it sounds like, particularly, you're turning around the contact lenses business and that Zeus will help a lot there. But what are other parts of that business where you think you've had the most favorable impact since you took over? You just mentioned China. Maybe you want to highlight a couple of other areas? And then, are you guys still confident you could do a deal at least the size of Bausch + Lomb in 2014? That was one of the aspirational goals that you highlighted.

J. Michael Pearson

Yes, well, on the second question, it's only February, so the answer is yes. In terms of Bausch + Lomb, sometimes we don't mention the pharmaceutical business enough, partly because it was really performing well historically, and so that continues to perform very well. So I do want to forget highlighting. And quite frankly, that's the business we put the most value on. The surgical business, the growth rate is tremendous now in the United States and in other parts of the world. What we've been able to do is there were some issues from -- I think I mentioned last quarter, there were some issues in terms of some software with some of the equipment, which has now been addressed, as well as there were some manufacturing issues on some of the key IOLs, which we've made a lot of progress on. So that business is doing extremely well. And I think doctors are looking for an alternative to Alcon. No one likes -- Alcon is a great company, but similar to what we're seeing in aesthetics, doctors are hungry for a second strong competitor, so we think that's a good business. So fingers crossed, Bausch + Lomb will start operating on all cylinders.

Operator

Our your next question comes of the line of Chris Schott.

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Just 2 questions here. First, on the potential to acquire pieces of larger companies, when you look at these opportunities, do you generally see more or less opportunity for cost synergy and value creation relative to acquiring an entire company of equal size? And when you consider these opportunities, are these generally Valeant approaching a company that you've identified a pool of assets that makes sense? Or these companies have already decided to exit the business, and you're looking to see if there's an opportunity for a transaction to make sense? My second question, Valeant's had a significant size advantage relative to other specialty pharma names that have been pursuing kind of more business development-oriented strategies. Given the announced transaction last week, it seems like we're creating another organization that's maybe of a similar scale to Valeant. I guess my question here, does size matter here in terms of being able to look at assets that others are not able to look at? And how are you thinking about the competitive landscape for deals as this trend has been evolving?

J. Michael Pearson

In terms of cost synergies, cost synergies really depend on the asset and whether it comes from -- as part of a larger company or as a standalone company, it's quite specific. It's quite specific to the company and quite specific to the business overlaps. So I don't think we can generalize. In terms of our size, if you look at our history, we started off as a sort of a $1 billion revenue company that shrunk. We sold Western Europe to $600 million. And then we embarked on this strategy. So most of the time, we've been actually a lot smaller than most other people in the space. And we may be a little bit larger now, but I don't think our size has much to do with anything in terms of -- I think what matters is, again, our operating model and our ability to deliver on both the cost synergies as well as continue to grow the revenues. And if we can continue to put together a track record where we continually exceed the synergies and are able to organically grow and accelerate the growth of the products and assets that we acquire, I think that's what's really going to make a difference if we're successful or not.

Operator

Our next question comes from the line of Douglas Miehm.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Mike and Howard, you did provide quite a bit of information with respect to foreign exchange and what's going on this markets and then also as a result of staging that quarterly EPS. But first question really has to do with emerging markets. Could you walk through the headwinds? Do you have exposure to the Ukraine? Do you see any impact -- this impacting Russia as well? Do you see this impacting the pricing of acquisition candidates? Could you see more attractive multiples? Or is everything being priced in U.S. dollars? That's the first question.

Howard Bradley Schiller

Doug, I mean, we're not in the business of predicting geopolitical events. So in terms of what's going to happen in various parts of the world, everyone -- each of us will have our opinion. Clearly, when events hit a region, as we've seen in the Ukraine, but also we've got a sizable business in Thailand now where there's been some unrest, it impacts the business for a period of time. What we've seen, talking to our folks that have been in these markets for a long period of time, you see a slowdown, and then you'll see them pick back up, assuming the unrest goes away and things settle down in short order. In terms of deal multiples, I mean, we're not looking at something in the Ukraine right now, so I can't tell you what multiples are right now in the Ukraine. But I think longer term, the price of these assets, the attractiveness of these assets is driven by their long-term growth prospects. And we're still very, very confident what multiples will be in a particular market. Mike said different markets go through hot periods at different points of time. But the important thing for us, the growth prospects in the markets we're in continue to be very strong, and we're very excited about the opportunity to add businesses in those markets.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

And just as a follow-up, Howard, you really delineated Q1. Do you see risks relative to where the Street is right now, just simply because of foreign exchange and just want people to maybe update the staging of that profile? And then for Mike, just with respect to the MOEs and the discussions you've had over the last while, is the sticking point -- and I know you've walked away from a couple of things -- is the sticking point generally just overall strategy? Or is it more price at this point? I'll leave it there.

Howard Bradley Schiller

As we mentioned in the presentation, we're sticking with our prior guidance. We did point out, as we mentioned, in January, we've included Solta. We clearly have not included PreCision, which will be a positive event, as we mentioned in the press release, and not exactly certain when it's going to close. It should be in Q2 for sure. So we will update guidance as a result of that. And we did point out that on a full-year basis we have absorbed since our budget was approved about $0.15 from FX. But we're not changing. I mean, as Mike often says, we just have to deal -- when things get thrown our way, we deal with them. We're not going to make excuses. We're going to work hard to overcome these. And as of now, we expect to.

J. Michael Pearson

And Doug, in terms of strategy versus price, it depends on the situation. But price, in the end, we will not -- price is price. And unless we are able to earn, what we believe, the hurdle rates that we've talked about often, so the 20% IRRs and the 6-year cash paybacks, we're just not just not going to do a deal. So from that standpoint, we will continue to be very, very disciplined. All that being said, we are still quite confident that over the course of the year, we'll be successful with at least 1 significant transaction.

Operator

Our next question comes of the line of David Risinger.

David Risinger - Morgan Stanley, Research Division

Two questions, please. One is on the numbers in Slide 10. Howard, I was hoping that you could just explain. For 2013, it says 10% same-store sales growth, but only 7% pro forma. So I was hoping that you could just walk us through that. And then with respect to M&A, there's some talk that Valeant is shifting away from looking at small deals. Just wanted to understand a little bit better from you whether that's true or not and how your directive to your senior executives is evolving in terms of looking for M&A transactions. And then, if you could provide any more color on using your stock for future deals? Obviously, this is a new initiative on Valeant's part. So just want to better understand how potential targets are responding to that and how investors should think about Valeant using stock for future M&A.

Howard Bradley Schiller

David, if I understand the question, you're looking at the slide that says 2013 performance versus guidance where it said organic growth 10%, same-store sales, 7% pro forma?

David Risinger - Morgan Stanley, Research Division

Yes, correct.

Howard Bradley Schiller

Okay. I mean, that corresponds with Slide 4, shows you the 2013 organic growth. It does exclude, as we've footnoted, Zovirax, Retin-A and BenzaClin.

David Risinger - Morgan Stanley, Research Division

And why is the pro forma slower than the 10%?

Howard Bradley Schiller

Well, a number of acquisitions were growing slower than the same stores is the answer. And we've talked about some of those acquisitions in the past, but that -- yes, for the full year.

J. Michael Pearson

And in terms of M&A, I'm a little surprised that that's -- I think, David, you said there's a feeling in the market or you're hearing some places that we're not focused on smaller deals as well. If I just reflect, we bought Solta this year. We bought PreCision. We licensed in Neotensil. Last night, actually, we signed a dental deal, which was signed too late to include today, a small dental deal, another set of products. So we continue...

Howard Bradley Schiller

Got a small deal in Australia, small deal in Central and Eastern Europe, Canada.

J. Michael Pearson

So basically, our philosophy hasn't changed. And in fact I think we're getting better and better with -- now that we've gone to the company group chairman approach that we continue to do lots and lots of little deals, but then we continue to look for the bigger deals as well. And I don't think that philosophy will change at all. In terms of using stock, I will note that we did this one time before, and that's when we merged with Biovail. And so that created a fair amount of value. So it's -- I think-- if anything, I think when we have discussions with others Valeant's a little bit better known at this point, and the stock is I think viewed as a pretty positive currency. And as we've always said, we think that our stock is our most valuable asset. And we are going to be very, very careful using it because we think it's extremely undervalued, given our growth prospects.

Operator

Our next question also the line of Marc Goodman.

Marc Harold Goodman - UBS Investment Bank, Research Division

First, on R&D, it seems a little light in the quarter. And I knew you guys were talking about how the spend was going to be in '14, but maybe you can talk a about what happened in the fourth quarter? It seems a little bit low than what the run rate would be. And then second, if you just can go back to Bausch + Lomb and that slide that you put up on same-store sales growth, contact lenses up 14%, surge up 24%. You mentioned a couple of things that would've impacted it, but these numbers are all much above, I mean, outside of the Rx and the generics, which I can understand. But consumer, up 11%, I mean I didn't know the solutions business ever grew that fast. Were there other things in there that helped it? And then how much was the IOL backlog, I guess, helped in the quarter? Like what's the surgical business really growing? Maybe you could just tell us in 2014 what the expectations are for contact lenses surge and consumes as far as growth rates?

Howard Bradley Schiller

Well, the R&D, we've been very clear that we'll spend about $300 million in year and $200 million in the first half, and it's just a question of timing of projects. So we're -- so that's what it is, Marc. We anticipate to spend the $300 million based on that progression. And on some of the B+L businesses, you talked about Rx and generics continuing at strong growth trend. The consumer business, people focus on renewal renu, but the Ocuvite and PreserVision franchises they've built had been growing at very, very healthy double-digit rates for some time. They really did a spectacular job of building those brands, especially the Ocuvite brand, really building it from scratch, and we'll continue to benefit from that. We'll add products to the family and continue to grow that. And as we've talked about, we've got -- the guys who's running it for B+L is running our consumer and -- the Legacy Valeant and the B+L consumer business he does a great job. In terms of the IOL business, we've talked about the growth in the surgical business globally, in the U.S., very, very attractive, and we're starting at a very small base. And keep in mind that B+L recently introduced a number of new products, including the Trulign IOL, which has been incredibly well received as the first toric IOL in the market and very high margins. Hopefully, we're executing better. We have our VICTUS machine, our Femto laser in the market. We hope to get the fragmentation indication soon. And again, we're grown off of the small base with a new set of products, and we expect to continue to grow at healthy rates. And likewise in contact lenses, Mike gave you the quote from 1 of the doctors who said we're back in the contact lens game. B+L lost share after inventing the contact lens and lost share for a number of years. With Biotrue and Ultra and the PureVision 2 Multifocal, we've got a refreshed product line, and we would expect to grow off of that base for the foreseeable future as well.

J. Michael Pearson

And I will mention, in contact lenses, we did not have Ultra in the fourth quarter. In fact, that growth rate we would expect -- it's off a smaller base, but our growth rate we expect will start with a 2 this year, not a 1.

Marc Harold Goodman - UBS Investment Bank, Research Division

And Mike, 1 followup just on a different subject, M&A. Asia and Latin America, 2 areas I know you're interested in growing in, and you talked about specifically Latin America being very expensive, and you've just been waiting for asset values to come down. And obviously, the emerging markets are slowing. You had mentioned Latin America is slowing. So have asset value started to come? Have people started to ratchet down expectations and maybe there's more opportunity there? And just give us a sense of Asia and how you're thinking about that.

J. Michael Pearson

Asia, we like a lot. We're in a number of discussions .and you should expect to see activity there. Latin America, we think prices are starting to come down, and we're in discussions there as well, and we'll have to see. But both Asia and Latin America are markets that we think, as Howard was mentioning, offer great long-term growth prospects, especially for our products aimed at sort of middle class, which is where we tend to target.

Howard Bradley Schiller

Marc, I'd also add, keep in mind a number of these regions it takes time to build relationships, a lot of private companies, family-owned companies where the relationship's important. As we become more local, as our business grows and we're well known -- better known in these markets, we're seeing more and more opportunities, and that's going to continue in these -- in a number of these markets, Asia being quite prominent on that list.

Operator

Our next question comes of the line of Annabel Samimy.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

So you mentioned you're focused this year a little bit more on bolt-ons and also that you're not particularly interested in Primary Care. So are there any specific specialties that you feel like you need to be in outside of derm and ophthalmology? Do you feel like you need to be in any new specialties? Or is the focus going to be more on geographies?

J. Michael Pearson

Sure. I don't think there's any specialties we feel we need to be in. Again, we approach M&A a little bit differently I think than many companies in that our first test is always financial. Can we earn the return that our shareholders have come to expect from us? Then we'll look at the type of assets. And again, we talk about the attributes or characteristics of the types of business. We like cash pay. We like durable assets. We like businesses where the sales force and their relationships really make a difference. So we have a long list of criteria. And if that takes us into other specialty areas, we talked earlier about animal health, which is an area which we may or may not get into. But if you look at the characteristics of animal health, the relationships matter. They're durable. They're durable products. It's cash pay. It's growing. So something like that, we'd say that's a good business to be in. Primary care, the reason we shy away from that is just the sales forces are becoming less and less effective because they just can't get time with the doctors and can't develop those relationships. Managed care is -- usually, they're larger products, so managed care takes -- pays more attention to them. Often, they're government-reimbursed products. And quite frankly, even from a liability standpoint, liability is usually higher since so many people are using these products. So those are the reasons we don't like Primary Care. It's not just -- it's just -- so I think in all likelihood, we will get into other specialty areas as we continue to grow, but it will be more based on the type of business it is than any specific sort of therapeutic class.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

And just a followup question. You had mentioned that neurology seems to have some pretty solid growth, and that doesn't seem to be an area that really fits into that profile so well. So is there anything that you're willing to invest in there? Or is this just nice to have neurology is growing at 30% and there's nothing more to do there?

J. Michael Pearson

Neurology is a bit of a legacy. When I joined Valeant, its focus was primarily on neurology. Biovail was primarily on neurology. So those are the bulk of our products, old Legacy Valeant products and old Legacy Biovail products. When we acquired Medicis, I think we mentioned that we picked up a couple of orphan drugs, which they weren't marketing optimally. And so we've been able to take advantage of that and grow those products. And we call it neurology, but it's really Neurology and Other. There are some neurology products in there, there's some other therapeutic classes and sort of the tail products that we pick up. But we do -- we have a team that does an extremely good job of managing that portfolio. And we have none of our own sales force, but many, many of these product are now promoted through third parties, third-party sales forces, a lot of it's done over the Internet. So we like to give those -- the team there a lot of credit because it's a very profitable business, and it's a very stable business, and we're very pleased as to how it's now returned to growth.

Operator

Our next question comes of the line of Alex Arfaei.

Alex Arfaei - BMO Capital Markets U.S.

Following up on your animal health comment, obviously, a very significant opportunity and very different business than what you're doing right now. Do you think you can successfully apply the Valeant model to animal health if you did find an attractive opportunity? And would there be any other operational synergies other that the obvious tax rate reduction?

J. Michael Pearson

Yes. Yes, we do think we could apply our model there. But I must -- I should emphasize, animal health is -- we've been using it as an example. It's --- everyone shouldn't come away from this call, thinking we're about to buy an animal health company. It's a good one to use as an example. There is many, many other specialty areas that are similar that would be quite attractive to us as well.

Operator

Our next question comes of the line of Andrew Finkelstein.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

One thing you talked a little bit about was moving some more of the manufacturing, particularly the Bausch business, to be local rather than exported. Can you talk at all about what that means in terms of the efficiency of the operations, whether you're increasing capacity as well? And then the capital requirements we might be thinking about? And this is over the next 1 to 2 years or a longer term plan? And then in your Generics business since that was within Bausch quite strong this quarter, what would leverageable to add onto that? You talked a bit about the challenges with commodity generics. But are there subsegments and niches that would best leverage that platform that you have?

J. Michael Pearson

In terms of manufacturing, maybe the best example is contact lens solution. Most of Bausch's contact solution is manufactured in Greenville, South Carolina, then is shipped around the world. So, obviously, it's not that economic to ship water all over the world. So we would look to -- it probably would makes sense to manufacture contact lens solution in Asia and in Latin America and places closer to the market. It also allows us to have the cost -- labor cost to be in the same currency as the revenue coming in. So clearly, there's opportunity in -- that's the most obvious one, but in a number of the product lines at Bausch + Lomb. This will happen -- some of this should happen in the next year or 2, and some will take a little bit longer than that. In terms of the Generics business, ophthalmology generics, which is the bulk of our generics business, is a highly specialized area. It's very, very hard to make these products and make high-quality products. They need to be made in a sterile suite. And there's a lot of supply interruptions from a competitive standpoint. And what Bausch + Lomb, they have an excellent track record of consistent good manufacturing, which is -- and a lot of the growth is because other companies are not able to continue to provide a stable supply. So in terms of solutions and if we see opportunities to expand that business, we will do so because it's a very good business; it's very high margin?

Howard Bradley Schiller

And what Mike described is what happened in Q4. There were some products where some competitors have dropped out -- had supply issues, and we were able to step in and take advantage of some opportunities. Plus, there were some launches earlier in the year which we benefited from.

Operator

Our last question comes from the line of David Krempa.

David Krempa - Morningstar Inc., Research Division

Two quick ones for you. First, on PreCision Dermatology, it looks like it's at about 3.7x sales, a little higher than what you typically like to pay. Is that a sign that dermatology valuations rising? Or is there some sort better growth potential or better margins there that justify it? And then secondly, can you just talk about your strategy for Ideal Implants? I think you'd previously said you expect an approval in 2014, but I don't see it mentioned anywhere in your plans.

J. Michael Pearson

Sure. So PreCision, the actual sales multiple, you're absolutely right, it's a little higher than what we typically pay. But part of that was based -- we think there's some significant pricing opportunity on day 1 which will bring that multiple way down. And so that's -- and then, obviously, from a synergy standpoint, we're in the dermatology business, so the synergies there should be significant. Ideal Implants, we probably should have mentioned it. So that was a mistake on our part. We still expect to -- we're in discussions with the FDA. We still expect it to be approved in 2014, and we should have had that on the slide, so we apologize.

With that, thank you, everyone, for attending our call, and we look forward to speaking again at the next opportunity. Thanks.

Operator

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

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